Is Sirius XM doing enough to save its business?
What can Sirius XM do to save its business? Don Reisinger thinks a healthy price cut might do the trick.
Quite a bit has happened to satellite radio over the past year. First, we had two companies vying for your dollars and then, in a ridiculously long merger process, the two companies finally became one.
Since then, the new Sirius XM has tried to find its footing in a world where terrestrial radio still reigns supreme and advertising dollars aren't floating around as much as they did last year. And to make matters worse, the company is forced to pay Howard Stern $100 million per year on a total subscriber base of about 19.1 million by the end of the year -- not the kind of numbers that would attract advertisers, let alone shareholders.
Following that, we can't forget that the company's share price is at a woeful $0.26 and $1 billion in debt is coming due in 2009 as the company posted a huge $4.88 billion loss. Sirius XM is working on refinancing and recently reduced a $300 million note to $210 million, but its troubles persist.
And although it sounds like the company is facing enough issues already, this whole discussion has left out an important piece of the puzzle: automotive sales are declining at a rapid rate, there are no signs of that slowing down next year, and America's three major car manufacturers -- Ford, Daimler-Chrysler, and GM -- are hoping the U.S. government will bail them out. And considering most people listen to Sirius XM Radio in the car, the company is feeling the effects.
So what can really be done? Should Sirius XM dump Howard Stern and other prominent radio personalities and stick to music? Should Sirius XM call it a day and try to sell its operation to the highest bidder? Or should Sirius XM forge ahead with its current strategy and hope against hope that everything will be OK?
To answer those questions won't be easy. But at this point, I simply don't know how Sirius XM can survive unless it does something drastic.
Satellite radio is probably one of the best technologies to come out of the industry in quite some time. Clear Channel and the rest have presided over radio for so long that it was becoming boring and they were becoming complacent in their programming thanks to no competition.
And while I hope Sirius XM will turn things around and emerge from its troubles with strong profits, I just don't see how it will. Its stock price continues to slide with each passing day as investors lose what little confidence they have in the company and its debt keeps piling up.
Sirius XM's CEO, Mel Karmazin believes that by refinancing the debt and maintaining a relatively stable operation over the coming months will help Sirius XM stay afloat and eventually turn a profit, but I'm not so quick to agree. I think something more radical needs to be done in order for Sirius XM to truly turn things around.
Some have called on the company to end Howard Stern's contract and make the service offer just music, but I think that's ridiculous. Why waste talent or give popular talent to competitors? It doesn't make any sense.
No, I think the best way to fix Sirius XM may be counter-intuitive to some, but I think it makes sense given the climate we find ourselves in: drop the price of subscriptions by at least 20 percent for the next year.
I know that that may sound radical to some and given all the issues with debt the company is facing, possibly reducing revenue may sound like a problem, but I think the major issue facing Sirius XM right now is that most people who consider subscribing to the service simply don't see a reason to pay each month for access to radio, since they've been weaned on free radio their entire lives.
I should note that subscription pricing should only be cheaper for new customers. Existing customers are a fine source of income and there's no reason to reduce revenue on those that are likely to keep using the service. But for new customers, they should be able to use Sirius XM for the next year at a rate that isn't nearly as high as $12.95 per month. Sure, that may be cheap for some, but for those that already enjoy free radio, why would they want to forgo that money each month in an economic downturn just to hear the same music with no commercials?
By dropping the price of new subscriptions, Sirius XM can solve two issues: how to coax new users to pay the company for the subscription and how to maintain a relatively strong revenue growth rate during an economic downturn.
Upon dropping the price of new subscriptions, Sirius XM may become a more attractive target for holiday shoppers this year. With prices on radios that are relatively low -- you can get one for as little as $39.99 -- paying as much as $10 every month isn't asking too much from customers that had heretofore decided satellite radio isn't for them. And in the process, Sirius XM will be able to maintain the same basic revenue level on existing customers and increase the number of subscribers to an even higher level than if it charged its current rate.
There's not much hope for Sirius XM unless the company can find a way to turn things around. Maintaining status quo isn't going to do it. But if you ask me, a well-publicized drop in pricing could make a difference.
At this point, it's worth a try.