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Three months after merger, Sirius XM struggles

Barely three months after the long-delayed merger of satellite radio companies Sirius and XM, the newly combined Sirius XM Radio is struggling to stay afloat.
/ Source: Billboard

Barely three months after the long-delayed merger of satellite radio companies Sirius and XM, the newly combined Sirius XM Radio is struggling to stay afloat.

The company has just another three months to start paying down more than $1 billion in debt that's maturing in 2009 at a time when credit markets are freezing up. It remains heavily dependent on automobile sales for new subscriber additions just as U.S. car sales are tanking. And its stock price is in a yearlong free-fall that has sparked an investor lawsuit.

For the music industry, the fate of Sirius XM looms larger than before. Under a U.S. Copyright Royalty Board decision made last December, satellite radio broadcasters like Sirius XM pay performance royalties for sound recordings based on a percentage of adjusted gross revenue. That means the better Sirius XM does, the more money labels and publishers make.

That rate currently stands at 6 percent and is set to increase by half a percentage point every year until 2012, when it will reach 8 percent. Neither SoundExchange — which collects those fees and distributes them on behalf of the music industry — nor Sirius XM will reveal exactly how much the company is paying in royalties. According to Sirius XM's quarterly reports, the company paid out a combined $92 million in revenue-sharing and royalty payments during the first half of 2008. That includes payments to SoundExchange and other partners, like equipment suppliers.

But while the music industry is poised to collect a growing percentage of Sirius XM's revenue, that revenue is in trouble. Subscription fees account for about 95 percent of Sirius XM's revenue. To increase income, the company needs to add subscribers and squeeze more revenue out of existing ones. The company reported 18.6 million subscribers as of June 30, up from 15.3 million for Sirius and XM combined a year earlier.

But Wall Street is deeply pessimistic about the road ahead. On Nov. 3, Merrill Lynch analyst Jessica Reif Cohen cut her previous forecast for net subscriber additions by almost 50,000 for the third quarter to 409,000 — which would represent a 51 percent smaller increase from the same period last year. She also cut her third-quarter revenue prediction for 2008 to $611 million, up from $528.8 million a year earlier but down $7 million from her previous forecast.

Slowing auto sales are driving some of the problems, since about half of Sirius XM's current subscribers — and about 80 percent of new subscriber additions in the second quarter — received satellite radios when they bought new cars.

A Sirius XM spokesman says that will be offset by an increase in the number of cars carrying its receivers as a factory-installed option. Its penetration rate among Mercedes-Benz vehicles, for example, is nearing 90 percent.

The company hopes to attract new subscribers by adding short-term, artist-specific channels dedicated to the likes of AC/DC and Led Zeppelin, which a representative hinted would be an ongoing initiative.

In the meantime, the company faces urgent financial challenges, in particular the $1.1 billion in debt that will mature in 2009, about $300 million of which is due in February. That, among other concerns, has caused the company's stock price to fall from a 52-week high of $3.94 per share last December to 26 cents on Friday. Meanwhile, a group of 500 shareholders dubbing themselves "Save Sirius" filed a lawsuit seeking to remove the board and CEO Mel Karmazin.

Ever the pitch man, Karmazin spoke at Nielsen and Dow Jones' Media and Money conference in October, insisting that Sirius XM is "one of the top 25 media companies today" and predicting that it will be "the most successful company in the audio entertainment industry."

Should that come to pass, the music industry stands to make a decent buck. But in the present, there's not much to count on.