Sunday, October 08, 2006

Over 5 Million

Howard just announced that Sirius has now sold over five million radios and is on track to hit more than six million by the end of the year. It is now outselling XM almost two to one, a complete reverse from before Howard Stern announced his move. Sirius added 441,000 subscribers this quarter (up from 359,000 a year ago) and XM only added 285,000 (a shocking drop from 617,000 from a year ago). These numbers are even better news for Sirius when you consider that last years quarter took place when Howard was mounting a media blitz about his move to satellite and hard core fans were scrambling to buy radios to make sure they didn't miss a minute. Just months ago radio pundits were saying that all of all Howard's fans who would make the move had already done it. But sales haven't gone down, they've gone up. The other good news is, as I pointed out in a previous column, Sirius current hardware sucks. They're coming out with a new radio, the Stiletto, that is rumored to be amazing, has tons of new features, looks cool and is already heavily backordered. If Howard wanted to get a big jump in subscriptions he can do it almost instantly by going on the PR circuit. He's the greatest salesman in the world. But right now, he doesn't have to. Sirius will be selling every Stiletto that can manufacture for the foreseeable future.

While XM still has more subscribers, around 7 million, and is technically still growing, the size of it's growth is in a free-fall and shows no sign of stopping. Sirius should easily surpass it in total number of subscribers sometime next year. So it's not surprising that XM stocks are in the toilet.

But, some have said to me, if Sirius is doing so well, why isn't it stock up? Because the stock is Sirius Inc., not Howard Stern Inc. If it was Howard Stern Inc. it would be through the roof.

The news spinners for traditional radio say the reason the stocks are low is because the rise in subscriptions can't continue at the current pace. The Washington Post lumping the two together despite the huge differences.

Well, obviously XM's growth isn't rising, but Sirius growth is up significantly and there reason to believe it won't continue.

But there is one area that investors should be concerned about. Programming costs. Howard cost Sirius $500 million for a five year deal and while he is worth every penny, it does put a drain on profitability since he and Super-agent Don Buchwald got a nice size chunk of the company. Moreover, but Sirius and XM are in a battle over sports rights, and it has cost them a fortune dueling over who would pay the most for baseball or football. XM stupidly paid $50 million for rights to Oprah and that is a complete waste of money. Sirius success is almost completely due to Howard because he is the only distinction between two great, but very similar products. And there's nothing stopping Howard from retiring in five years, going back to traditional radio (which he will never do, but investors have no promise) or even switching to XM for a huge chunk of that company. (You know for a fact that if XM could do it over, they would have paid twice as much to get Howard.)

So time to sell your Sirius stock? Nope, hold on to it, in fact, buy a bunch more because I have an announcement to make. Sirius and XM are going to merge.

What, you say, you haven't heard that? Why hasn't Howard announced it? Do I have the inside scoop or is it just a rumor?

No, I don't have any information about negotiations, but I do know it will happen. Why? Because the business economics just makes too much sense.

While Sirius is rapidly gaining on XM, XM is still growing, at least a little, and expects to reach 8 million that year. Together, their audience would instantly be 14 Million. That's a huge leap. Moreover, they wouldn't be force to compete for content, would be able to offer all sports on one service. That would make the argument for subscribing even more compelling.

Also they would save a fortune on R & D and manufacturing costs, distribution and sales and become available in all car brands. There wouldn't be much government objection to a merger and their are no FCC rules to stop it. It just makes too much sense for them to merge.

So why haven't they already? Because XM thought it would win. When they both came out, XM looked like the winning horse. Why would it merge with a rival that was probably going to fail. But with Sirius rapidly catching up, XM has to be concerned. If Sirius continues to grow at the current rate, it will surpass XM by next year. If that continues, in a couple more years it's XM might go completely under. And already it's management is in turmoil while Sirius management is in the hands of one of the best men in the broadcasting business, Mel Karmazin.

So then why shouldn't Sirius just hold out and figure that XM will get Betamaxed? They could. And once it went under they would have the benefit of less competition. But XM's 7 million subscribers is still a lot of subscribers, and Sirius is under pressure from shareholders to offer them results as quickly as possible. And since shares of both companies are undervalued, in my opinion, it won't be hard to make a deal.

I predict the companies will merge with in a couple years. Definitely with in four years. Why? Because, of course, of Howard.

When Howard's contract comes up, if they haven't already merged, there is a huge danger that Howard could over to switch to XM for even more that the 500 million he has already gotten. There's even the danger that Howard would start his own satellite company or a new startup. He has already proven what he can do in bringing an audience into a new medium.

Not only with Sirius and XM merge, but they'll also have to give Howard a huge chunk of the new company too keep him happy and not rock the boat. If you think Howard hit the jack pot with his old deal, wait till you hear about the new one. As I've said before, it won't surprise me if he ends up owning most of the company.

And then it really would be Howard Stern Inc. And that's a stock worth betting on.

No comments: