A Siriusly Unattractive Investment

This post appeared earlier today on RealMoney. Click here for a free trial, and enjoy incisive commentary all day, every day.

Chartists and bulls are crowing that the tide has turned for Sirius XM (SIRI Quote). And while they may be correct that the tide has shifted enough so that a tsunami will not drown investors in the short term, there is a large and heavy rock tied to the ankles of shareholders. This rock is an unsustainable business model. SIRI has invested over $10.2 billion in infrastructure for satellite radio. This amount includes equipment, FCC licenses, provider programming contracts (think Howard Stern), software development and various marketing programs. Unfortunately, technology is changing so rapidly that the value of those assets acquired is in question. The rampant popularity of podcasts has tipped the value proposition away from satellite radio.

SIRI had the wind at its back during the third quarter. Cash for Clunkers instigated a frenzy of new car purchases. The government estimates that the program generated an incremental 677,000 new car purchases during its tenure. While it is unclear how many of these trade-ins resulted directly in SIRI subscriber growth, there was clearly a positive impact. This one-time event helped to drive OEM subscribers up 407,000 sequentially. Yet, the decline in retail subscribers accelerated, with SIRI losing 1.1 million retail subs YoY during the period vs. 950,000 in the previous quarter. It will be important to follow these metrics as new car sales readjust to the reality of zero subsidies and high unemployment.

The bulls are excited that ARPU (average revenue per user) inched up from $10.39 in Q2 to $10.60 per month in Q3, but investors should realize that the bulk of this increased pricing slips out the door to pay for more content. The $10.4 million of additional revenue generated from pricing was offset by an incremental $11.3 million in content costs recognized in the quarter. Much of these increases are derived from huge investments in proprietary content. As consumers judge each expense monthly on the value it is providing, Sirius must constantly improve its content, if only to keep pricing flat.