Sirius XM Is Forced to Face the Music

Hefty Contracts and Slow Subscriber Growth Beget Threat of Bankruptcy

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NEW YORK ( -- Mel Karmazin's dream of creating an alternate radio business with Sirius XM Satellite Radio is turning into a nightmare, as slowing subscriber growth turns expensive talent into scary debt and the specter of bankruptcy looms large.

Sirius XM CEO Mel Karmazin
Sirius XM CEO Mel Karmazin
The plight of the merged Sirius XM has been well-documented in recent weeks, with EchoStar chief Charlie Ergen helping to finance $400 million of the company's $3.25 billion debt and even offering to merge XM Sirius with his own satellite TV service, Dish Network. Failing a merger, Sirius XM CEO Mel Karmazin may have to declare bankruptcy as early as Feb. 17, the due date for $175 million in bonds.

Combine that with increasingly expensive programming contracts ($583 million for Howard Stern alone over five years and stock options), stock selling at 10¢ a share on a good day, and a reliance on gaining new subscribers from a distressed auto industry -- down as much as 48% in monthly sales in January alone -- and you have a media company suddenly without a profitable business model.

This is one case in which you can't blame advertisers, which accounted for only 3% to 4% of the company's overall revenues, as Mr. Karmazin told Ad Age in September. Advertising was only a marginal part of Sirius' and XM's business models, banned from its music channels and often limited to an average of three or four commercials on its personality-based talk shows.

Agnes Lukasewych, a senior VP-group account director for MPG's radio buying group, said Sirius and XM always had a "very targeted, niche audience" that worked for certain promotions, but by and large couldn't offer the measurement accountability required to prompt any large-scale shifts from terrestrial radio to satellite.

"When the economy is not great, clients are looking at everything they're doing and the accountability isn't what it should've been in terms of who we are reaching, where and all those questions we can't answer with that platform. As things get tougher and a little more volatile, it would not be a consideration for some," she said.

'What a steal'
For a while, subscriber revenue was working well as the company's primary revenue source, and even seemed to justify some costly programming contracts. In the case of Howard Stern's high-profile leap from CBS to Sirius in 2004 for $100 million, the shock jock played a key role in gaining share over then-market leader XM, as Mr. Karmazin told Ad Age in September. "In order to pay for that $100 million, Sirius would need to get 1 million subscribers in 12 months," he said. "So let's assume 1 million subscribers gets you $120 million, you pay Howard $100 million, and therefore he's paid for himself. We have about 9 million subscribers now. Howard believes he's responsible for all that difference, and I would never debate Howard. We only needed 1 million; he got us 8 million more, so, boy what a steal that was."

In 2006, Sirius awarded Mr. Stern 34 million shares of stock at a share price of $6.39, which made them worth about $220 million. With the average share price now hovering around 10¢, those shares are worth only about $3.4 million.

Yet more programming contracts meant more money to recoup. In 2004, XM signed Major League Baseball for an 11-year deal worth $650 million, a steal compared to the $500 million Sirius shelled out for Stern in less than half the time. In 2005, Sirius ponied up $30 million for a four-year deal with Martha Stewart, while XM paid Oprah's Harpo Radio $55 million for a three-year deal.

For a while, using talent as leverage paid off for the then-competing companies. "Sirius had to align itself with high-profile talent at the time XM had the contract with the biggest car company in the U.S. They had to find a way to give themselves a competitive advantage," said one major media analyst.

Yet by September 2008, even as the newly merged Sirius XM was up 17% in subscribers (totaling 18.9 million) on a year-over-year basis, the company had only $360 million in cash, and about $3.25 billion in total debt due to existing long-term bank and bond debt, which even combined subscriber growth and pricey programming couldn't recoup. High-profile automotive contracts with Hyundai, Kia and BMW were going to HD radio, terrestrial radio's hastily-assembled competitor to satellite, with Jaguar announcing last week its plans as the first automaker to add HD to its 2010 line.

Hurting for subscribers
Also last week, Liberty Media's DirecTV threw in as a potential investor, despite having plenty debt of its own. Thomas Eagan, a media analyst for Collins Stewart, wrote in an investor note, "DirecTV certainly does not need it. Their operations lead the industry." EchoStar, meanwhile, could use the extra subscribers, having lost 10,000 in third-quarter 2008, taking a net loss of $308 million.

Mr. Karmazin had positioned Sirius XM to become the second-largest subscriber-based company next to Comcast in 2009, hoping to boost subscribers to 21.5 million by year's end. A merger with EchoStar's Dish would accelerate that goal.

But barring a merger, is bankruptcy the only option? Analysts seem to think so.

"Given the immediate refinancing requirements and lack of capital available from banks today, the possibility of a pre-packaged bankruptcy is increasing," Fred Moran, an analyst at Stanford Group in Boca Raton, Fla., recently wrote in a note to investors.

A Sirius spokesman declined to comment on the bankruptcy and merger rumors.

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