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Sirius Debt Challenges Aside, Satellite Radio Has Largely Lived Up To Expectations

This story was written by Rory Maher.
*Sirius* XM Satellite Radio has had an interesting 2009: it fended off rumors its burdensome debt would send it into bankruptcy, then reported that Q408 subscriber additions had plummeted. But, while the company's debt issues have fueled speculation about the viability of its business, few reports explore whether the satellite radio industry as a whole has achieved success as a viable consumer product.

With that in mind, I compared forecasts from one of the original analyst reports on satellite radiopublished in 2002 by Robertson Stephens analyst James Marsh with some help from yours truly with benchmarks the industry achieved in 2008. The result may be surprising to some who have been negative on the industry's prospects: it largely has lived up to expectations set way back in 2002, when the satellites were first being sent into orbit. The results are after the jump.

 

Subscribers: In 2002, Marsh forecast 23 million average subscribers for satellite radio in 2008. Sirius (NSDQ: SIRI), which merged with XM Satellite Radio in 2008, had 19 million subscribers by the end of 2008lower, but relatively close given how hard it is to forecast a new industry with accuracy six years in the future.

Revenue: Marsh expected $4.3 billion in industry revenue by 2008 while the industry generated about $2.5 billion in 2008 (XM and Sirius combined). This is a fairly sizable difference, driven by the fact that satellite radio companies have had to discount in order to win over new subscribers. For example, in 2008, Sirius offered subscribers who sign up for more than one account a discounted fee of $6.99 for each additional account versus the initial subscription fee of $12.95 per month (discounts for long-term subscriptions are also given). Marsh assumed all subscription fees would be $13.85 in 2008.

The bottom line: Even though Sirius is having problems servicing the debt used to finance its growthcalling the company's viability into question, the satellite radio industry as a whole has largely lived up to its initial billing. Subscribers are essentially in line and though revenue has fallen somewhat short of forecasts made seven years ago, it's unclear if discounts meant to entice new subscribers will be necessary when the economy recovers (and people have money in their pockets to spend).  To be fair, if those steep discounts continue over the long term, questions may arise about the viability of the industry as a whole since profit margins will likely continue to suffer. 
 
Note: James Marsh is currently the media and entertainment analyst for Piper Jaffray.


By Rory Maher