Sirius XM Radio (SIRI)

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.