Sirius XM Holdings Inc (SIRI)

[SeriousMoney]

Satellite Radio: Now It's a Race
By Olga Kharif
BusinessWeek Online, DECEMBER 28, 2005

Sirius is still No. 2 to XM, but the lead is getting narrower. So why are investors growing skittish about both stocks?

December hasn't been kind to satellite-radio stocks. Amidst a flurry of contradicting analyst opinions, alternately downgrading or predicting a red-hot future for stocks in the sector, confused investors decided to pull back until the fog clears. As a result, shares of market leader XM Satellite Radio fell 3% since the beginning of December. Runner-up Sirius lost nearly 4%.

What gives? Wall Street insiders have been whispering about the possibility of weak holiday sales. A recent sell-off of satellite radio stocks did nothing to soothe investors' nerves, either. Apollo Investment Fund recently sold about a third of its holdings in Sirius (SIRI ), in which it was the largest shareholder.

And Sirius Chairman Joe Clayton has unloaded 20% of his holdings since February (his last planned sale took place on Dec. 27). Sirius claims the sales are simply the result of Clayton's transition from CEO to chairman. Insider sales at XM (XMSR ) are fraying nerves among investors too. In early December, XM CEO Hugh Panero sold nearly $24 million worth of stock. Several executive vice-presidents followed suit.

STERN BUZZ. What's really going on? It's more than the typical holiday-season cycle of years past. Historically, satellite-radio stocks rev up early in the fourth quarter and cool off as institutional investors and fund managers sell off to take profits, says Kit Spring, an analyst with St. Louis-based investment bank Stifel Nicolaus & Co.

But this picture has one new factor, and it's causing all kinds of jitters: Howard Stern. The self-proclaimed "King of All Media" debuts on Sirius on Jan. 9, and expectations couldn't be higher. The buzz around Stern helped propel Sirius above the 3 million subscriber mark, which it announced Dec. 27.

That newfound momentum has helped Sirius eat into XM's market-leading position. In October, XM said it was on track to break the 6 million-subscriber mark. (It will announce its latest subscriber numbers on January 4, 2006.)

CUSTOMER COSTS. Spring says XM will probably meet those expectations, but that may be beside the point. Spring says his research shows the fourth quarter will mark the first time that Sirius will come out ahead of XM in the share of satellite radios sold by retailers like Best Buy (BBY ) and Circuit City (CCY ). Both XM and Sirius sell roughly half their subscriptions directly through auto makers. "XM has lost a little momentum," Spring says. He has a hold rating on both stocks.

And increased competition from Sirius can only raise XM's customer-acquisition costs. In the third quarter, XM said it spent $89 to add every new customer. Spring says that cost could go as high as $115 in the fourth quarter. He says Sirius spends even more -- about $140 per subscriber. XM declined to comment. It next reports earnings in February.

But clearly the momentum is with Sirius, and XM is finding its long-held lead under attack. "Stern alone can make Sirius bigger than XM within a year," says Richard Doherty, director of tech consultancy The Envisioneering Group.

HARDWARE GIVEAWAYS? You can be sure, though, that XM won't sit still and watch its market share erode. Neither XM nor Sirius is yet profitable, and an all-out marketing battle could cut into both companies' plans for profitability. One possibile strategy: While satellite-radio hardware is sold today for as little as $30, it might not be long before it's made free with a subscription, says Doherty. If that happens, it would change the industry's business model and sap the potential for profits.

That said, both companies' shares will likely benefit from announcements expected at the International Consumer Electronics Show in Las Vegas, only a week away. XM is expected to announce a satellite-radio player that, thanks to the company's collaboration with music service Napster (NAPS ), will allow users to bookmark songs they hear on the radio to buy later.

XM might also announce the roll-out schedule for a satellite-video service it first demonstrated in 2003, says Frank Viquez, an analyst with tech consultancy ABI Research. And a Sirius partner could introduce a combined navigation-system/satellite-radio device, he says.

The bottom line is, "satellite radio is starting to become what FM became in the 1960s," says Doherty. "It's one of the hottest areas of consumer electronics." And chances are the sector's momentary pull-back won't last long.

http://www.businessweek.com/technology/content/dec2005/tc20051228_530250.htm