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Satellite Radio Facing Bankruptcy?
Satellite radio companies have been suffering heavy losses – and plunging stock prices – even as they continue to add subscribers. And a front-page story in Tuesday’s Wall Street Journal warns that the worst may be yet to come. Industry leader XM Satellite Radio Holdings Inc. lost $667 million last year, and rival Sirius Satellite Radio Inc. lost $863 million. The big losses have shaken investor confidence in the industry. XM shares have lost 71 percent of their value this year, and Sirius shares have lost 51 percent. "Given current course and speed, there is, in my view, a significant chance of crisis on the horizon,” wrote Pierce "Jack” Roberts, an XM board member who resigned in February. The Journal traces the problems to a number of factors. For one thing, a substantial number of people who buy vehicles with pre-installed satellite radios don’t activate them, nor do many who receive a radio as a gift. It’s estimated that 10 percent of all store-bought radios given as gifts during the last holiday season were never activated. Also, those who do subscribe often abandon the service after a period of time, some switching to iPod adapters to provide music in their vehicle.
Story Continues Below When GM began offering three months of free satellite service in their 2003 models, 45 percent of buyers did not sign up when the trial period was over. A bidding war for product between the two companies has also fueled the losses. Sirius signed Howard Stern earlier this year by offering him $500 million over five years, and is paying the National Football League $200 million for seven years. XM has agreed to pay Major League Baseball $650 million for 11 years. A big test for Sirius will come when many free, one-year trials soon come to an end, the Journal reports. Then early next year, subscribers who signed on to get Howard Stern will have to renew their subscriptions. It’s not known how many will do so. XM has been paring costs to battle its woes, while Sirius – with 4.7 million subscribers, about 2 million less than XM – is aggressively seeking to increase its subscriber count. But the two firms face troubles on another front. Music labels contend that satellite radios that can store songs infringe on the labels’ copyright.
Sirius agreed in March to pay a fee to labels each time it sells a radio, while XM is battling a lawsuit from the Recording Industry Association of America. Five years ago, Steve Blum – a media consultant with Tellus Venture Associates in Monterey, Calif. – gave what was then considered a modest prediction of satellite radio growth: 16 million subscribers this year. Instead, the number stands at about 11 million. Said Blum: "It’s a much more complicated market than we realized.”
Editor's note:
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