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Satellite Radio Falling to Earth?

OK, so XM has maybe 350,000 subscribers now, and Sirius is trying to break out above 10,000 (a bit like the Dow in that respect). With about 100 channels apiece, that works out to 3,500 and 100 subscribers per program offering, respectively.

OK, so XM has maybe 350,000 subscribers now, and Sirius is trying to break out above 10,000 (a bit like the Dow in that respect). With about 100 channels apiece, that works out to 3,500 and 100 subscribers per program offering, respectively. This presumes all channels will get equal audiences, although the Lithuanian channel may not have the draw of ESPN or CNBC, I’m thinking.

Most of these subscribers are in cars, and the conventional wisdom is that automobile listening is maybe two hours a day. So if the regular FM radio in the dash never gets turned on and Sirius or XM get all the listening, we’re looking at about 200,000 subscriber-hours of actual ear time each month for each of market-leader XM’s channels.

Arbitron says the leading Webcast sites blow the doors off those numbers. Virgin Radio got 1.38 million listener hours in July. Jazz FM UK was second with just over a million listener hours. In third place was WQXR, a classical FM out of New York! A 200,000-hour performer would have been ranked between number eight and nine, between KPLU(FM)’s jazz and Ozzy Osbourne on KNAC(FM).

Alright, maybe the money is in the subscriber fees, which regular FM and Webcasting don’t have. The market capitalization of XMSR (found on NASDAQ) as of this writing is about $275 million, and it has a price-to-book ratio of 0.21, meaning they’ve got about $1.3 billion in the deal overall. They’ve been cut off from further borrowing and have been told it’s pretty much do or die.

I’m ignoring Sirius since it has already been downgraded and investment bank Salomon Smith-Barney’s analyst used the phrase “time to throw in the towel” on the firm’s Web site, which is probably good news for XM, although Sirius might live on in bankruptcy and/or be acquired by Ford. So don’t count them out altogether.

How many $10 subscribers do you have to have to cover the vigorish on $1.3 billion? Presuming an average margin of 50 percent (a wild-ass guess at best), you need about 3 million folks sending in their checks every month based on my guess of a 15-percent cost of funds. Maybe they borrowed the money for less than 15 percent on average, though I doubt it, since the funding came on the heels of Motorola’s Iridium disaster.

The business model XM trumpeted is that costs are mostly fixed while revenue is determined by the number of subscribers and advertising dollars. Iridium’s was the same – once it’s built, every increase in revenue is an increase in profit.

“Holy cash-flow, Batman! That means if we double the number of subscribers, we quadruple the profit! How can we lose?”

Well Robin, partly because the FM stations you expect to get your listeners and ad revenue from may not take this lying down. You’ll need to buy advertising from terrestrial FM (though probably not from Mel Karmazin, who prohibited ads for streaming media on Infinity stations) to get the subscribers you need. And if you are successful at getting ads off the FM band, you’ll face the age-old revenue vs. clutter problem with your subscribers. And the alternative for the subscribers is to go back to free FM.

So by all estimates, with the capital market spigot shut off for XM and Sirius, and with enough money in the bank to run the store for maybe another year (although marketing expenses must surely increase to improve penetration), I’m thinking the birds named Rock and Roll (XM’s geostationary satellites) will soon be delivering pictures of the kids to Grandma’s color-screen cell phone. Or the entire enterprise will just become a wholly-owned subsidiary of GM and Ford, delivering the latest news on zero-percent-financing and a constantly updated map giving directions to the nearest dealership.

RW welcomes other points of view.

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