XM & Sirius Have Bigger Problems than the FCC
Wednesday, April 2, 2008 | Wayne Mulligan
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Market Commentary - XM & SiriusThere was a pretty interesting Q&A exchange that appeared on TickerHound this week.
A member asked, "If Sirius and XM get approval from the FCC is it time to buy?" - click here to read the entire question.
One of the members was leaning towards the Bearish side of the argument... and he makes a good point:
"Think about it - iPod docks come in most cars now, iPods are outselling satellite radios by orders of magnitude and with the proliferation of pod casting, the "talk show/news" aspect of radio is rapidly becoming commoditized."
This got me thinking - how has satellite been doing relative to HD radio and the iPod?
Where will this industry end up?
Many opponents of the XM/Sirius merger argued that the union of these two companies would create a virtual monopoly in the satellite radio industry. But what XM and Sirius argued - and ultimately, what the Department of Justice agreed with this week - was that the battle they're fighting isn't with other potential satellite rivals, it's with EVERYBODY ELSE in the personal audio market, namely Apple and traditional broadcast radio.
And I have to admit, I personally don't listen to the radio in my car anymore. I plug my iPod in and I have my own personalized radio station for an hour. I know plenty of other folks who can't stomach the thought of paying to listen to the radio in their car either - even if it is for Howard Stern. They'll simply tune into the regular radio stations.
It's pretty clear that the alternatives are compelling, and that's why I think it made a lot of sense for the DOJ to approve this merger - and ultimately I think it'll pass the FCC as well. There's a lot of competition in this game and the prize is certainly a big one.
So let's take a quick look at the battlefield and break it down by the numbers:
XM Satellite Radio
Subscribers: 9 million
Revenue: $1.14 billion
Sirius Satellite Radio
Subscribers: 8.3 million
Revenue: $922.1 million
Together these companies will have roughly 17 million subscribers (have to assume very little overlap here).
Broadcast & HD Radio
While it's still the clear leader in terms of market penetration, traditional broadcast radio has been plagued by sluggish advertising revenues for the last few years. If this industry has any hope of surviving, its future lies in Digital/HD radio.
iBiquity, the company that invented and sells HD radio technology, is privately held so accessing credible data is difficult. My best guesstimates are below:
HD Radios sold (FY: 2007): 330,000
Revenue ($180 per unit): $59.4 million
Apple iPod
I've bought roughly 3 iPods over the last few years, so it would be unfair to use the number of total iPods ever sold as an accurate comparison to XM/Sirius. To be conservative I'll just use Apple's Fiscal 2007 numbers instead.
iPods sold (FY: 2007): 51.6 million units
Revenue (FY: 2007): $8.3 billion
Who's Gunning For Who?
HD Radios certainly seem like the next logical evolution in the automotive market - people are used to it, more and more radio stations are getting equipped with HD broadcasting technology, and the price of the units is bound to come down as manufacturing processes and component costs fall.
But will that deter the growth of satellite or the iPod as a compelling alternative?
HD radio sounds good in theory, but you still can't fit it into your pocket and carry it to the gym with you. With satellite radio and the iPod, you can take your music with you wherever you decide to go - with HD radio, you're still stuck in your car.
And while satellite is certainly growing, it's far from profitable and it still lacks the penetration rate of the iPod.
Furthermore, Apple is making a concerted effort to penetrate the auto market - the only big car manufacturer that doesn't have an iPod option is Toyota, and I don't see that lasting much longer. In any case, with all of the after-market options available, anybody can bring their iPod into their car with ease these days.
This is a direct challenge to both broadcast AND satellite radio, and based on the numbers, Apple's definitely leading the pack for the moment.
So even if the FCC gives this merger its blessing, I think XM/Sirius have bigger problems ahead.
Visit the TickerHound Blog at http://blog.tickerhound.com to weigh in on this topic today
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Wayne Mulligan
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