By Chris Stepanik

The critics of Sirius XM Radio (Nasdaq: SIRI) have finally come full circle. Seven years ago, I began following the Satellite Radio provider. As the company neared its first one million subscribers, the “glass half empty” critics began to emerge and brilliantly announced through anonymous message board postings, that Internet Radio and 2G/3G cell phone technology would be the demise of any competing entertainment medium. According to their calculations, Satellite Radio was doomed from the beginning. Nearly twenty million Satellite Radio subscribers later, the critics seem to have run out of ammunition. Like an army in retreat, they have little left to fight with except to hurl expired ordinance, which failed to hit its mark the first time. Suddenly, there is renewed concern for Sirius XM’s future at the hand of mobile Internet and next generation cell phone technologies. The argument was weak in 2003, and it remains even weaker today.

Free is never a good business model, and nothing is truly free. Consider Pandora or any other online streaming music service. Already, cell phone carriers are complaining that music streaming is putting a bandwidth strain on service providers, and have begun to charge customers extra to use these “free” services. AT&T (Nasdaq: T) for example charges customers an extra $8.99 monthly fee for Pandora streaming, and that is on top of the $30.00 per month Internet access fee. Streaming, which now can include advertising as well. Other carriers will no doubt follow suit. Ironically, Sirius XM Radio is actually available for as little as $6.99, and is more reliable in that it doesn’t require a cell signal to function. Why would anyone pay more, for less?

The recent television ad for Sirius XM Radio is able to effectively communicate the differences in content that separates satellite radio, from supposedly “free” alternatives. In one thirty second spot, Sirius XM is able to demonstrate that it offers exclusive music, sports, comedy and talk which remains unparalleled on any other service. The commercial which features Elvis Presley, Michael Jordan, Richard Pryor and Howard Stern is a statement that appeals to Sirius XM Radio’s largest consumer base.

The only remaining argument then, would be mobile Internet services as a real threat to the viability of Satellite Radio’s future. Somehow, some high school dropout came up with the idea that streaming the Internet in cars could replace radio in cars. There are two problems with this theory. The first is that a car moves. It does not stand still like a person in Starbucks surfing the web. As one Wi-Fi connection is lost and another established, signals are dropped. This means that a constant stream of uninterrupted music, such as is provided by Satellite Radio, remains impossible.

In fact, in order to provide a seamless nationwide Internet connection, a company would need to have nationwide satellite coverage at its disposal and an extensive repeater network, dedicated to Internet service. If such a company were to exist, it would require a fleet of satellites and repeater infrastructure that it had no other use for. Likewise, this company would be better served if it could partner with a company like Direct TV (Nasdaq: DTV), which already offers Internet via Satellite to its customers. Recently, John Malone of Liberty Media (Nasdaq: LMDIA)  spoke of potential synergies between Sirius XM Radio and Direct TV. Many saw this as a cross marketing opportunity. I see it as much more.

In the next few years, either the Sirius or XM infrastructure will be consolidated into a single brand, leaving an entire infrastructure of satellites and repeaters already in place. The unused platform can be used to bring a dedicated version of mobile Internet to future automobiles, allowing for content streaming of audio entertainment. There exists today no other company to my knowledge with this potential. The addition of John Malone, Greg Maffei and especially Eddie Hartenstein of Direct TV to the Board of Directors at Sirius XM Radio, make this more than a reasonable probability in the years ahead.

Position: Long SIRI

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