The war for subscribers between the two U.S. satellite radio rivals heated up considerably at the close of 2005 with Sirius Satellite Radio capturing a larger share of new subscribers during the fourth quarter, and both Sirius and XM Satellite Radio posting large losses. Both companies reported losing significantly more money in the fourth quarter than they had the previous year as both companies spent heavily trying to woo new subscribers.
The spending spree at XM, in fact, spurred the resignation of one of the company’s board members in protest.
XM Satellite Radio Holdings Inc. of Washington beefed up its marketing efforts during fourth-quarter 2005 in response to the approach of the holiday spending season and the impending arrival of disc jockey Howard Stern to New York-based Sirius in January.
“We did grow strongly but we failed to do so as economically as we had expected or planned to,” said Gary Parsons, chairman of the board for XM, during the conference call.
XM Chief Executive Officer Hugh Panero said during a Feb. 16 conference call that the company increased media spending in the fourth quarter to “counter the one-time blitz” surrounding Stern’s arrival, offering significant discounts and spending more on advertising. Panero said the company had planned ahead for this, spending less in the first three quarters of 2005 to counter the increase.
XM’s subscriber-acquisition cost, which includes such things as advertising and discounts on hardware, was $89 per customer, compared to $64 per customer during the fourth quarter of 2004.
“We expect [spending] to drop sharply in the first quarter as we scale back media spending and hardware discounts,” Joseph Euteneur, the company’s chief financial officer, said during the call, calling the expenses “abnormally high.”
Sirius, however, spent even more than XM to gain subscribers, spending $113 per subscriber during the fourth quarter. But the number actually reflected a decrease from the previous year, when Sirius was spending $124 per subscriber during fourth-quarter 2004.
“We expect to make a lot more progress here,” James Meyer, Sirius president of operations and sales, said during a Feb. 17 conference call with investors, promising to scale back subscriber-acquisition spending.
Parsons acknowledged during XM’s call that board member Pierce Roberts had resigned from the board Feb. 13 over concerns about XM’s heavy spending.
In his letter of resignation, Roberts said he was “troubled about the current direction of the company” and that there is a “significant chance of a crisis on the horizon.” Roberts said he had increasingly made his concerns known to the board and it had not been having any effect.
Parsons said that Roberts had expressed those concerns for a period of time, but that other members of the board felt the spending on program content and marketing was worth the investment.
“This is a balancing act for management and the board that we take very seriously, and the differing opinions are quite similar to those we hear when visiting our investors at large,” Parsons said.
Analyst Shaun Parvez of S.G. Cowen & Co. of New York, said that while XM’s spending was higher than anticipated, it likely would pay off for the company in the long run.
“We knew in Q3 they were going to spend heavily in Q4,” said Parvez. “I guess no one sort of appreciated how much they were going to spend, so that was a bit of a surprise. In a broader scheme of things, it’s sort of a one-time blip, as the management said, so we’re not really concerned.”
Cost questions aside, the fourth quarter provided a boon for Sirius in terms of new subscribers. Sirius managed to add significantly more subscribers than its competitor during fourth-quarter 2005, adding 1,142,640 subscribers to XM’s 898,315.
Overall, XM ended the quarter with 5,932,957 subscribers; the company has since passed the 6 million-subscriber mark. Sirius finished with 3,316,560 subscribers.
But XM’s total loss for the quarter was less than the loss Sirius experienced. XM lost $268 million in the fourth quarter of 2005, compared to a loss of $188.2 million in the fourth quarter of 2004. Sirius lost $311.4 million in the quarter compared to $261.9 million in fourth-quarter 2004.
Both companies lost more money in 2005 than in the previous year. For 2005 overall, XM’s loss was $666.7 million, compared to a net loss of $642.4 million in 2004. Sirius lost $863 million in 2005 overall compared to $712.2 million in 2004.
XM’s revenue for the quarter jumped to $177 million, up from $83.1 million in fourth-quarter 2004. Sirius brought in $67.8 million, up from $22.7 million in fourth-quarter 2004.
Revenue for the year was $558.3 million for XM, up from 2004’s $244.4 million. Sirius’ revenue for 2005 was $242.2 million, compared with $66.9 million in 2004.
The companies’ latest programming battle appears to be over female listeners. Beginning in September, XM will offer a new channel, “Oprah & Friends,” featuring talk show host Oprah Winfrey, whose syndicated television program and monthly magazine attract a huge female audience. “Oprah is to women as sports is to men,” Panero said during the call. “XM is clearly the leader in women’s lifestyle content.” The three-year deal with Winfrey and her associates was valued at $55 million.
But Sirius already hosts a Martha Stewart Living channel, and will host a “Cosmopolitan Radio” channel dedicated to beauty, fashion and other topics, this year.
Both companies during their conference calls projected they would be able to generate positive cash flow by the fourth quarter of 2006.