Sirius Trouble: Is Satellite Radio Headed for a Fall?

Sirius Trouble: Is Satellite Radio Headed for a Fall?Satellite radio was one of the biggest success stories of the past decade.

A generation ago, it seemed absurd that people would pay for radio. Then again, the same thing could've been said about television a generation earlier.

Sirius Satellite Radio and XM Satellite Radio hit the market with competing platforms, merged in 2008, and now combine to serve premium content to more than 21.3 million accounts. Sirius XM Radio (SIRI) CEO Mel Karmazin expects to tack on another 440,000 net subscribers during the holiday quarter.

Things seem to be going swimmingly at the media giant, going by this week's third-quarter report. Revenue is growing at a mere 6% clip, but earnings, free cash flow, and adjusted EBITDA are increasing at healthy rates. In other words, the model works. Expanding margins and sustainable profitability led credit rating agency Standard & Poor's to upgrade shares of Sirius XM Radio last week.

Could things get any better? Sirius XM is so confident in the quality of its product that it's boosting its primary monthly rates by 12% -- from $12.95 to $14.49 -- early next year.

The rub is that it can all go away, faster than you can say Baba Booey.

Watch Your Step

There are a few things that Sirius XM would prefer to see go away.

For starters, the average monthly revenue per user has shrunk from $11.81 to $11.66 over the past year. One of the reasons for this is that Sirius XM finds itself discounting its service to both attract new customers and retain existing subscribers.

Call up Sirius XM's customer service -- if you dare -- and threaten to cancel. Don't be surprised if they offer you a sweetheart deal to stick around.

It makes sense for Sirius XM to bend over backward since this is one of the more scalable models out there given its high fixed overhead and low variable costs. However, it's not exactly what you want to see happening just two months ahead of a widely publicized rate hike.

Folks also aren't converting as eagerly as they used to. Sirius XM's conversion rate -- the percentage of new car buyers who begin paying for satellite radio after their free trials expire -- has fallen from 48.1% to 44.4% over the past year. Again, this isn't the trend that any company wants to see before it makes its product even less attractive through higher prices.

These Audio Turnstiles Click Both Ways

Churn is a part of any subscriber-based business, but it's important to see this from the vantage point of gross additions and subtractions. Sirius XM ended the third quarter with 334,000 more subscribers than it had three months earlier, but this is actually the difference between 2,138,131 signing up for satellite radio and 1,804,448 people cancelling their accounts. These gross additions aren't cheap, even if subscriber acquisition costs are down to $55 per head. More important, the sheer volume of folks going in and out indicates that this industry is more mature than you probably think. It's not as if no one outside of its current 21.3 million subscribers has ever tried the service. They have, and every year more than 6 million listeners deactivate their receivers.

The math still works for Sirius XM. The company has been routinely profitable since early last year. However, what if the slow subscriber growth -- clocking in the mid-single digits on a year-over-year basis in recent quarters -- isn't as much a sign of the economic times or of sluggish car-buying trends as it is of a service that is simply peaking in popularity?

Tomorrow's Lose-Lose Scenario

Smart listeners will have every right to challenge January's price increase. Even if Sirius XM positions the move as adding just a nickel a day to someone's tab, it's not as if the increase is justified. Programming and content costs have actually declined 10% over the past year. Kindles and iPhones get cheaper over time. Why is Sirius XM taking a page out of Netflix's (NFLX) ill-advised playbook?

Sirius XM is rolling out SiriusXM 2.0 this week, a new platform that features nearly two dozen more stations. The problem is that folks need to buy new receivers. Two receivers will be available in stores this holiday season, but it will take automakers a year or two before rolling out new cars with factory-installed SiriusXM 2.0 systems.

Along the way, new cars continue to ramp up their dashboard infotainment options. At least three automakers are allowing smartphone owners the ability to seamlessly stream Pandora (P) and Clear Channel's iHeartRadio through their speaker systems. In other words, Sirius XM isn't just competing with terrestrial radio anymore.

Satellite radio isn't going away anytime soon, but its days of growth may be more in the rearview mirror than on the road ahead.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any stocks in this article, except for Netflix. Motley Fool newsletter services have recommended buying shares of Netflix.

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after my free subscription to xm/sirius is up, i'm gone. $500 for a 3yr. subscription? i get cable tv for less. i'm in the house more than in the car. most of us are. and my radio listening preferences have changed drastically over the years. never howard stern, sports, religion, rap, hip-hop, politics. the oldies? they were crap when they made 'em. local is free and has everything i want.

September 13 2012 at 4:29 AM Report abuse rate up rate down Reply

I was originally an XM subscriber and loved the service. Then after the merge, the content got stale and they keep playing the same stuff over and over. Regular radio does that and it's free, why do I need to pay for that? They used to have stations where they played music, but now they talk a lot on them.

The final nail in the coffin for me was that I got a new radio as a replacement. During pre-sales call, they assured me I could combine the 2 subscriptions. When I called to activate the new radio they said they didn't do that. When I finally got a supervisor that knew what they were doing, I was told "no problem". A month later, I noticed that the new subscription had not been updated. Now they would combine what remained on the two, but I lost the two months where the 2 radios were active. They screwed this up (of course). So, I canceled when the subscriptions were up. They claimed they would not screw up and would give me extra months, but I told them "You already screwed it up 3 times, how are you going to get it right this time." They cancelled my account at that point.

Of course, they do send me notices every month to reactivate my radios. Do they really think that is going to happen?

November 09 2011 at 4:37 PM Report abuse +1 rate up rate down Reply

The disparity between disconnected service and new service can also be attributed to someone acquiring new equipment. My old portable unit was disconnected when my new car came with the service capability already integrated into the car's stereo. I never stopped listening.

November 09 2011 at 3:45 PM Report abuse rate up rate down Reply

They need scrap the radio and use their satellites to provide mobile internet access, so I can Skype on the go (Buy them too Google!). At $199 a year it would be worth it. I pay $180 a month because GCI another corrupt company in Alaska monopolizes the fact they are the main cable internet provider.

November 09 2011 at 1:09 PM Report abuse rate up rate down Reply
1 reply to RobertO's comment

their satellites... the u.s. taxpayer paid to launch.

September 13 2012 at 4:34 AM Report abuse rate up rate down Reply

I bought a new car in June, 2010. It came with Sirius. Great. When the free 3 month service ended, I was called to renew at a low 6 month rate, which I agreed to do. When the 6 month period was up, I chose not to renew, since I am not traveling in my car a great deal. Silly me. I didn't call them and tell them I was not renewing, and I also did not send in a renewal payment. After several months, I received a rather nasty and threatening letter from a collection agency. My credit rating is 825; therefore, I was greatly shocked by this turn of events. Sirius insisted I must pay an additional $35 for the two months that had passed since my 6 month period expired. Needless to say, I was angry and shocked. Can I now spread the word about Sirius business tactics? You bet. And I do it every chance I get. They may be the next victim of subscriber wrath; i.e., NetFlix anyone?

November 09 2011 at 11:05 AM Report abuse rate up rate down Reply
John S

Satellite radio will be dead shortly. As web adapters to smartphones become more popular and allow web access to sites like Pandora. Satellite will be killed off. Raising subscriber rates is just another Netflix blunder and it shows that Sirius XM has a problem. My issue is that their program packages changed and they eliminated Music only and cheaper packages. Trying to reinforce that bottom line I guess. I do miss it, but not enough to justify the costs. Considering the options coming into play with digital music in vehicles. I see a dark future for satellite.

November 09 2011 at 10:50 AM Report abuse rate up rate down Reply

Does not matter what the charge for it. If they dont beam internet access to the Cars, it will soon be a dead technology.

Why do we need satellite when we can, via wireless, tether our Cellphone and the Full power of the internet to your vehicle?

The future isn't radio in the car, its Browsing, Google Maps, Downloaded Movies, Work applications, EVERYTHING else.

Sirius is no longer Serious.

November 09 2011 at 10:02 AM Report abuse rate up rate down Reply

I will be Canceling !!

November 09 2011 at 6:25 AM Report abuse rate up rate down Reply

when you pay nearly half a BILLION to an unfunny jock whose best years are far behind him, your management needs to either wake up or be replaced. Unfortunately Karmazin and Howard are a package deal. If the company is to get its house in order, it needs to drop Stern once his contract is up (BTW, this entitled has-been is only doing 4 days per week with an obscene amount of vacation time to boot???) and Karmazin needs to learn a little humility. Further, with the advent of G, internet radio/podcasting etc will become far more attractive in the next several years.

Hmmmm.....maybe Sirius isn't the company to look at after all.

November 09 2011 at 2:08 AM Report abuse rate up rate down Reply
1 reply to rookofone's comment

Karmazin and Howard aren't talking to each other since Howard sued Sirius over stock option/contractual concerns. Howard has some weeks that are 3-day weeks, and other weeks that are 4-day weeks.

I have been a subscriber to Sirus or XM (depending on what I am driving) since 2003. In the rare times I have flipped over to terrestrial FM or AM, it is hard to imagine having to tolerate it on a regular basis.

The only thing that is bothersome about the service is their Customer Service and Marketing. Among the worst a person will ever experience!

November 09 2011 at 1:46 PM Report abuse rate up rate down Reply
1 reply to loveburgers!!'s comment

howard some 4 day weeks? i wish. it's 3 days weeks now, and has been for months. since the lawsuit, the show's been terrible- you can count me as a cancel as soon as my prepaid year is up in jan.

November 09 2011 at 4:52 PM Report abuse +1 rate up rate down
Art Hayes

Through the years I've been a subscriber to first XM, and now Sirius for 5 years. This is the first I've heard of an increase and I will be cancelling. I was already considering it, this is just the final push. There are maybe 8 channels I flip through, and nothing I can't live without. Losing the internet stations was a little rude, now another price increase. Companies that nickel and dime their customers need to learn. I feel America is finally waking up. We've seen it with Netflix, BoA, etc.

November 08 2011 at 11:08 PM Report abuse rate up rate down Reply