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Mathew Ingram

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High burn rate

Mathew Ingram


TORONTO (GlobeinvestorGOLD) — Here's a new idea for a new year: how about a subscription-based service that beams entertainment programming from a satellite to an earth-based receiver? But we already have that, you say — it's called satellite TV, and millions of people subscribe to it through companies such as ExpressVu, Star Choice, DirecTV and the Dish Network. That's true. But this new idea isn't television — it's radio.

Satellite radio is one of those things that seems so obvious it makes you wonder why it took so long. If people are willing to pay monthly fees for satellite TV, why wouldn't they pay for the same kind of digital-quality service but with audio instead of pictures? One of the stumbling blocks may have been that people are used to getting radio for free, just by flicking a switch and turning a dial.

That used to be the case for television too, of course, until cable came along, followed by satellite. Can radio make the same leap? Two companies are betting it can — XM Satellite Radio Holdings Inc. and Sirius Satellite Radio Inc. (both of which also have Canadian partners, with whom they are pursuing a license from the federal broadcast regulator). And investors are betting satellite radio will eventually become a money maker, by pushing the share prices of XM and Sirius into the stratosphere.

The idea behind satellite radio is fairly simple: use the same kinds of satellites that transmit TV signals (since you can pack a lot more audio into the same amount of bandwidth a video signal takes up) and beam high-quality radio programming — music and talk shows — into people's cars, for a monthly fee. That fee removes the need to run advertising, which in turn makes the service even more appealing. And the digital signal is available even in places where regular radio is not (although it reportedly doesn't do well inside office buildings).

While it is currently the smaller of the two, with just over one million subscribers, the company that became Sirius was actually the first one to win a license for satellite radio. The venture ran into a snag involving its satellites, however, and couldn't launch when it wanted to. It later wound up having to restructure financially, which is why it has more than a billion shares outstanding. As a result, competitor XM Satellite got a head start and now has close to three million subscribers.

Both companies have been busy signing deals with as many high-profile people and organizations as they can, in order to boost demand for their services — and each announcement tends to push the shares up even further. Sirius jumped when it announced it had signed popular talk-show host Howard Stern to a contract, and XM gained when it signed a deal with the Major League Baseball association. Both companies have also signed deals to have their receivers installed in cars sold by Ford Motor Co., Toyota Motor Ltd., and General Motors Corp.

While these deals make a lot of sense from a business standpoint, the problem for investors is that they cost vast sums of money. As a result of their marketing campaigns, both Sirius and XM lost more than $600-million (U.S.) in the past 12 months — that's more than three times what XM took in as revenue and more than 10 times what Sirius had in sales for the same period. The Howard Stern deal alone is going to cost Sirius $500-million over the next five years, while XM's MLB deal is $650-million.

Both Sirius and XM argue that these kinds of arrangements are necessary to draw subscribers, which is probably true. But how many paying subscribers are they going to need in order to break even, let alone make any money? Until earlier this year, Sirius was saying it needed a million subscribers in order to get into the black, but now it's saying it won't break even until next year at the earliest.

XM said it is hoping to do so next year too, but some analysts say neither one is likely to make much money until the year 2008. And yet XM has a market value of $8-billion with revenue of just $200-million, while Sirius has a market cap of about $10-billion with sales of just $47-million. That's a price-to-revenue multiple of more than 40 times for XM and more than 200 times for Sirius. Even if the latter increased its sales by more than 5,000 per cent it would still be overvalued by most traditional benchmarks.

There's no question that satellite radio has tremendous potential. Sirius has come out with a personal satellite radio receiver that would allow subscribers to take their digital-quality music and services with them almost anywhere — possibly competing with Apple's iPod music player — and there are docking stations that a satellite radio can plug into for home use as well. XM says it envisions a future in which subscribers can download weather information, maps and even video clips to display in their cars.

The problem for investors is that all this potential comes with a gigantic price tag, one that could keep both companies swimming in red ink for some time. In that sense, XM and Sirius are much like Internet companies in the late 1990s — filled with potential, but burning through cash at a furious pace. Amazon.com Inc., eBay Inc. and Yahoo Inc. became profitable businesses, but there are plenty more that didn't. XM and Sirius may succeed, but until they do you are paying dearly just for the hope that some day they might.

Mathew Ingram joined The Globe and Mail's online news team in June of 2000, after spending four years as the Western business columnist, based in Calgary.

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