SIRIUS Financial Take: Howard Stern/Pandora Risks (SIRI, AAPL)

SIRIUS XM Radio (NASDAQ: SIRI) has been a key trading focus of late, mostly with positive metrics.  The company has now posted positive cash flow for the entire year of 2009 and it showed stronger subscriber growth in over a year.  There are a couple of risks not just tied to the economy, although any company selling paid-subscriber media today would tell you that the biggest risk to their business model is if the economy tumbles anywhere close to where we were in early 2009.  The specific risks to consider for SIRIUS XM are Howard Stern first as a risk for 2011 and beyond, and new competition from Pandora starting this year.

The first risk here is the Stern risk.  His contract with SIRIUS ends this year, and there are some reports from Barron’s that Stern is starting to get offers from other media outlets.  CNBC’s David Faber brought this back up in a Mel Karmazin interview about 75 days ago, and Karmazin did note that the shock jock’s contract does come up at the end of 2010.  He also noted that they had not started negotiations and noted that Howard has said he is working too hard and doing too many shows and might take less money for some less work.  If Stern is getting offers now, Karmazin better decide how he is going to deal with Stern whether it is in a positive light or in a negative light.

Karmazin in that same CNBC interview said he was looking at 11 million cars sold in 2010 as a run rate rather than the old metrics of 16 million, but he also noted that at 11 million they would add subscribers.  The new run rate that 24/7 Wall St. has used is 11.5 million projected auto sales for 2010 based on an Edmunds.com figure from early this month.  About 55% of cars sold in the US come installed with satellite radio, and the figure we use fr conversion is a 25% to 50% which became self-paying subscribers after the introductory period ends.

Another recent risk is the potential new competition via a Pandora-Pioneer radio partnership that would actually stream Internet radio straight to automobile radio players.  In theory this could be a huge threat to SIRIUS XM, but we would also caution up front that there are more risks and caveats to Pandora’s business model than can be summed up in a short period.  TheStreet.com did a survey, and while its overall base may differ than the public in general, it did claim that 72.5% of the 5,828 votes said SIRIUS would hold its subscriber base after the April launch of the Pandora product.  GigaOm, Om Malik’s site, recently highlighted in BusinessWeek how the Pandora service was expanding to many new platforms.  Malik noted that Pandora’s registered users reached 43 million in 2009, and that nearly 100 different consumer devices other than computers are streaming the service.  Again, the risks and caveats for Pandora and what lies ahead are far too many to list in a short order.  Both SIRIUS XM and Pandora are available for the Apple Inc. (NASDAQ: AAPL) iPhone and other non-radio devices.

The nearer risk ahead is Pandora over the Howard Stern risk due to it being a nearer event (roughly 90 days).  We will also know the answer to this risk comparison sooner than the Stern risk based upon survey data we will get as the launch gets closer.  The larger risk for 2011 and beyond still seems to be the risk of Howard Stern threatening to stage a walk-out on contract expiration long before that date comes.  The good news is that Stern is not the end-all be-all force he was when SIRIUS launched Stern in its fight against XM before they merged.  The number of customer defections that would leave SIRIUS XM is still probably significant, and that would effectively depend upon which media platform Stern would end up on.  But as far as it being a percentage of total subscribers it would now be far less than it was pre-merger.  Is this figure 8%? 10%? 15%? 20%? or more?

Then there is one other notion, and one that has to at least be considered.  What if the company could save millions upon millions of dollars without Stern?  Who knows what a renewed contract would cost the company… the tally has been in the hundreds of millions so far, and 2009 is the first year ever for a full year of being cash flow positive.  It is almost certain that whatever program SIRIUS XM tried to use for a replacement that the cost savings would be noticeable and significant on operations and on stock-based incentives.

SIRIUS XM has other draws like all the major sports networks and major news networks.  It does not have the same raunchy shock-jock draw as competition for Stern, but you can bet money that it would launch something similar if Stern does not renew.  It also has dozens of other exclusive personalities which keep some loyal customers as well.  There are risks here, but SIRIUS XM is showing that it is likely to survive both risks here even if the risks become more of an event rather than a threat.  S&P has kept a positive light on SIRIUS XM.  Unfortunately, the ultimate answer is one that it is still unknown.  You could line up all the data side by side with the same data conclusion, and you would probably end up with a split crowd over the opinion of whether the company makes it at all and whether it thrives.

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JON C. OGG