Costs Cloud Sirius Story

The cost of growth is starting to weigh on Sirius (SIRI) investors.

As promised, the New York satellite radio broadcaster added 111,449 subscribers in its just-ended fourth quarter, pushing total user numbers up 75% from a third-quarter levels. But all the rebates, stock giveaways and promotional discounts helped jack up expenses to an uncomfortably high level for some tastes.

"They are subsidizing a lot of growth at this point, but hopefully as Sirius gets more popular they can bring down" the subscriber acquisition costs, says Stifel Nicolaus & Co. analyst Kit Spring, who has a neutral rating on the stock. Stifel Nicolaus has no banking ties to Sirius.

In midday trading Wednesday, Sirius, one of Wall Street's recent favorites, was down 3%, falling a dime to $2.87. Another 2003 highflier, Washington, D.C., rival XM (XMSR), rose 19 cents to $23.27.

About $1.5 million worth of rebates on radio purchases cut into Sirius' fourth-quarter financial performance. That's why fourth-quarter revenue, at $5 million, at first blush appeared to fall so far short of the $6.5 million analyst estimate. Fortunately, some analysts were in a giving mood and so backed the rebates out of the revenue figure, putting Sirius' numbers right in line with targets.

That said, the company's financial performance remains lamentable no matter how you slice up the various pro forma measures. For the year, Sirius lost roughly $25 for every $1 in sales it brought in as the company launched its 100-channel subscription radio service. That's OK, say bulls who argue that satellite radio will one day leap from a cultlike following to mass market acceptance.

But the road to widespread consumer success hasn't been cheap. Last year, Sirius spent $293 for every customer it added. At the going rate of $13 for a month's subscription, it will take nearly two years until Sirius sees a profit on that initial investment -- assuming all subscribers stay on that long.

Company executives on a conference call with analysts said that subscriber acquisition costs would "be south of $200" this year, but offered nothing more specific.

While happy to hear that those costs are coming down, Janco Partners analyst April Horace says she'd be more encouraged if the company stopped the promotional activity and held firm on the pricing front. Horace has a neutral rating on the stock, and her firm has no banking ties to Sirius.

Sirius chief Joe Clayton said most of the selling costs came from radio rebates and less from its promotional offer of three free months with every prepaid one-year subscription.

"We have no plans to change our pricing," said Clayton when asked by analysts about rumors of a price cut. "We believe we have a premium programming position with the NFL," he said, referring to a recent deal to broadcast pro football games starting this fall.

But as is always the case with Sirius, there's a Catch-22. The attractive but pricey NFL pact set off alarms among investors last month as some questioned throwing more cash on the bonfires: Terms of the deal revealed that Sirius mush dish out an estimated $95 million up front for the broadcasting rights.

The presumed payoff for the deal is that a stampede of football fans will now sign on for the pay-radio service.

Look at it this way: If 250,000 football fans sign on, it will only take 2 1/2 years for the deal to pay off.

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