XM Satellite Radio Holdings and Sirius Satellite Radio: How big is the market, really?

Today, Sirius Satellite Radio (SIRI) fell sharply after cutting their "subscriber forecast" on weak holiday sales. It got me thinking, how big is the market for satellite radio, really?

Sirius Analysis

Sirius said it expects to add between 2.6 million to 2.8 million new subscribers in 2006, to a total of between 5.9 million to 6.1 million by the end of 2006. Previously, the company expected to end the year with a higher total of 6.3 million subscribers.

As of the quarter ended September 30, 2006, they had the following revenues:

Subscriber revenue, including effects of mail-in rebates: $155,337
Advertising revenue, net of agency fees: $7,130
Equipment revenue: $3,579
Other revenue: $1,067

Total: $167,113

Two things stand out from this 10-Q.

"As of September 30, 2006, we had 5,119,308 subscribers."
"a monthly subscription fee of $12.95."

At the end of the previous quarter:

"As of June 30, 2006, we had 4,678,207 subscribers."

Let's say that the average number of subscribers they had over the period was 4,898,758. 4.9MM subscribers x $12.95 a month x 3 months = $190.36MM in revenues. But somehow, they only managed $155.3MM in revenues from all these subscribers. So what's the deal here? A significant number of subscribers are either getting the service for free or at a discount. By my calculations, they are only getting around $10.57 per subscriber.

For the quarter ending March 31, 2007, analysts are projecting revenues of $218.11M. Please note these numbers haven't been revised for lower projected growth yet. Assuming similar ratios, here's the breakdown:

Subscriber revenue: $202.74
Advertising revenue: $9.31
Equipment revenue: $4.67
Other revenue: $1.39

Monthly revenue: $202.74 / 3 = 67.58 / $10.57 = 6.39MM users average.
Beginning subscribers: 6,000,000
Estimated ending subscribers: 6,780,000

For the year of 2007, using the same ratios:

Subscriber revenue: 1,208.39
Advertising revenue: 55.47
Equipment revenue: 27.84
Other revenue: 8.30

Monthly revenue: $1208.4 / 12 = 100.7 / $10.57 = 9.53MM users average
Beginning subscribers: 6,000,000
Estimated ending subscribers: 13,060,000

Obviously it's possible that they could also increase their revenue per subscriber or other revenues, but we'll assume they are still in the growth phase right now.

XM Analysis

Now let's do a similar analysis of XM Satellite Radio Holdings (XMSR).

"the addition of more than 868,000 gross and 286,000 net new subscribers to end the period with over 7.1 million total subscribers"

"Our basic monthly subscription fee is $12.95"

10-Q for quarter ending Sept 30, 2006:

Subscription: $214.82
Activation: $4.21
Merchandise: $3.16
Net ad sales: $8.79
Other: $9.46
Total: $240.44

Monthly revenue: $214.82 / 3 = $71.61MM / 7.1MM subscribers = $10.09 per subscriber

To get to December, let's do a projection for the 4th quarter using analyst estimates of $247.18MM revenues.

Subscription: 220.84
Activation: 4.33
Merchandise: 3.25
Net ad sales: 9.03
Other: 9.73

monthly subscription revenue: $220.84 / 3 = $73.61MM / 10.08 = 7.3MM subscribers average
Beginning: 7.1MM
Estimated ending: 7.5MM

One more time, using XM Projected revenues for 2007: $1.24B

Again, using the same ratios to project the entire year:

Subscription: 1,107.84
Activation: 21.73
Merchandise: 16.32
Net ad sales: 45.31
Other: 48.81
Total: 1,240.00

Monthly subscription revenue = $1107.84 / 12 = $92.32MM / $10.08 = 9.16MM subscribers
Beginning subscribers: 7.5MM
Ending subscribers: 10.82MM

Current Size of the Market

So here is the total estimated subscribers of the two Satellite radio services:

3Q 2006: 12.22MM
4Q 2006: 13.50MM
4Q 2007: 23.88MM

At this point, I'm getting a little iffy about the projected growth. Supposedly, there will be 23.88MM subscribers by the end of next year. Assuming it's only 1 subscription per household and there are 2.6 people per household, that represents 62MM people or over 20% of the United States' population of 300MM. How many more people REALLY are willing to pay $155 a year for radio?

Projected Growth

Analysts project XM's five year earnings growth at 25% and Sirius' at 22.3%. Now obviously they will eventually tone down advertising expense and reach a break even point of some sort. But let's say these numbers requires 7% annual subscriber growth for the next 5 years. What percentage of the population will be covered by satellite radio assuming 2% population growth?

2007 20.29%
2008 21.28%
2009 22.33%
2010 23.42%
2011 24.57%

I am, to say the least, VERY skeptical that it will ever reach that level of adoption. I think it is much more likely that we will see a big growth in alternate radio technologies like wireless internet connections with streaming internet radio stations instead.

Financial Issues

In the meantime, the satellite radio companies are BLEEDING money. Take a look at the current ratio for the two as of the last quarter:

Sirius
CA: 534,976
CL: 641,405
Current Ratio: 0.83

XM
CA: 560,618
CL: 676,099
Current Ratio: 0.83

Both are already basically already insolvent. Without massive earnings growth, they are obviously in big trouble.

Conclusion

I could be completely wrong, but I very much doubt that satellite radio will ever reach the levels of adoption that are guesstimated by the analysts. It seems like alternative, cheaper technologies will overtake the services well before they reach the levels of subscription they need - basically every man, woman, and child in America. More than likely, one or both of these services will be bankrupt in the next 3-4 years. They are already appear to be close to it now.