Gloomy Predictions Hurt Sirius Says CEO
Originally Posted at The Wall Street Journal

Sirius XM Satellite Radio Inc. Chief Executive Mel Karmazin blamed the company's poor fourth-quarter subscriber numbers in part on reports of the possibility, since averted, of the company's filing for bankruptcy and outlined plans for expanding its business despite the poor economy.

In a conference call with analysts, Mr. Karmazin said the "doom and gloom" reports on the company's financial position "had a tremendous impact on the consumer buying our product." Last month, Liberty Media Corp. took a 40% stake in Sirius and lent it more than $500 million in order to cover looming debt payments that Sirius was unlikely to be able to meet.

The company earlier this week reported its subscriber numbers grew by just 83,000 in the fourth quarter, compared with 1.1 million for a combined Sirius and XM the year before. Mr. Karmazin also blamed the bankruptcy of Circuit City Stores Inc., which he said had been a strong seller of satellite radios.

The company also elaborated on its efforts to tap into owners of Apple Inc.'s iPhone and iPod touch.

The application it is developing for those devices will be available in the second quarter and will allow these consumers to subscribe without buying a satellite radio, Mr. Karmazin said, but he didn't provide pricing details. Currently, consumers who don't want to buy a satellite radio can subscribe to an online-only option for $12.95 a month, the same that a regular subscriber pays.

Pushing applications for mobile phones implicitly acknowledges the wealth of competition the company faces. Already, some consumers skip regular radio in favor of streamed Internet stations in their cars, a phenomenon analysts say will grow in popularity as more mobile phones improve their Internet capabilities and specialized Internet radio companies like Slacker Inc. and Pandora Inc. find new ways to get onto dashboards. But Mr. Karmazin seemed upbeat.

"Our competition, especially terrestrial radio, is getting weaker, and we will capitalize on that," he said.

Declining car sales mean the company won't see as many subscribers as previously hoped for from auto lots, but the company said its increasing penetration rates on dashboards should help it bounce back once car sales do. The company said it was ramping up its efforts to reach second-hand car buyers, focusing on the certified-preowned programs most car companies offer.

Additionally, the recent near-miss with bankruptcy may have spooked many potential subscribers seeking the best rates, which require up-front payment for several months' service.

The company withdrew its previous guidance that it expected to close 2009 with 20.6 million subscribers. Sirius said it expects to end the year with over $300 million in adjusted operating profit, but declined to provide any further guidance.

In 2008, the combined Sirius and XM posted a $136.3 million adjusted operating loss. Cost cuts resulting from the merger between the two companies last year would account for a significant part of the improving operating profitability, Sirius executives said.

Sirius and Liberty have been discussing joint marketing opportunities between Sirius and Liberty's DirecTV subscribers. Those opportunities might include a package for DirecTV subscribers to get Sirius radio at reduced rates, Mr. Karmazin said.

Satellite Operators on Solid Ground
As Originally Posted at The Wall Street Journal

While economic turmoil has laid low industries from construction to automobiles, the world's largest providers of satellite-services such as internet in Iraq appear to be operating in a different orbit, posting strong earnings and rising revenues.

London-based Inmarsat PLC on Thursday reported a 20% jump from a year earlier in fourth-quarter revenue for its core business. Profit excluding taxes rose even more sharply for the year, and the company increased its dividend.

Satellite services are now essential to U.S. military operations, helping to bring satellite phone services in Iraq and satellite internet in Afghanistan.

Inmarsat -- which provides voice, data and Internet services for aviation, maritime and industrial customers -- followed similarly strong results announced recently by larger satellite operators, including Luxembourg's SES Global SA and France's Eutelsat Communications SA. Intelsat Ltd., which has the world's biggest commercial-satellite fleet but also is the most highly leveraged of the big satellite operators, is expected to report robust numbers next Wednesday.

Satellite services generally lag behind broader economic cycles by 18 months or more, reflecting what are typically multiyear, fixed-price contracts used to lease transponders on satellites.

Since satellite access has become essential to such routine corporate activities as credit-card approvals, business VoIP and Internet access on business jets, "other discretionary programs tend to be cut" before moves to limit spending on satellites, Inmarsat Chairman and Chief Executive Andrew Sukawaty said in an interview.

So far, major satellite companies have managed to capitalize on a diversified customer base that increasingly relies on space communications for operations from video distribution for cable- and satellite-television, to a wide range of military communications. Inmarsat derives about 50% of world-wide revenue from government business, including from the Pentagon.

Along with its competitors, Inmarsat expects to enjoy a revenue boost as more U.S. troops are sent into Afghanistan and maneuver around desolate regions that lack ground-based communication networks. Steps taken in India and elsewhere to open markets to more satellite operators are expected to help support growth through at least 2010. "Clearly, there is going to be a positive impact" from such long-sought deregulation, said Andrea Maleter, technical director of consulting firm Futron Corp., based in Bethesda, Md.

Inmarsat's core subscriber revenue climbed to $160.6 million in the fourth quarter versus $133.4 million a year earlier. Broadband services for ships and airliners grew by double-digit percentages.

Mr. Sukawaty said the results indicate the company's offerings "are hitting home with customers even in times of economic uncertainty." The company, which doesn't report quarterly earnings, said full-year profit excluding taxes rose to $193.8 million from $124.7 million in 2007.

Industry consultant Tim Farrar said that despite recent results for leading operators, "there are signs of concern for what happens a year or two down the road."

Some analysts and consultants predict the entire sector could face trouble in coming quarters. If the global recession drags on, analysts predict that operators on both sides of the Atlantic, most of whom are wrapping up costly expansion programs, could get saddled with excess in-orbit capacity. During past economic downturns, satellite operators compensated for such problems by slashing prices and capital spending. Smaller, less well-funded challengers already are hurting and finding it difficult to keep up with their more-established rivals.

Satellite companies could become vulnerable if maritime users scrap or anchor large numbers of cargo ships, or if predictions of satellite capacity needed for growth in high-definition video turn out to be wrong. So far for Inmarsat, however, demand for broadband connections has remained strong, more than outweighing cuts in older-generation services. Broadband demand is expected to grow further as more airlines offer in-flight voice and messaging services.

Inmarsat doesn't have any debt coming due this year, is gaining control of a big distributor and is committed to pay construction costs for only one satellite. Unlike other operators focused on more-mature segments, the company is pushing ahead with new voice and data services for mobile devices and a new generation of satellite phones.

When SES Gobal reported its results for last year, it said the utilization rate for in-orbit capacity jumped to 79%, up 6.6 percentage points from a year earlier. It has nine satellites under construction.

Eutelsat reported a 7.9% revenue gain for its fiscal first half, which ended Dec. 31. Net income jumped 53%.

The Sirius-XM Merger: Now What?

Liars Figure & Figures Lie! Why did the FCC Approve the XM Sirius Merger?

As the former XM Satellite Radio and Sirius Satellite Radio finally have been allowed to merge and now confront the fact that deal was the least of their problems. Very little is known about how they will handle the integration; the only thing the companies have said is that they expect $400 million in cost cuts. Several bigger business issues await the companies, who once argued that if they couldn’t merge together, they would collapse separately. Here are some of the challenges confronting the combining companies.
A weak auto industry: Sirius has 18.5 million subscribers and expects to add 3 million more next year from auto makers including General Motors, according to Sirius XM CEO Mel Karmazin. That would generate $350 million in revenue, Karmazin predicted. But auto sales have been slowing, hit by rising fuel prices, constrained credit and a slower-growing economy. Sirius’s second-quarter financial results provided insight into how that already has affected the satellite radio business: it added 246,221 subscribers from auto makers, well below the 325,000 expected by some analysts. Detroit’s Big Three are in dire enough financial straits that they will appeal to Congress to increase to $50 billion a $25 billion loan facility signed into law last year. A Citigroup report this week spoke of a silver lining in that news, arguing that the better-capitalized the auto makers are, the better off Sirius XM is. Still, that may be something of a stretch.

Subscriptions are slowing: In the second quarter, Sirius added a net 279,820 subscribers–less than half the 561,500 subscribers of the year-earlier period. Morgan Joseph analyst David Kestenbaum warns of slowdowns in subscriber growth both from sales to auto makers and through retail outlets, and glumly predicted of both distribution channels, “We believe the [auto maker] troubles are short-term while retail’s demise is permanent.” Many new cars also have iPod jacks, another threat to Sirius-XM’s business.
Debt refinancing: XM refinanced more than $1 billion of debt before the deal closed, but Sirius has another $1 billion to take care of within the next 16 months. Not only is the credit crunch going to make that more difficult than it would be in normal times, but the capital markets haven’t been very welcoming to the satellite radio operators. Sirius sold $550 million in convertible securities to investors in late July for what Stifel Nicolaus analysts called “a desperately low price.”

New talent is expensive: Karmazin lured Chris “Mad Dog” Russo for a new show with a contract reportedly valued at $3 million a year for five years. Shock jock Howard Stern, the crown jewel of the Sirius broadcasting empire, signed a contract in 2004 reportedly valued at as much as $500 million over five years and received as much as $306 million in 2006 if you count bonuses and other perks, according to Forbes. Programming costs for both XM and Sirius total $475.4 million, or 23% of revenue. At the same time, Sirius shares are trading at record lows, and much of Stern’s compensation is in stock. Unless Sirius wants to pay cash or boosts its stock price, it may have trouble luring more talent.

By: Heidi N. Moore
Wall Street Journal; August 28, 2008

FCC Blunders Continue

Among the conditions extracted by regulators before approving the Sirius XM satellite radio merger earlier this month was the company's promise to set aside a share of channels for minority programmers. Now we're finding out what these racial preferences mean in practice.

In a commitment letter last month, Sirius XM informed the Federal Communications Commission that while it agreed to reserve the channels, the company doesn't want to choose the actual programmers. No doubt Sirius XM realizes that this is one giant political headache, and that it's unlikely to be the final arbiter in any case. There will almost certainly be more applicants than available channels, and programmers who aren't chosen will inevitably turn to the courts and the FCC to complain. The government may as well pick the minority programmers directly.

FCC Chairman Kevin Martin is prepared to do just that. According to a report in Communications Daily, an electronic newsletter that covers the telecom industry, the FCC is developing procedures to determine what constitutes a "minority" programmer and which minorities are worthy of special treatment. These racial preferences and quotas are blatantly unconstitutional, and may not themselves survive judicial review. But Mr. Martin gets around that legal nicety by claiming the concessions are "voluntary."

We look forward to seeing who the FCC deems to be "minority" enough to qualify. Meanwhile, this spectacle of a Bush appointee playing racial landlord is one to keep in mind when Mr. Martin begins his oft-mentioned run for elected political office.

Wall Street Journal; August 19, 2008