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$1.92 0.01 (0.52%)
7/3/2008 1:00 PM

Sirius Satellite Radio, Inc. (SIRI)

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A satellite radio provider in the United States which currently broadcast a number of channels of programming to listeners across the country.

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Avatar alexvb (39.53) Submitted: 3/10/08 11:09 PM : Outperform Start Price: $2.70 SIRI Score: -25.52

Srius Radio has a profitable business model that will do well as the economy slows down even if it does not merge with XM. At first glance their financials look bad. They are loosing money ($-.39 per share in 2007 or $565 million). This is the smallest loss it has had since 2003 when its revenue was less than 2% of 2007's.

But, the question is whether it will turn a profit, and how much will that be. I began by looking at their income statement in a per subscriber bases. Sirius collected $922 million in revenue in 2007 and had $1435 million in expenses for an operating loss of $513 million. They ended 2007 with 8.2 million subscribers and started with 6 million. That implies that they collected $110 per subscriber, paid $172 per subscriber, and lost $62 per subscriber.

The key to this is understanding why their expenses are so much larger than revenue. The largest single expense line is "subscriber acquisition costs" (SAC, the incentives to partners) at $49 per subscriber. Next is programming content at $28 per subscriber. Then sales and marketing at $21 per subscriber. The other costs add up to $74 per subscriber.

So, most of their costs are associated with getting more subscribers and they increased the number of subscribers by 37%. What happens when the market is finally saturated and everyone has a radio that would want one? Marketing costs and to a greater extent SAC will be significantly cut. Programming costs do not increase with the number of subscribers. Lets assume (very conservatively) that the number of subscribers grows by 100%, marketing gets cut to 50% ,and SAC goes to 20%. In this scenario, Sirius Radio is profitable with an expense of $96 per subscriber and income of $110 per subscriber. Sirius is trying to grab as much of the market as it can. Once the market becomes saturated, it can shift gears and become more profitable.

Sirius also has the opportunity to do especially well in the coming years if the economy continues to slow down. Slowing economy leads to decreased advertising. Sirius does not receive a significant amount of its revenue from advertisements. But, advertising is a significant cost. So if advertising declines, Sirius wins. Also, because terrestrial radio stations advertising revenues would be down, the cost of programming throughout the industry may decrease.

Satellite radio is seen to have two competitors: terrestrial digital radio, and MP3 players. Neither will significantly damage Sirius. Unlike satellite radio, terrestrial digital radio has advertisements and greatly reduced programming content. However, terrestrial radio does have local content. If the economy slows, terrestrial radio will not have the cash to spend on capital to convert to digital radio.

Almost everyone already has an MP3 player. Yet, both Sirius and XM continue to grow their subscriber base by leaps and bounds. Satellite radio provides the listener with music that they do not already have and may not know about. It also provides live information and news. If anything, they should be viewed ascomplementary goods instead of competitors.

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Avatar Matt8265 (87.28) Submitted: 3/11/08 1:14 PM

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This is an excellent, excellent and well written view. Thank you.

Just one note.... as the subscriber base builds two things happen. Ad revenue goes up as the customer base determines rates ...and..... programming costs do increase as the content remuneration is tied in royalties to the number of subs in part.

Other than that..... I wish someone... anyone at TMF could write something as meaningful as compared to the shite they created on satrad.

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Avatar Matt8265 (87.28) Submitted: 4/28/08 8:49 PM

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This pitch assumes that Kevin martin of the FCC is not on the take. I think he is.... what else can explain a 15 month delay....incompetence or bribes?

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Avatar alexvb (39.53) Submitted: 4/28/08 10:42 PM

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Actually it doesn't. I argue that even without a merger, Sirius radio can be profitable once they stop trying to grow as fast as they can and instead manage for profitability.

Although I didn't say so in my original pitch, I believe that Sirius radio has a greater ability to become profitable. Because XM uses different categories that Sirius on their income statement, I cannot be certain that I am comparing apples to apples. However, I did not see (please correct me if I am wrong) that XM is profitable when they stop trying to expand.

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Avatar Matt8265 (87.28) Submitted: 4/29/08 10:06 AM

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Alex,

I agree with you..... if the FCC ever acts, and acts against the merger, you're still only going to have one player anyhow... and that is Sirius for three reasons not mentioned.

1. The high amount of OEM subs contribute little cash to XM. The GM contract underscores just how little XM makes.
2. Conversely, Sirius has no payment to make on it's aftermarket sales.... very lucrative.
3. The GM contract allows for XMSR to be "bumped" if they (XM) can't hold a certain share. In their last Q-10 filing XM's management stated they "thought" they met this metric..... I don't think they did personally.

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Avatar OneHumbleFool (37.07) Submitted: 5/21/08 9:08 AM

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I am long SIRI and have been for some time. The slow step of the FCC is disappointing, however, I am not entirely sure this has to be a bad thing. I think there are potentially may other great suiters of SIRI such as RIMM or Apple. I device maker could potentially be a great fit as they would benefit from the sale of content, etc.

If none of this take place, I will be patient for SIRI to turn into the cash cow it eventually with become. It should eventually do that as this business is the future dispite the fighting and lobbying put up by the current radio owners and associations.

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Avatar Matt8265 (87.28) Submitted: 6/18/08 2:25 PM

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I must say, On June 18th, after tentative approvals, this has sunk to 2.42.
This is one turde' of a stock, that wouldn't float with balloons.

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Avatar Matt8265 (87.28) Submitted: 6/26/08 2:32 PM

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Ooops.... 2.42 was a high water mark. UnF'ing believable . ..1.85 today and sinking,
The worst investment in 25 years sans Worldcom..... hey.. that's it... Sirius is
Worldcom with Satellites" !

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Avatar McNabRanch (24.40) Submitted: 6/30/08 12:24 AM

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Go to NAB.ORG.....they have posters available......spending lots of money.....love to be able to trade "fear options".......I intend to hang out until all the shorts are squeezed out.....love to know who holds them....who bought SIRI up to 2.10 at market close and who sold off to 2.04 in after hours...love to know that also.....

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Avatar Matt8265 (87.28) Submitted: 7/02/08 8:24 AM

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Now crossing the 470 day mark is the FCC.... a new high water mark for future generations!

It's reported that Ms. Tate can't make a decision... Humm... a blond from Tennessee that can't decide after six Congressional hearings, 470 days and a DOJ approval three months ago. Shocking!!!!

Debbie. Please shite' or get off the pot. If you can't make a decision, any decision, please resign and let a competent person take your chair!

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Avatar Matt8265 (87.28) Submitted: 7/04/08 6:30 PM

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Did I hear somebody say... WTF's going on with a Sirius merger now at day 510 (since announcement)..... well... here's my .02565

To Wit;

Commissioner Tate plays Kathy Bates - In the movie "Misery"

Remember the movie "Misery" where Kathy Bates "Hobbles" James Caan so that she can keep him incapacitate just enough to enjoy his company, but to never see him become healthy enough to leave or defend himself? Every time the poor bastard would start to heal, here comes Kathy with a sledgehammer to crush his ankles.

See an analogy here?

The FCC five are not stupid people, in fact, if you look at their writings you'll discover that they are highly intelligent and articulate people. I've read most of their individual works and rulings. However, apparently something is horribly amiss as past history has shown that the average merger processes in less than 9 months .. So why are we here nearing 18 months with two quickly fading companies whose stock is valued by the leading financial house in the ENTIRE world as being worth less than a Big Mac or a quart and a half of gasoline?

Why ... Because the FCC knows very well that this merger is necessary for the proliferation ... no, existence of satrad. They know these companies are deeply in dept and can't sustain themselves for another half year, they know people love the service, they know satrad provides a great pubic service, they know the NAB has had a monopoly for years treating consumers like sheep.... and YOU know all these things are true!

But as Mr. Addlestein's writing hint (and I like him as a person and Commissioner ... he'd make a great future Chairman IMO) the FCC has allowed itself to be controlled by Congress... and Congress has allowed itself to be controlled by the NAB... and the NAB's intent is to destroy Satrad for their own financial benefit.

The FCC has fully relinquished its autonomy under Kevin Martin.

So what is a puppet FCC organization to do? Torn by the dictates of their puppet masters yet intelligent and moral people who realize that they are not doing their duty to consumers or the technology by nixing this arrangement.

They "Hobble" Sirius and XM with delay via meetings and lobbyists, and meetings and ex partes and people looking for handouts ... very much like Kathy hobbled James. They take XM and Sirius within inches of their lives. This way, when they are finally tired of the game, and primarily their careers are assured, they can have it as close to "both ways" as possible. Please their Congressional puppet masters and (lastly) hopefully the public.

This is exactly what they have done!

Let's hope it's not too late.

Go Jimmy Go!

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