Analysts and investors are divided over whether the creation of Sirius XM Radio is a death knell or a lifeline for the satellite radio industry.
With yesterday’s closing has come the realization that Sirius XM now competes with all the audio entertainment choices that set the stage for the companies to merge in the first place, and it has put Wall Street in a dour mood.
The abundance of competition, combined with slowing net subscriber growth, has pushed shares down more than 40 percent since word of the Federal Communications Commission’s approval of the deal emerged last Thursday.
“With the rapid increase in adoption of streaming media technologies and lackluster demand amongst the younger demographics, we have to wonder if after eight years of marketing the service, satellite radio has already satiated the natural demand,” wrote Goldman Sachs analyst Mark Wienkes in a report.
With high-definition terrestrial radio gaining traction, new car models integrating jacks for MP3 players into audio systems and the increasing prominence of free Internet radio, competitors are beginning to see cracks in Sirius XM’s business model.
“I don’t think making people pay subscriber fees for content is sustainable,” said BlogTalkRadio CEO Alan Levy.
Launched in the fall of 2006, Levy said BlogTalkRadio’s user-generated platform, which features 3.2 million monthly listeners and 4,000 active hosts, is a “much more beneficial cost structure than terrestrial or satellite radio.”
Sirius XM Chief Financial Officer David Frear dismisses Levy’s tough talk by asking rhetorically, “We generated $2.3 billion in revenue for the trailing 12 months, how much did BlogTalkRadio generate? Do they have a viable business plan?”
Frear also noted that with 18.6 million subscribers, Sirius XM is not only the second-largest subscription media business behind Comcast, but its adoption rate also has outpaced that of the wireless and satellite television industries despite the multitude of competition.
Many Wall Street analysts share Frear’s bullish outlook.
“From a competitive position, we believe satellite radio’s dynamic content, exclusive programming, nationwide coverage, time warping abilities and commercial free product places it in a prime position to gain market share in audio entertainment,” Citigroup’s Tony Wible wrote in a report yesterday.
Merrill Lynch analyst Jessica Reif Cohen thinks satellite radio becoming standard in new automobile production gives Sirius XM a sizable advantage over its competition – she projects the company’s vehicle subscriber base alone will grow to 17 million by 2010.
Whether Sirius XM falls victim to its competition or prevails over it will depend largely on execution, observers said.
“Now there’s an important window open to them to build traction before other technologies start to permeate the landscape,” said RBC Capital Markets analyst David Bank. “This is their time to make [subscribers] sticky.”