Excerpted from BusinessWeek, “Sirius XM Radio Faces Sky-High Debt”, by Olga Kharif, October 22, 2008, AND Knowledge@Wharton, “Tuning in a Post-Merger Strategy: Sirius XM Must Cut Costs and Build Its Case”, published September 3, 2008
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Sirius, which completed a merger with XM in July, is facing a serious cash squeeze. It has more than $1 billion in debt coming due next year, and it doesn’t have the money, at least not yet.
Despite the merger and a combined 18.6 million subscribers, Sirius XM has seen its stock tumble from 3.94 last December to 31¢ as of Oct. 22. Beyond the funding squeeze, the company faces a tough economy in which consumers may cut back on its service, which costs $7 to $17 per month. Barclays Capital estimates that Sirius needs to raise $750 million to $800 million to cover its debt repayments, programming costs, and capital spending for next year.
The company is struggling with a problem of its own making. Sirius signed top talent—including Stern, Martha Stewart, and Oprah Winfrey—to draw in subscribers. But programming costs have triggered heavy losses. Sirius pays $60 million annually to broadcast Major League Baseball games, plus an estimated $80 million yearly to Stern and his team. Goldman Sachs predicts Sirius will lose $564 million next year as revenues climb 12%, to $2.7 billion.
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In many respects, Sirius XM is a paradox, say experts at Wharton. On one hand, Sirius and XM argued that the merger should be approved because the combined company would be a small player in a big audio entertainment market. But the same argument that won FCC approval for Sirius XM also illustrates what a tough battle the company faces.
In other words, Wall Street believes that Sirius XM has shaky prospects even though it’s a monopoly. Sirius XM is in a “make or break” moment where it has to deliver on merger synergies, cut costs and attract new customers while keeping current ones.
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Yet Wharton marketing professor Eric Bradlow says that the market for satellite radio may not be as large as CEO Mel Karmazin hopes. Bradlow argues that the company is still too dependent on automobile sales for subscribers in an economy where consumers are buying fewer cars and cutting back on discretionary spending. And the competition for audio entertainment is fierce.
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Wharton marketing professor Peter Fader says the company needs a marketing makeover, advocating a potential name change and a marketing message that defines Sirius XM as a music service, plus an interactive content and entertainment provider. He says Sirius XM should also distance itself from being so closely affiliated with automakers.
“Sirius XM is too dependent on the car. The company is implicitly telling people that this is the only place you can use it. The company should explicitly disassociate itself from its car strategy. Come up with a proposition that can compete with the iPod,” says Fader. “I’m calling for a marketing makeover. Dump both names (Sirius XM) because both are tightly linked to satellite radio. The company should be saying, ‘Here’s a music and entertainment service that’s available on every platform every place. And it’s commercial free.'”
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Wharton experts agree that Sirius XM may have to be reinvented to effectively compete with the iPod and other music services, but they note that there’s a market to be addressed. For instance, Fader says that the iPod lacks the surprise factor that radio can provide. Meanwhile, Internet radio services offer interactive features, but for the most part aren’t portable.
“I do believe a middle ground (between the iPod and radio) exists. A device could store MP3s, get updates with new songs by satellite and Wi-Fi for listening when you’re not connected,” suggests Fader. “No one cares about the technology behind the service. It’s all about the consumer experience.”
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In a research note Aug. 14, Citi analyst Tony Wible wrote that, “Reports of a new Internet streaming application that would allow Sirius XM users to get content on their iPhones and other portable devices are now emerging and highlight that (the company’s) value lies in its content and not its hardware or infrastructure,” says Wible, adding that a Sirius XM collaboration with Apple could allow the satellite radio company to cut costs while adding subscribers. For its part, Sirius XM could generate demand for music sales on Apple’s iTunes.
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Analysts say that, ideally, satellite radio will ultimately become just another channel on an integrated multimedia device.
Before then, however, Sirius XM will have its hands full squeezing inefficiencies out of its business.
Edit by DAF
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Full articles:
http://www.businessweek.com/magazine/content/08_44/b4106000485006.htm & http://knowledge.wharton.upenn.edu/article.cfm?articleid=2042
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