Sirius XM Seeks New Model, First Profit

Special Coverage

Convergence

DETROIT – The business model for satellite radio may be broken, but Mel Karmazin is on a mission to fix it.

Karmazin is CEO of the newly merged Sirius XM Radio Inc., a New York company that has 18.5 million paying subscribers but still has not earned a dollar.

“It's not a very good business model,” Karmazin tells the crowd after his keynote speech on the opening morning of the Convergence Transportation Electronics Conference here. Sirius XM has exclusive arrangements to supply satellite radio for every major auto maker.

Karmazin made the comments in response to a question from the audience about the prospects for Sirius XM to take its satellite radio broadcasts global. He says chances are slim the service can go global because finding success in its home market of North America for an English-speaking audience has been difficult enough.

Starting up the satellite radio business has been a massive struggle – and tremendously expensive. For instance, each satellite costs at least $250 million to launch. Before the merger, which closed in July, Sirius had three in orbit; XM had four.

Streamlining management, consolidating operations, eliminating duplication and improving content is the path the new company is following.

In 2004, when Karmazin joined Sirius after leaving as president and COO of Viacom Inc., the standalone Sirius posted revenues of $67 million. Now combined with XM, the new entity expects 2008 revenues of $2.4 billion.

For now, only former Sirius subscribers can hear Bruce Springsteen's E Street Radio station.

“And the company still is not making money,” Karmazin says, adding he expects 2009 to stand as “the first year of positive earnings.” Sirius has racked up big losses since launching in 1991 and going public in 1995, he says.

What keeps Karmazin awake at night is fear that one of the company's satellites will malfunction, interrupting service for millions of paying customers and potentially derailing any hope for profitability.

Karmazin's top technicians are under strict orders to begin every email to him with the words, “the satellites are fine.” Unless, of course, they are not.

It took 17 months for Sirius to complete its acquisition of XM, its former competitor. XM shareholders are receiving 4.6 shares of Sirius common stock for each share of XM. The new combined stock will continue to be traded on the Nasdaq Global Select Market under the symbol “SIRI.”

Satellite radio is appearing on a growing number of new vehicles, not all of them expensive luxury cars. Still, Sirius XM claims less than 10% penetration of the home and vehicle market, suggesting there is plenty of room to grow.

Program offerings are vast, including everything from Howard Stern and the Playboy channel to Martha Stewart and a 24-hour Catholic radio station. In all, Sirius XM offers more than 300 channels of coast-to-coast programming, with no commercials on music stations.

More content and continued marketing of the service – for OEM and aftermarket applications – are crucial to the success of the new company, Karmazin says. Subscribers pay $12.95 a month.

Beyond catering to audiophiles, Sirius XM also offers Sirius Backseat TV, the first ever live in-vehicle rear seat entertainment featuring Nickelodeon, Disney Channel and Cartoon Network.

In addition, the GPS-based XM NavTraffic service delivers real-time traffic information, including accidents and road construction, for more than 80 North American markets.

“Our success will be based on the best content you can get on the radio,” Karmazin says.

But that bid for programming excellence is bound to cause additional heartburn.

For instance, a Bruce Springsteen channel known as E Street Radio is available on Sirius but not yet for prior XM subscribers. Because the company's bandwidth is full, another XM channel would have to be deleted to make room for Springsteen.

“We don't want to anger our customer base,” Karmazin says.

With the arrival of satellite radio, Karmazin still sees a future for free terrestrial AM/FM radio, so long as those stations continue to offer region-specific services, such as school closings and local election coverage.

But the “jukebox” stations that provide generic music content to major markets across the country will wither away because they rely on an “obsolete” business model, Karmazin says.

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