Mel Karmazin carved out bookend strategies to preserve life for Sirius XM including preparations for a possible Chapter 11 filing and negotiating an apparent deal with John Malone and Liberty Media. We wonder whether this company will continue to be an important player in the audio entertainment marketplace. Clearly, it starts from a position of strength with its combined twenty million subscribers and the related $2 billion in recurring annual revenue. Its present arrangement with car manufacturers allows it to introduce new subscribers, even though those numbers are lower given the decrease in new car sales. Yet, it is not clear even with an auto sales driven infusion of new subscribers that the business model makes enough sense.

Sirius must run a gauntlet to come out of this mess. We see four critical steps Sirius must achieve to be a viable business.
Sirius will have to:

1. Arrange new financing sources. This will be challenging as it will have to convince others that it will be able to get the other arrangements done under economically feasible terms. The deal with Liberty solves this issue for the time being, though there are still some refinancing challenges ahead.
2. Convince the automobile manufactures (who have ownership interests in Sirius) to lower the marketing costs they charge Sirius for each new subscriber. Given the state of the automobile market, it will be difficult for manufacturers to give up more of their shrinking margin on sales.
3. Convince programming owners (e.g., Major League Baseball, Howard Stern, etc.) to accept lower fees. These owners of programming or talent have no other nationally distributed outlets with available financial resources to go to, so they should be accommodating.
4. Convince subscribers that the resulting programming mix emerging out of these bankruptcy proceedings will still be attractive enough. There is some churn in customers each month, but they have still been able to retain a large percentage of their customers.

Even though successfully negotiating these arrangements will be challenging, the outlook for Sirius would then be positive. A critical mass of consumers already is established who have adopted this source of programming and likely will remain loyal. The other parties discussed earlier who have to come to new terms really have nowhere else to go. While some programming could migrate to terrestrial radio, the business climate facing that medium is so poor that the amounts that would be paid would be small. The largest hurdle is to convince enough creditors and other financial sources that with the cost savings it will have be able to negotiate, Sirius’s revenue stream will be sufficient to meet debt obligations and earn attractive long run returns for its share holders.

Tags: audio entertainment marketplace, BIA Advisory Services, John Malone, Liberty Media, Mark Fratrik, Mel Karmazin, Sirius XM