In the last decade FM radio has declined dramatically, creating a void that promoters, producers, and artists struggled to fill. That is until the inception of commercial DAB (Digital audio broadcasting), or satellite radio, in 1999. Sirius satellite radio was officially launched on July 1, 2002. Unfortunately for advertisers Sirius offers 100% commercial free radio, but for record labels, artists, and publishers, it was the answer to their prayers. It meant uninterrupted music promotion, and as of last December, a constant flow of cash royalties for artists and publishers. The current royalty rate for satellite radio broadcasters stands at 6% and is set to increase by half a percentage point every year until 2012, when it will reach 8%. The recently merged Sirius XM, company reported 18.6 million subscribers as of June 30, up from 15.3 million for Sirius and XM combined a year earlier. Sirius XM also reported a combined pay out of $92 million in revenue-sharing and royalty payments during the first half of 2008, which includes payments to SoundExchange (the ASCAP/BMI of Sat. radio) and other partners, like equipment suppliers. All and all, it seems like the highly anticipated merging of the two satellite radio giants brought everything the music industry hoped it would bring; More Money!
The reality is this long awaited and delayed merger between Sirius and XM has created a “Sirius” problem. With the economy in the state that it’s in it’s no surprise that Wall Street analyst Jessica Cohen (Merrill Lynch) is cutting her third-quarter revenue prediction for 2008 to $611 million, up from $528.8 million a year earlier but down $7 million from her previous forecast. Especially since about half of Sirius XM’s current subscribers—and about 80% of new subscriber additions in the second quarter—received satellite radios when they bought new cars, and we all know how the auto market is right now. Now Sirius XM is facing the same problem as many corporations, companies, and families in this country; a nearly insurmountable debt. A $1.1 billion debt that will mature in 2009, about $300 million of which is due in February. That, among other concerns, has caused the company’s stock price to fall from a 52-week high of $3.94 per share last December to about 30 cents at press time. When you look at the previous numbers, if Sirius XM is predicted to make $611 million dollars in the third-quarter, then $300 million by February and $1.1 billion by next year shouldn’t be a problem. As for the auto crisis, a Sirius XM spokesman says that will be offset by an increase in the number of cars carrying its receivers as a factory-installed option. Its penetration rate among Mercedes-Benz vehicles, for example, is nearing 90%. So, where lies the real problem?
There are some “Sirius” accusations being thrown around regarding who created these “Sirius” Problems. Orange County realtor and stock investor Michael Hartleib has formed a group of more than 500 Sirius and XM shareholders who bill themselves as “Save Sirius” and say the Sirius XM managers led by Mel Karmazin have unjustly enriched themselves at the shareholders’ expense. It is hard not to agree with Hartleib when you look at the fact that Sirius XM reported a third quarter net loss of $4.88 billion, or $1.93 a share. A year earlier, prior to Sirius Satellite Radio’s merger with XM, Sirius lost $119.6 million, or 8 cents a share. The current loss includes a $4.8 billion impairment charge related to the merger. Most people can get pretty “impaired” off a $50 bar tab, I can’t imagine how messed up Karmazin and his board members must have gotten from a $4.8 billion “Impairment charge!” Many people thought this merger was going to bring more income into the music industry as a whole. On a pro forma basis, assuming Sirius and XM were one company a year ago, the Q3 loss improved from $265.5 million, or 18 cents, to $217 million, or 9 cents. Pro forma revenue rose 16% to $613 million. Unfortunately, Sirius XM went the way of Enron, and decided to keep the money amongst a very small few in upper management. When Sirius XM asked for shareholder approval to dilute SIRI shares by expanding the outstanding share pool to 8 billion and then have a reverse stock split of up to one share for every 50 owned, the 500 shareholders of “Saving Sirius” filed a derivative law suit in U.S. District Court in Los Angeles.
I’d like to get a little candid and pose some “Sirius” solutions of my own. First of all, Mel Karmazin, stop making up guilt ridden childish excuses. On a conference call with analysts Karmasin said, “We think the environment sucks. It is not like we’re doing something wrong. It is that, unfortunately, we do not have a whole lot of control over what cars are getting sold. We do our best.” Just stop focusing time and money on the auto industry at all. There is a whole line of new Sirius Stiletto radio receivers that have up to 3GB of MP3 storage space amongst a slew of other great features, and no body even knows about. I’m currently developing a subscription based online music distribution cooperative. As a member of the Co-op you receive one of the Stiletto models, and Sirius XM radio as part of your membership subscription. When you are listening online at home it will automatically bring you to a station it thinks you will like, based on your download history, using technology similar to Pandora. With these newer receivers listeners can tag a song they hear on the radio, and instantly go to a cooperating website to buy it. With a little bit of tweaking to these devices, and stronger relationships with more online music distributors, these new transceivers could genuinely compete with iPods! Finally, to everyone reading this, help the “Save Sirius” cause in whatever way you can. If you believe that some “Sirius” wrong-doing accord, then do or say whatever you can, because it is this kind of unethical behavior that is sinking corporation and destroying our economy. Helping could just be going out and buying SIRI stock. Thirty cents a share is an amount even a broke college kid can afford, especially if you are a musician. It is worth $.30 to save one of the last great outlets for not only making performance royalties, but more importantly for getting your art heard by the masses.
By Leo Brayman