For years satellite radio seemed like a bust, another “technology of the future” that nobody seemed to want or was willing to pay for. Why spend $12 a month on radio when you can get it for free? Sirius and XM, the two satellite players, always seemed on the brink of failure, unable to crack into the home, and even more important, the car. When you talked to the folks in traditional radio—condescendingly called “terrestrial” radio by the ethereal denizens behind satellite—they scoffed at both of these perennial start-ups, offering verbal obituaries over cocktails to anyone who would listen.
But in 2004, satellite radio caught fire, and now those obituaries seem absurdly premature. The conflagration occurred so quickly that it’s traditional radio that may be closer to its deathbed. First, the take-up of the customers who bought cars that came loaded this year with satellite radios, GM, Ford and Dodge, turned out to be surprisingly high. Once the built-in free subscriptions ran out, customers eagerly paid up for hundreds of stations sans commercials that stayed with you no matter which hill, valley, or state line you drove through. Second, a prudish FCC discouraged the terrestrials from producing foul-mouthed programs that the public frankly loves, regardless of what that exit-polling data said. The combination of critical mass and uncritical regulation—the FCC doesn’t govern satellite—allowed both companies to attract enough capital to last until they project profitability. XM, well ahead of Sirius in sign-ups, because of its close relationship with General Motors, suddenly saw its revenues explode in 2004.
But it was second-fiddle Sirius that created the news that pancaked the old paradigm, first landing the most popular shock jock in the country, Howard Stern, and then hiring Mel Karmazin, the former CEO of Viacom and acknowledged king of mass-scale terrestrial radio who built Infinity into a network, then sold it to CBS. Showing as much financial savvy as it did programming finesse, Sirius immediately tapped Wall Street with bonds that raised enough money to eliminate any funding problems for years to come. Quite a turn for a company that had been nicknamed “the Dog Stock” for the hundreds of millions it lost on the way to 2004. Sirius now has a market cap exceeding that of terrestrials Cumulus, Emmis, Entercom, and Sinclair combined. The Stern-Karmazin tandem also boosted the stock of Sirius a billion dollars past XM in value, even though it has a fraction of the revenues. No matter—if Karmazin and Stern convert one tenth of Stern’s 12 million listeners to paid radio, they’ll justify the revaluation and then some.
Of course, just because the paradigm’s been shattered doesn’t meant that either XM or Sirius are good investments right now. Sirius, for example, currently sells at $10,000 per customer relative to its market cap. That’s 4.5 times what an average Comcast customer sells for—a steep premium. But on Wall Street, momentum is king, and few stocks have more momentum than Sirius, or XM. So higher prices can’t be ruled out.
The reaction from the landlubbers has now gone from ignorance to a modified panic that has included a slimming down of the number of commercials and a cessation of the rate increases that had become commonplace. It might not be enough. Remember, this radio dichotomy isn’t like broadcast and cable; we’ve practically got a zero-sum situation. With premium cable, you might watch some HBO and you might watch some basic. But if you take Sirius, you won’t listen to basic because you can get similar programming with better reception and no commercials. Plus you can get proprietary programming like Stern. There’s not much room for coexistence.
Too bad for the terrestrials. As recently as eighteen months ago, any of the traditional players could have bought the satellite companies for a song. Now they’re airing fewer commercials (to enhance the experience), and making a lot less money, as they struggle to stay relevant in a world that suddenly, in 2004, seems to be saying that their businesses are no longer growing and, amazingly, may not even exist when satellite radio’s finished its build-out.
Right now, when you add up the market cap of Sirius and XM, you get $17 billion. That isn’t a dot-com fantasy figure, either—XM could have several hundred million in revenues this year, and Sirius could equal that as soon as Stern starts in 2006. Sirius and XM can afford to buy all their critics, but they don’t want to. They think they’ve built a better mousetrap, and the market appears to agree.