10-07-2004, 11:41 AM
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Join Date: Oct 15, 2003
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Fool's Take on Stern & Sirius
Sirius and Stern
By Rick Aristotle Munarriz (TMF Edible)
October 7, 2004
Kelly Osbourne held her ground as the phone call hecklers chimed in. She's a trooper, and she knows the body armor well. It's just what happens when celebrities take calls on the nationally syndicated Howard Stern radio show. But just as Stern concluded the morning segment he announced that he had some major news to unload on his audience after the break.
It was. As we all know by now Howard Stern will be moving his broadcasting antics over to Sirius Satellite Radio (Nasdaq: SIRI) once his deal with Viacom (NYSE: VIA) is complete at the end of next year.
I wasn't surprised. In fact, I had even predicted this move back in February, and rumors started swirling around naming Sirius as Stern's next stop a month later. Our own Seth Jayson was skeptical about the way the stock tacked on huge gains yesterday on the news. I am not as pessimistic.
Last week, in my When Models Explode article, I warned about the problem of underestimating a company's potential. I had singled out Sirius and XM Satellite Radio (Nasdaq: XMSR) and how pundits were underestimating their earnings potential beyond the basic monthly fees.
While the press release didn't mention it, Stern explained that the deal with Sirius wasn't just about taking the popular morning show into geostationary orbit. Both parties would be developing two more channels -- premium channels -- of content.
Yes, trading in Sirius was delirious yesterday. The stock added just more than $640 million in market cap yesterday. But if this was the market's way of saying that Sirius would be taking a significant slice of market share away from its only rival, why did XM shed just $100 million? Or could it be that this was just an unreasonably upbeat trading day in a volatile stock? And what can one assume if Stern is so valuable to the prospects of Sirius yet Viacom -- the company that will be losing him -- saw its shares rise yesterday too?
I won't leave you hanging with the questions. If you go by the combined market caps of XM and Sirius, the satellite radio industry is now worth $11 billion. XM is worth more than a billion bucks more right now, and it's not entirely unfathomable to see Sirius catch up -- if not lap -- XM in subscribers come 2006. Between Stern and the NFL that young male audience that makes up the juiciest chunk of satellite radio listeners will have a hard time passing up Sirius.
Yet now that Sirius and XM are rolling out premium channels that will grow the amount of money it can make off each new subscriber (and this is a beautifully scalable business in that every incremental user is practically gravy to the bottom line) isn't the industry worth more? Yes. Now that some of the critical morning show ear magnets like Stern along with Opie and Anthony are making a move to broadcast exclusively on satellite radio, isn't the value of free radio diminishing? Yes. Could that mean some tougher times for traditional radio broadcasters like Clear Channel (NYSE: CCU) and Cumulus Media (Nasdaq: CMLS) if those tuning in migrate to satellite radio? You bet.
Rick Munarriz owns shares in Viacom but not in any of the other companies mentioned in this story.