Today I start with a review of the high points of the XM Radio/Sirius Radio saga, which has important lessons for all of us.
The roots of Sirius Satellite Radio date to 1990, when ex-NASA engineer Robert Briskman formed a company called Satellite CD Radio in Washington, D.C.
Two years later, American Mobile Satellite Corporation established a unit called American Mobile Radio Corporation dedicated to developing a radio service broadcast from satellites.
By 1994, Satellite CD Radio had spent $10 million on development costs, while accumulating a deficit of $9.5 million. That year, the firm made an initial public offering of stock on the NASDAQ, raising close to $7.5 million.
In April 1997, after a fierce legal battle against the anti-satellite radio establishment, Sirius bought the first of two licenses granted by the FCC to broadcast digital radio signals, paying $83.3 million at auction.
The other license was bought by American Mobile Radio, and thus was born a legal duopoly, which I, for one, thought would be a terrific structure for making money. But it didn’t work out that way.
Five years later, American Mobile Radio was spun off as XM Satellite Radio in the bull market of 1999; it began trading at 13 in October 1999.
Also in 1999, American Mobile Radio filed suit against its rival for patent infringement … not a smart way to spend money, particularly since, at this point, neither company had a service, or customers, let alone revenue and profits.
In November of that year, American Mobile was renamed Sirius Satellite Radio, and it moved into a new $38 million, 100,000-square-foot space in Manhattan.
XM Satellite Radio, meanwhile moved into its own well-equipped quarters outside Washington, D.C.
In February 2000, Sirius and XM ended their legal standoff and agreed to jointly develop unified standards for satellite radio.
By July 2000, Sirius had launched one satellite, while XM had launched none; Sirius was ahead … but it was still providing no service.
XM got its satellites into orbit in 2001, and began signing up subscribers; now Sirius was scrambling to catch up.
Finally, in July 2002, Sirius launched its nationwide service.
At the end of 2003, XM had 1.36 million subscribers, while Sirius had only 261,000
So in October 2004, fueled by competitive juices, Sirius signed Howard Stern to a deal worth an astounding $100 million per year for five years.
The winner: Howard Stern … and his listeners.
The losers: All the Sirius shareholders, who saw the opportunity for the company to make a profit pushed even further into the future.
Admittedly, XM never made a profit either, even without the bank-busting paycheck of Howard Stern.
After the costs of developing satellites, the costs of developing programming, and the costs of paying big bucks for stars, there were no profits for either company …. and to this day there have been no profits made in the business.
Hemorrhaging money, the companies begged the government for permission to combine (even though when the duopoly was instituted, merging was strictly forbidden), and on March 24, 2008, the United States Justice Department approved the merger of Sirius and XM (after the longest approval process in United States history) and the Federal Communications Commission followed suit on July 25, 2008.
On July 29, 2008, XM and Sirius merged.
And in the year since then they’ve reduced redundancies and found the path to profitability, right? Wrong!
In the latest quarter, ended September 30, Sirius XM saw record revenues of $619 million, and it lost a penny a share. Analysts now estimate that in 2010, the company will come very close to breaking even.
But here’s the problem. For years, subscriber growth came mainly from sales of new cars … and that’s a business that’s now in the toilet. Sirius ended this quarter with 18.5 million subscribers, down from 18.9 million a year ago.
And the company remains deep in debt.
Sirius stock (SIRI), by the way, is now trading at about sixty cents.
Ironically, when there no customers and no revenues, back in 1999, the companies were valued at more than $260 billion. Now, with more than 18 million customers, the market says Sirius XM is worth just $2 billion!
So was there ever a way to invest profitably in these companies. YES!
The first phase would have been in the period prior to the big market top of 2000. At that point, when neither company had subscribers, the stocks were climbing on hopes and dreams, on the perception that someday these two companies could make big bucks from their government-sponsored duopoly. I was a big fan back then, but because the companies had no revenues, we didn’t advise investing.
After 2000, both stocks went south for years.
The second time to make money was after the 2002 market bottom, when both companies were selling subscriptions, and the stocks were rebounding strongly. In fact, Cabot Market Letter subscribers made 644% on XM Satellite Radio by holding from March 2003 to May 2004!
But the trend didn’t last, as the weight of debt brought the stocks tumbling down.
The third time to make money was earlier this year, as SIRI rebounded from five cents to 70 cents. A nice profit, if you could snag it, but the risks are high in those low-priced waters. We don’t play with penny stocks, period.
So what’s the lesson? Often, the sizzle is better than the steak. Romance is better than reality. And finally, you can’t predict the future. When investors were high on the prospects of XM and Sirius, they didn’t foresee the massive spending that would put each company deep in debt, they didn’t foresee the dominance of the iPod, and they didn’t foresee the collapse of the automobile industry.
Yet you could have made very good profits from the stocks, simply by watching the stocks and investing when the uptrends were in effect.