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XM faces the music (CNN article)

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#1 of 8 OFFLINE   Monty B

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Posted July 26 2006 - 11:41 PM


XM faces the music
With shares of XM Satellite Radio sinking near a three-year low, is the company now a tempting takeover target?
By Paul R. La Monica, CNNMoney.com senior writer
July 26 2006: 2:06 PM EDT

NEW YORK (CNNMoney.com) -- XM Satellite Radio has crashed and burned and now some are starting to wonder if the company could be a takeover target. Shares have plummeted more than 60 percent this year.

Tough competition from rival Sirius Satellite Radio, which now employs shock jock Howard Stern, appears to be taking a toll. XM lowered its year-end subscriber and revenue forecasts in May. Analysts are also worried about increased advertising and promotional expenses as XM tries to stay ahead of Sirius.

Out of orbit: Shares of XM Satellite Radio have plunged this year and are trading at their lowest pirce since the summer of 2003.

The company is also facing regulatory headaches. The Federal Trade Commission is investigating marketing practices. And in May, the company halted the sales of two models of radios that emit signals over standard FM frequencies because the Federal Communications Commission said they did not meet transmission standards.

The hiring of a new president and chief operating officer on Monday hasn't eased Wall Street's concerns just yet either. Shares have fallen 6 percent so far this week as investors nervously prepare for the release of XM's second-quarter financial results.

XM will report its numbers on Thursday and analysts expect sales of $221.6 million and a loss of 66 cents a share.

So could XM (Charts) soon find itself acquired? After all, the stock is now trading at its lowest point since August 2003 and with a market value of about $2.7 billion, the company could conceivably be absorbed by Sirius, which is valued at $5.5 billion, or one of the two largest terrestrial radio firms, Clear Channel Communications or CBS.

Some Sirius merger rumors
There have been sporadic rumors during the past year about XM being a target of each of these companies.

In fact, Sirius (Charts) chief executive officer Mel Karmazin said at a media conference in June that he would love to buy XM at the right price. However, he said he wasn't sure a deal would be approved by government agencies.

Analysts agree, saying that Karmazin's comments about a Sirius-XM merger are probably just a pipe dream for now.

Chad Bartley, an analyst with Pacific Crest Securities, points out that the Justice Department and FCC blocked a proposed merger between satellite TV firms DirecTV (Charts) and EchoStar (Charts) in 2002.

Based on that precedent, Bartley said it's highly doubtful that the government would look favorably on a deal between the only two satellite radio companies. XM currently has 6.9 million subscribers while Sirius has 4.7 million.

But David Bank, an analyst with RBC Capital Markets, said that an eventual merger between the two can't be ruled out. As more and more technologies emerge, such as digital radio and streams of music over cell phones, it may be easier for the two companies to argue that a Sirius-XM combination would not crush competition.

"I don't think a merger is viable at this point given the business concentration issues," Bank said. "But in three or four years you maybe could see a deal happening."

Takeover in the Clear?
So what about the traditional radio firms? Big radio is struggling to hold onto listeners and is faced with sluggish ad sales growth. A steady stream of subscriber fees could help reignite growth.

"As people become more comfortable with the longer-term trajectory of satellite radio then XM could ultimately be attractive to outside investors," said Stuart Kagel, an analyst with Janco Partners. "A lot of larger media companies are bereft of high return on investment opportunities and satellite radio could be one."

Clear Channel (Charts), the nation's largest radio firm does own 8.3 million shares of XM, about a 3 percent stake, and also programs some of XM's music channels. But relations between the two companies have taken a sour turn lately.

Clear Channel and XM feuded over whether or not XM should air ads on the stations Clear Channel programs. Commercial-free music has been a main selling point for XM so the company resisted ads. But in March, an arbitration panel ruled in favor of Clear Channel, forcing XM to air commercials.

The business arrangement between Clear Channel and XM is set to expire in 2008 and Clear Channel already has an agreement to sell its XM stake to Bear Stearns in that year as well. So it seems unlikely that Clear Channel and XM would kiss and make up and forge a larger deal.

An Eye on XM
That leaves CBS (Charts). The company has recently inked a program-sharing deal with XM and that has led to increased chatter about a deeper partnership between the two firms. In April, some CBS stations began airing shortened versions of XM's "Opie & Anthony" show.

That's a significant move for CBS since the two radio hosts were fired by CBS's radio business (then known as Infinity) in 2002 after they broadcast a couple having sex in New York's St. Patrick's Cathedral.

A CBS-XM deal would be juicy since Karmazin and Stern both used to work for CBS. And Stern has not hidden his dislike of CBS CEO Les Moonves. So having Moonves and CBS suddenly become Sirius' top competitor does make for a great battle of egos.

However, analysts don't believe the CBS-XM hype that much either.

Although XM is getting along better with CBS than Clear Channel right now, Bank said that it would be difficult for CBS, even with its market value of $20.7 billion, to justify a deal since it would hurt CBS's profits for the foreseeable future. Analysts don't expect XM to report positive cash flow on an annual basis until 2008.

"I don't really see XM as a viable target for one of the larger radio companies," Bank said. "The dilution would be substantial and I don't think they could withstand it."

Bartley adds that buying a satellite radio firm would put Clear Channel or CBS in the uncomfortable position of having to explain why listeners should now have to pay for radio broadcasts.

"Strategically, I don't think it fits. It would be a marketing 180 and counter to their view that radio should be free," he said.

So XM investors are in a difficult situation. Few deny the long-term growth prospects for satellite radio as more and more automakers begin to install units in their cars.

But for the short-term, increased competition, rising costs and regulatory concerns all paint a gloomy picture for XM. Legitimate takeover chatter might be the only thing to spark any interest and so far, all the talk is merely idle speculation.

"XM is a momentum stock without a whole lot of momentum right now," Bank said.

#2 of 8 OFFLINE   Chris


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Posted July 27 2006 - 02:16 AM

XM's condition worsens:


Most notable is the increase is subscriber acquisition costs. XMSR has also re-lowered it's expectations for year end subscriber numbers, and a report scheduled for later today suggests that XM may be under-estimating "churn" by using non-paying subscribers to artificially inflate subscriber rates. (In other words: call and threaten to leave, say you're unhappy, get a month free or whatever).
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#3 of 8 OFFLINE   mylan



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Posted July 27 2006 - 07:26 AM

Now the question is, why all the churn? What makes XM subscribers leave once the company has spent all that money to acquire them? In my case, I wanted XM for everything FM was not, mainly music I wanted to hear all the time and, for awhile, it was. I have had it for five months and realize that there is too much crap that passes for music and really too many choices to comprehend (if you can believe that!). I like mainly rock and classic rock so I listen to 40, 41, 46, and 49 with a bit of some others from time to time and have come to the conclusion that songs I actually like are few and far between. Their idea and my idea of music must be two different things. What stops me from cancelling and ripping my Ski Fi 2 off the dash and throwing it into oncoming traffic is that sometimes, once in a blue f*#king moon, something magical happens, I hear a few songs in a row that I really, really care about, without having to flip from station to station to try to find something I can listen to for more than two songs. That morning The BoneYard played Ted Nugent's "Great White Buffalo" and it made my day, most of the time I couldn't tell you what I just heard. I do not think Sirius would be any better or I would switch, that and the $200 investment I have already made in XM. I even have a connect and play antenna for home XM that I have not set up not wanting to pay the extra and be frustrated all the same. It comes down to programming most of all and they need to figure it out soon or you just may see my Sky Fi come bouncing down the street! Thats my rant and i'm sticking to it.
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#4 of 8 OFFLINE   Stu Rosen

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Posted July 27 2006 - 09:41 AM

I apologize. I'm to blame. I've been an enthusiast for laserdisc - never caught on. I have 3 Tivos in the house - another company with no apparent traction. I bought a nice bunch of DVD-As and SACDs and a universal player - the market is dead on arrival. I confess that I pay for 5 XM units a month (Inno, Roady, 2 SkyFis and a XMPCR), so all the signs should have been pointing to this meltdown. I'm actually depressed. I find no shortage of XM stations - I'm a regular listener to Willie's Place, Bluesville, Soul Street, Cafe, Loft, Hear Music, and a few others. My wife loves the 70s; my older son hits Verge and XMU; my younger son loves all the hits stations. It's not just bad marketing, but that certainly plays a part. I read a commentary recently from the Lefsetz Letter saying that Sirius now has the mindshare - it IS satellite radio to a lot of people. That's precisely why Howard is so valuable to Sirius. It's like when Fox grabbed the NFL rights from NBC at an astronomical price - they were looking past immediate income and saw a greater value. I love XM, but I worry.

#5 of 8 OFFLINE   Ronald Epstein

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Posted July 27 2006 - 10:24 AM

I agree with you, Stu. I have been an avid supporter of XM. The diversity in music programming is miles above what Sirius offers. Panero ran that company into the ground. I lost about $20k in XM stock. I'm really ashamed that XM is on thre complete opposite end of the spectrum to where it stood two years ago.


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#6 of 8 OFFLINE   TheLongshot



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Posted July 27 2006 - 03:47 PM

There is some good news with the naming of Nate Davis as President and COO, if just that they are getting someone else involved in the area where XM has fallen down: marketing. Meanwhile, no one is commenting that Sirius' stock hasn't really done crap since Stern signed on. It is only slightly more valuable since I bought it. Jason

#7 of 8 OFFLINE   TheLongshot



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Posted July 29 2006 - 04:02 PM

And wouldn't you know, XM's stock goes up about a point and a half on Friday. Jason

#8 of 8 OFFLINE   Chris


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Posted July 29 2006 - 04:14 PM

I think there is a lot of hope within WallStreet and elsewhere that XM is a company with the right general idea - it's just had some terrible management for the last 18 months.

I'm not saying this in regards to Howard Stern, but mostly in regards to the way XM has marketted itself, and the way it has allowed itself to be portrayed. XM went from having a perception as a market leader, a trailblazer to an also-ran. SIRI was able, through agressive marketing and a solid media campaign to get into the public mindset as the market innovator.

Now, XM fans will not agree that SIRI is a market innovator, but they were able to effectively get airtime on all the major news nets with their talent and keep themselves in the news and as such, the general public perceived them that way.

Perception is half the battle. XM didn't do much to counter this perception. When SIRI landed anything, they trumpetted the hell out of it with news releases, PR tours, asked appearances on things from MSNBC to FoxNews to SportsByLine.

Good example: XM has had NASCAR for a while, adn while it's been good to them, they didn't do anything really effective with it. SIRI has NASCAR (of which I'm not a fan) and they send out people to all of the races this year (where XM is a sponsor) and they get press ink in papers like the KC Star, St. Louis Post Dispatch, and elsehwere where they are written into news stories because their PR department has spun the story and managed to get them free press which references them, that they have talent at the races now, how involved they are in planning, etc.

SIRI has waged an incredibly effective ground campaign with all of it's entities. XM didn't. XM had O&A, and while they will appear on Letterman later this month, that's mostly attributed to CBS putting their own talent on their own networks, to cross-promote "their" product. XM had O&A for a while, and the media promotion for them... chirp, chirp. Meanwhile, SIRI has managed to book Stern A-listers and get almost weekly press in NYT, WashingtonPost, etc. Because they have cooked up moments which were guaranteed to leak into common press because of things said, etc.

SIRI planned an effective campaign. XM didn't.

While I like SIRI, I think it is not that SIRI's plan was "so good" it's that they had a generally good plan and executed it, and XMSR had a terrible plan and executed it. If XMSR gets together a better, more agressive, informative campaign within the media - and I don't mean just ads, but general awareness, they have the right qualities to "sell" to the public. I think that's the hope.

Can XM wage an effective media "hearts and mind" campaign? That's the wait and see. Posted Image
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