SAN FRANCISCO (CNN/Money) -
Satellite Radio got knocked out of its orbit last week when Sirius, one of two publicly-traded companies that offer the service, filed a quarterly report stating that it needed $300 million to keep its service alive.
The Sirius filing also said that if the company failed to raise additional funds, "we will be forced to seek protection under the United States bankruptcy code, materially reduce our operations, significantly alter our business plan and/or seek the sale of our company." What's more, the firm reduced its 2002 subscriber goal to 75,000 from 100,000-150,000.
Yikes. Understandably, the stock was hammered on the news, losing more than half its already minimal value. The next day, Sirius (SIRI: down $0.12 to $1.10, Research, Estimates) released a damage-control press release, and the stock rebounded nicely -- but the damage had been done. Then XM Radio (XMSR: up $0.63 to $3.96, Research, Estimates), the competing satellite-radio company, disclosed some glum news of its own in its quarterly filing, stating that it, too, needed significant additional funds to cover its cash requirements.
Don't get me wrong: I think satellite radio is an innovative concept that makes a lot of sense in these dull days of homogenized broadcast-radio programming. Satellite radio offers top-quality sound and a great selection of music and talk shows that are beamed from satellites to special radios. Customers pay $9.95 (for XM) or $12.95 (for Sirius) per month for the service, on top of a one-time set-up fee. Users can select channels by music genre or talk topic, and the playlists -- unlike much of modern radio -- aren't bland, hits-only fodder (unless, of course, that's what you want).
But as anyone in the business world with a pulse and a Palm Pilot knows, funding is awfully hard to come by these days, especially if you're pushing an unproven concept (such as satellite radio) with fairly high operational costs.
While both companies have scored some impressive deals -- Sirius has licensing deals with BMW (BMW: Research, Estimates) and DaimlerChrysler (DCX: up $2.77 to $46.91, Research, Estimates), and XM has similar partnerships with General Motors (GM: up $1.26 to $46.76, Research, Estimates), and Toyota (TM: down $0.96 to $48.70, Research, Estimates) -- I'm going to go out on a limb here and say that I don't believe either of these two companies is going to make it. Ultimately I expect to see satellite radio go through an evolution akin to what's taking place in telecommunications right now.
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Last week, the Wall Street Journal ran a report detailing how companies that are snatching up fiber assets for pennies on the dollar in the bankruptcy market will be able to offer telecom services on those lines for significantly reduced prices, because they aren't saddled with the crippling debt that brought down the previous owners. Something similar will happen in satellite radio. These companies are having trouble raising additional funds and reaching their subscriber goals. When they file for bankruptcy, another company will come along, snatch up the assets and services, and relaunch the service without the legacy debts. Neat trick, huh?
So who is most likely to pick up the pieces when satellite radio crashes down to earth? As with most things radio, the signals point to ClearChannel. The radio/entertainment/advertising monolith already has an investment in satellite radio, and it could add additional reach and some cool technology by picking up these assets at fire-sale prices before relaunching them.
Radio purists (I think there are a few left) will cry foul at ClearChannel extending its reach further, but as a business proposition, it makes sense. Satellite radio will fall victim to the version 1.0 blues, where a great idea comes along, can't find the market or the money, goes under, and gets relaunched by established companies. Stay tuned.
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