sorry couldn't resist.
From WSJ:
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From WSJ:
Sirius Satellite
May Be Headed
For Dog Days
Overspending on Stern, NFL
Plus Too-Optimistic Assumptions
Look Like Recipe for a Flameout
December 8, 2004; Page C1
Sirius Satellite Radio is named after the brightest star in the Earth's sky, which is fitting. Stars burn brightest right before they flame out.
The once-desperate No. 2 behind XM Satellite Radio Holdings Inc. has seen its stock rise 340% to $9.01 since mid-August, mainly after the October signing of a five-year, $500 million contract to carry the musings of Howard Stern. Mr. Stern paved the way for Mel Karmazin, the erstwhile satellite-radio skeptic, to come aboard as the chief executive.
Rabid cult-shareholders have taken this to mean that satellite radio is finally legitimate. They are right, in the sense that satellite radio will survive in some fashion. For this, they must thank the terrestrial radio companies, who have defiled their golden goose with robotic programming and assaultive ads every third minute.
But the real lesson from Sirius Satellite Radio Inc.'s binge is that content remains the real king of media. By overpaying for Mr. Stern and for its earlier agreement to carry National Football League games, Sirius has started to crush its own windpipe. Sirius's chief financial officer, David Frear, says the company will break even on the first one million subscribers Mr. Stern generates. They put his fan base at 12 million, though trade magazine Talkers puts it at roughly 8.5 million weekly listeners.
That seems overly optimistic. The problem is that Mr. Stern owes his appeal to the very Federal Communications Commission restrictions he complains about. How many people will want to tune into a Howard Stern who can get away with anything? More important, how long will they stay subscribers?
Worse, Sirius has set a malign precedent, driving up prices not only for XM, its major competitor, but also for any distributor looking to bid on hot content.
Numbers never matter for these echo-bubble sectors, of course, as long as the companies experience hypergrowth. But the valuations of the two stocks -- especially Sirius -- make about as much sense as nudity on the radio. The market value today assumes that Sirius will reach 45 million subscribers. Today it has around 800,000.
Here's how to get to those numbers. Sirius's former chief executive and current chairman, Joe Clayton, hasn't just overpaid for content. He has treated his shares like paper. Thus, the company has a market value of $15.7 billion, using Sirius's own fully diluted share count of 1.74 billion.
In the third quarter, the average monthly revenue per subscriber -- known as ARPU -- was $10.92, well below the $12.95 monthly charge. But for the purposes of this exercise, let us assume the ARPU hits $12. That means each subscriber will generate $144 annually.
In this business, investors look at "contribution margin," which measures the cash flow after the variable costs from that subscriber but before marketing and subscriber acquisition costs. Sirius expects a 70% contribution margin. As a comparison, EchoStar Communications Corp., the satellite-television company, has a margin in the low 40s. With a 70% margin, a subscriber is worth $100 a year to Sirius.
Sirius's churn rate, or the rate at which subscribers drop the service, was 1.5% a month in the third quarter, down from 1.6% the quarter before. Investors and analysts focus on churn, but they overlook that, by simple math, the churn will be overstated at the early stages of rapid growth for any company or service. Subscribers tend to fall off only after a period of time.
Analysts debate where the churn rate will settle. The company thinks it should settle at around 1.7%. For reference, Bruce Leichtman, of the eponymous cable and satellite market-research firm, estimates that satellite television has a 19% annual churn, while cable has a 30% rate, of which more than half comes from people moving homes. Both Sirius and XM have deals with car makers, which raises the question: Will satellite radio suffer greater churn since people switch cars every three years or so? Or will it have lower churn as the companies make plug-and-play models?
Bulls will surely whine, but let's assume a higher rate of 2% monthly, or 24% annually. That means after four years, the equivalent of all the subscribers churn off. A subscriber, then, is worth $400. This is a tad oversimplified because money tomorrow is worth less than money today, but so be it.
Then there is the subscriber acquisition cost, or SAC. This year, Sirius forecasts that its SAC will be $200, down from $293 a year ago. Analysts think that someday SAC should be $50. Grant that to Sirius today and that means a subscriber is worth $350 to Sirius.
With a market cap of almost $16 billion, the market is valuing Sirius as if it reaches already 45 million subscribers all by its lonesome -- on generous unit economics. Today, the entire cable-TV industry has about 67 million subscribers and entire satellite-TV industry has 24 million, according to Leichtman Research.
Sirius is also called the Dog Star. Something to think about.
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