Why Is Sirius XM Shrinking?

This is worrisome, with the chalked outline of 404,422 net
defections turning what should have been a positive report into a crime
scene investigation.

The near term is unlikely to get any prettier. Chrysler's bankruptcy
and factory shutdown will deliver "a noticeable hit" the company warned
during last week's conference call. Chrysler cars sold with prepaid
subscriptions delivered 900,000 accounts to Sirius XM last year alone.
Good luck finding replacements for those accounts. Rival carmakers like
General Motors (NYSE: GM) and Ford (NYSE: F)
are on wobbly knees. It gets even uglier outside of the showroom, since
net retail subscriptions have been running negative since last year.

What happened? What will happen? What should happen? These are three
meaty questions that every investor -- long or short -- needs to
consider.

What happened?

Sirius XM was upbeat in September. The merger between the two satrad heavies was completed over the summer, and the company saw growth on the horizon. It projected 19.5 million subscriptions by the end of 2008 and 21.5 million on board in 2009.

The rolls dimmed just two months later,
when Sirius XM revised its targets lower. It would close out the year
with just 19.1 million subscriptions and have 20.6 million on board by
the end of 2009. It didn't stop there. Sirius XM's periscope went all
the way out to 2013!

Subscribers in millions; dollars in billions.

It was the last time that Sirius XM would point to the fences. When it closed out the year
with just 19 million subs -- gaining less than half of the 200,000 it
figured it would corral during the fourth quarter -- it decided to
abolish its subscriber targets entirely.

It's been a perfect storm since then, unfortunately:

• The sour economy is pinching disposable income,
  and satellite radio is an easier cancellation than essential utilities
  or home theater diversions.
• Car sales plummeted with the
  one-two punch of consumers afraid to indulge in big-ticket items and
  lenders reluctant to dole out credit.
• Sirius XM decided to consolidate its music channels in November, spurring an angry backlash from some subscribers.
• The
  company began charging $2 for secondary family accounts in March, as
  well as turning Web-streaming access into a premium offering.

The first two hits were beyond Sirius XM's control, though the last two points were clearly the company's handiwork.

There is no official breakdown of the biggest contributors to the
subscriber downturn. I would like to think that the programming change
isn't a major culprit, since the hubbub died down in November, though
it clearly impacted renewals after that. The March increases may factor
into the current quarter metrics, since average revenue per subscriber
actually fell during the first quarter.

Car sales hurt, but we're also getting to the point where new car
buyers are simply replacing cars that already have satellite receivers.
It should no longer be the net subscriber boost it used to be.

What will happen?

Since I correctly predicted
that the company would miss its fourth-quarter subscriber targets and
post its first net decrease in accounts during this year's freshman
quarter, I feel I have a pretty good read on the company at a time when
Sirius XM is tightlipped.

In short, I see another sequential dip in total subscribers from the
18.6 million it watched over at the end of March. Consumer confidence
is showing signs of life, but the March rate increases will begin
eating into family accounts, and the stagnant auto market isn't going
to help.

I do think the Chrysler retreat is overblown. We're not talking about 900,000 people who won't
buy a car if there isn't a new Chrysler to buy. Sirius XM lost a retail
distribution partner when Circuit City went under in March, but it's
not as if there are folks still peeking into liquidated storefronts.
They have moved on to Best Buy (NYSE: BBY)
for their consumer electronics, including Sirius XM portable receivers
that clearly weren't selling well last year even when Circuit City was
still in business.

Sirius XM should begin turning the corner by this year's final
quarter, but it probably won't be enough. I see Sirius XM ending the
year with fewer than the 19.1 million subscribers it began with.

What should happen?

Are there catalysts out there? You bet. There is buzz building over the upcoming Apple (Nasdaq: AAPL) iPhone app. Now that Liberty Capital (Nasdaq: LCAPA) has a 40% stake in Sirius XM, it's just a matter of time for a deal to be brokered with fellow Liberty investment DirecTV (NYSE: DTV).

Why am I not dusting off the pompons? Well, an Apple app will be
incremental, but the market for premium streaming audio is probably
limited. The quality difference between satellite radio and terrestrial
radio is huge, but the moat isn't as wide between Sirius XM as a
streaming service and the limitless free alternatives available.

DirecTV and Sirius XM are the class of satellite subscriptions, but
I'm not convinced that there are many DirecTV accounts that want Sirius
XM but aren't already subscribers. If they can afford DirecTV's pricey
monthly bills, they can already afford Sirius XM. If they are diehard
couch potatoes, then they may not spend enough time driving around to
justify the activation of a satellite radio receiver in their cars.

I believe that an improving economy will be a bigger contributor to
the subscription turnaround at Sirius XM than these catalysts. Let's
hope it happens soon, because Sirius XM was a lot sexier when it was a
growth stock story.

Some other Sirius stories:

• 404,422 Reasons for Sirius XM to Worry
• Sirius in 2012

• The Greatest Secret of All

© 2009 UCLICK, L.L.C.