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Old 11-24-2006, 05:09 PM   #1
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Default Sirius/Karmazin Interview

Loved the "flowers" question towards the end...


Can Mel Put Sirius Back on Top?
By Dyan Machan Published: November 24, 2006
This story is from SmartMoney magazine:
http://www.smartmoney.com/mag/ceo/in...2006&afl=yahoo


CEO: Mel Karmazin, Sirius Satellite Radio (SIRI)
IT'S MONDAY MORNING, and Mel Karmazin bursts into a glass-enclosed conference room on the 36th floor of Sirius Satellite Radio's Rockefeller Center headquarters. He's a minute early. But it doesn't take long for the white-haired, bushy-eyebrowed media mogul to live up to his reputation as one of America's most aggressive and blunt-speaking chief executives. For one thing, he tells us how much he hates being interviewed. And being photographed? Even more so. Despite once running (before being pushed from) Viacom, which was then the parent of CBS, Karmazin tells us he never liked television. Then he drops a little bombshell: Sure, he'd be interested in merging Sirius (SIRI) with XM Satellite Radio (XMSR), his archrival and the market leader in the hotly competitive $1.5 billion industry.

"Mergers often lead to creating shareholder value," Karmazin says. "I've always been open to that." He'd floated the idea at a trade conference that he'd like to buy XM, but he predicted there would be regulatory hurdles. He no longer thinks regulators would pose a problem. A native New Yorker, Karmazin, 63, is a well-known figure in media circles. Many Americans may remember him as the guy who launched shock-jock Howard Stern on satellite radio. But in two years at Sirius, he's also added everyone from Martha Stewart to Nascar to the station's programming, raising the company's profile in the process.

Still, this is an industry facing a lot of static. Once the darling of Wall Street, satellite radio has made headlines for big losses and plummeting share prices. Consumers, it turns out, love their iPods and are sometimes reluctant to renew the $12.95 monthly subscriptions that come with new cars. As Sirius's largest individual shareholder, Karmazin finds himself on the hot seat — and on this day talking (quite bluntly, of course) with senior writer Dyan Machan about his next step.

You've got an avalanche of debt and no earnings. Your bonds are rated CCC — in other words, junk. Why in the world should anyone buy your stock?

It will be higher in the future. This year we will have over $600 million in revenue; next year we will have $1 billion. By 2010 we will have $3 billion in revenue and $1 billion in free cash flow. Using the 15 to 20 times cash flow valuation Wall Street gives growth companies, that's a market value of $15 billion to $20 billion. Today it's $6 billion. The stock will take care of itself.

When you joined the company in 2004, the stock was $4.72. Today it's under $4. How do you live with yourself?

Badly. Wall Street compares us with XM Satellite Radio, and they've had hiccups. The day I started they were $35, and today they are $12. Being in the same sector, we've gotten hit.

So it's XM's fault?

We've not missed a single goal in the past two years.

Explain your business model.

Before we got a single subscriber, we had to launch three satellites and program more than 100 channels. We have high fixed costs. We had 600,000 subscribers the year I joined; we will have 6.3 million at year's end. As subscribers grow, a significant amount of money falls to the bottom line. It's similar to a cable company.

You will become like a cable company and raise prices?

Subscribers pay $12.95 a month, the same price they paid before we offered Howard Stern and the National Football League. We have Nascar starting January. We have a great opportunity to increase our pricing, but I can't say when.

It costs you $110 to acquire a subscriber — in subsidies and commissions paid to the car manufacturers, retailers and radio manufacturers. It costs XM only $89 a subscriber.

XM had some costs in place ahead of us. Our subscriber-acquisition cost was over $200 when I joined. The biggest component is what we pay auto companies like DaimlerChrysler to install Sirius in their cars. When we can order a million radios, instead of several hundred thousand, we'll get a lower rate.

You haven't released numbers on how many consumers stick with Sirius after the promotional period, but only about half of XM's customers stay with XM in GM cars. That seems scary.

Not scary. You should assume our numbers will be about the same. There will be 16 million cars made in Detroit this year. Assume 50% — eight million — come with satellite radio. That means we will have four million who will continue to be subscribers — just in cars. It took 15 years for FM radio to become standard in the car.

I tried wearing your portable headset radio during my commute, but I had to point my head out the window to make it work and it hurt my neck.

When you go back the other way, turn your head to the other side (laughs). You're dealing with satellite. The service is very good in markets that have lots of [ground-based signal boosters]. I got 100% perfect service driving for one and a half hours today. With time, the products will improve.

Tell us what new technology we can expect.

We will give you real-time traffic. Assume you live in central New Jersey, and have three ways into New York City. AM radio doesn't know where you want to go. The killer application is when we reroute you to the Lincoln Tunnel because a tube is closed in the Holland Tunnel. We could also tell you where the cheapest gas is.

Where are you with a possible merger with XM?

I'm really not allowed to say. I have focused my entire career on shareholder value and wealth creation. Often mergers allow for that. I combined my radio company with CBS, and I combined CBS with Viacom.

What was XM's reaction to your proposition?

"I'm dreaming" is their quote. But before they said that, both stocks went up. So I guess investors think [a merger] could be interesting.

Have you tried flowers?

I personally believe regulatory agencies are not a problem. If there's an iPod with terrestrial radio, it's hard to believe government is worried about two satellite radio companies combining.

What are you getting out of this?

I am having a blast. I love taking over a company that's not making money and having it make money. That's why I came here: Everyone says, "Gee, it's a great service and I love the content, but what's the business model?" I'm going to show them exactly what it is.
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Originally Posted by atlwxman: "I love Sirius...but in my car, not in my portfolio."

Originally Posted by Andrew-NYC: "...Just make a radio that gets both services, and there will be no need for the merger!"


Current Sirius radios:
Brix Streamer Replay
XACT "Visor"
XACT XTR8 Replay
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Old 11-24-2006, 05:41 PM   #2
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= Merger
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Old 11-24-2006, 11:16 PM   #3
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Where are you with a possible merger with XM?

I'm really not allowed to say. I have focused my entire career on shareholder value and wealth creation. Often mergers allow for that. I combined my radio company with CBS, and I combined CBS with Viacom.
__________________________________________________ _____________

Why is he not allowed to say? I think we can now at least agree that there is alot of smoke around the merger rumors. Not allowed to say? That sure sounds like something you would say if you were pursuing a merger.
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Old 11-25-2006, 06:53 AM   #4
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"When you joined the company in 2004, the stock was $4.72. Today it's under $4. How do you live with yourself?

Badly. Wall Street compares us with XM Satellite Radio, and they've had hiccups. The day I started they were $35, and today they are $12. Being in the same sector, we've gotten hit.

So it's XM's fault?

We've not missed a single goal in the past two years."


Mel's a great businessman and all that, but sometimes he says the stupidest things. SIRI shitty performance is all XM's fault? It has nothing to do with Sirius's God awful quarterly reports year after year? Nothing to do with Sirius being a billion in debt? Nothing to do with their SAC being sky high!? Come on Mel!!!
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Old 11-25-2006, 08:19 AM   #5
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I think you can just about bank on a merger happening between Sirius and XM. It would solidify the strength's of both satellite companies. The FCC would look favorably on such a merger, and it simplifies the whole industry.
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Old 11-25-2006, 08:31 AM   #6
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Quote:
Originally Posted by hazzar
I think you can just about bank on a merger happening between Sirius and XM. It would solidify the strength's of both satellite companies. The FCC would look favorably on such a merger, and it simplifies the whole industry.
The FTC, though, may not look favorably on the merger. They, and the FCC, stood in the way of the DISH/Echostar - DirecTV merger a few years ago. Many parallels between that attempted merger, and that of sat radio. Although there is a different political climate, I don't think it's that much different that today their would be a wholesale change in allowing the combining the two competitors. There are other debates about this on SBS, so I'll suggest looking there for more info. Who cares about it simplifying the whole industry, and what does that mean?

Anyways, personally I hope they don't merge. Competition is very good in this industy. We get more choice, and the providers are kept on their toes looking for more & better ways to provide a wider variety of content. Look at terrestrial radio and how Clear Channel failed, and now is having the equivalent of a 21st century fire sale of its stations.
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Originally Posted by atlwxman: "I love Sirius...but in my car, not in my portfolio."

Originally Posted by Andrew-NYC: "...Just make a radio that gets both services, and there will be no need for the merger!"


Current Sirius radios:
Brix Streamer Replay
XACT "Visor"
XACT XTR8 Replay

Last edited by HomieG; 11-25-2006 at 08:34 AM..
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Old 11-25-2006, 08:41 AM   #7
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I disagree. At this point, a merger would be a good thing for both Sirius and XM. It would make them a more equal competitor with the other competition in the radio industry, and strengthen the whole industry by creating MORE competition.
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Old 11-25-2006, 09:15 AM   #8
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merger is NOT going to happen with new Democratic majority now
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Old 11-25-2006, 09:32 AM   #9
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"They, and the FCC, stood in the way of the DISH/Echostar - DirecTV merger a few years ago. Many parallels between that attempted merger, and that of sat radio."


I strongly disagree. They are almost no parallels between sat TV's failed merger and sat radio's prospective merger.
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Old 11-25-2006, 10:26 AM   #10
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Quote:
I think you can just about bank on a merger happening between Sirius and XM.
I can see why siri would want to merge w/ xmsr but can you give me one good reason xmsr would willingly merge with siri?

Unless both cos are willing to admit that satellite radio is a failure it is hard to be seeing a reason for any merger.
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Old 11-25-2006, 10:45 AM   #11
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A merger would turn XM/Sirius whoever survives in to the SDARS equivalent of Clear channel. If one doesn't like the channel selections/DJ Chatter/Mindless T&A on one service, they go to another one. What happens when one doesn't have that choice, said person would go to Internet radio, iPods or god forbid back to terr. radio, and as technology evolves (Internet radio in cars, etc.) I see no way possible this would be a pretty scenario for either company. It may make the stockholders happy, but in the end the consumer would lose BIG!
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Old 11-25-2006, 11:12 AM   #12
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I really think the benifits of a merger are obvious, to both the consumer and the individual companies. The Democratic majority is a positive in that regard, not a hinderince.
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Old 11-25-2006, 12:07 PM   #13
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Quote:
Originally Posted by Satradioman
They are almost no parallels between sat TV's failed merger and sat radio's prospective merger.
Almost no parallels? Maybe almost, but just a few big ones:
- Sat radio competition is terrestrial and internet radio
- TV Parallel - Sat TV competition is terrestrial OTA and cable TV

- Sat radio has just two main consumer distribution companies (XM and Sirius)
- TV parallel - Sat TV has just two main consumber distribution companies (DISH and DirecTV).

Read the FTC and FCC rulings on the failed Sat TV merger. There happen to be many parallels to that proposal, and what a sat radio proposal would look like.
Some of us thinks it's good, some of us don't. We'll see if it ever happens. Personally, I don't want it too (duh!). I've worked in this industry for over 30 years. Consolidation sucks for consumer choice, and the quality of the product will suffer because there are no direct competitors to keep each other trying new innovations.

Anyways, this has all be debated to death in other threads, so I'll stop.
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Originally Posted by atlwxman: "I love Sirius...but in my car, not in my portfolio."

Originally Posted by Andrew-NYC: "...Just make a radio that gets both services, and there will be no need for the merger!"


Current Sirius radios:
Brix Streamer Replay
XACT "Visor"
XACT XTR8 Replay
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Old 11-26-2006, 11:18 AM   #14
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Quote:
I really think the benifits of a merger are obvious
Thats what people keep saying but i dont see anyone explaining exactly what those benefits are. seems like xmsr just takes on siris problems (siris debt, overly expensive programming, etc.) and gets relatively little of value in return.

cost savings? not much. both co.s already have cust svc problems and that is not going to get better by making it bigger. car mfrs? they still have to pick xmsr or siri because they are on different planes technologiclly. so what are the obvious beneifts?
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Old 11-26-2006, 10:56 PM   #15
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The biggest hurdle to a merger is the merging of the technology. The price tag for combining their chipsets would be enormous. Like merging MAC OS and Windows. These companies took different paths technically.

Sirius by the looks of the advertising blitz, are doing the same thing XM did a year ago, blowing out the marketing budget for Q4 numbers.

The problem this time is that investors saw what happened to XM's stock afterwards and the element of surprise is gone.

I fail to see why any subscriber would want a merger.
It's understandable why Mel Karmazin and the stockholders want one but not subscribers.
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