Sirius XM Radio relies heavily on the OEM channel for exposing consumers to satellite radio, and hopefully converting those that are exposed into full time subscribers. As penetration rates increase, many naturally think that the number of subscribers will follow suit. This however is not the case. Differing OEM deals count subscribers in different ways. The big contributors to subscriber rolls have been on the sidelines for much of the second quarter, and this will once again Sirius XM will deliver a negative subscriber number for Q2. I have some additional data to collect, and more calculations to run bad the subscriber number will be for Q2.

Overall, sales are off from 2008 totals by over 35%, and the annualized realistically looks to be below 10 million cars sold for 2009. So how does the continued bad news in the auto channel translate into good news for SDARS? The answer is that it is not the number of subscribers that really matter as much as the average revenue derived from each subscriber, and that costs are under control. The auto sector brings in the bulk of subscribers, but it is also responsible for the bulk of costs.

A slower OEM channel means fewer costs. Combine that with additional revenue due to the price increase, and from Internet subscriptions, and you will see the bottom line of Sirius XM Radio have continued improvement.

Sirius XM will for the first time in a long time be able to offset some royalty costs above and beyond what they have been able to do in the past. The company will also enjoy the fruits of the iPhone app because it requires an Internet subscription, thereby adding $3 per month to the subscription price. A consumer like me gets the standard Sirius package, plus the Best of XM, plus the Internet feed. Instead of being a $13 per month sub, I am now a $19 per month sub for the balance of my current subscription, then a $21 per month sub going forward. This additional revenue will begin to show up beginning this quarter, and will continue to grow for the next year.

In the end, the company will have yet another good news vs. bad news situation on their hands. The good news will be in the cost cutting and revenue line. The bad news will be the subscriber number. Overall, the quarter should be decent, but as usual, it depends on what the mainstream media focuses on as to how the perception of the quarter is received. Investors who know now how some of these numbers will shake out have the advantage of being able to determine an investment strategy before the company announces. Look for great cost cutting, revenues that beat expectations, and bad subscriber numbers, and pay close attention to how the mainstream media reacts to the news.

Position - Long Sirius XM

The new satellite is not yet in it’s final location, and there will be maneuvers to accomplish the finalized orbit during the first two weeks in July. Once in place, the nine meter reflector deployment will happen, and then the company can begin testing of the functionality. The functionality testing should happen during the final two weeks of July, and it can be anticipated that Sirius XM will take control of the satellite in early August.

The newest satellite will not only improve the signal reception for Sirius receivers, but also carries the capability to do more functions than the satellites in the existing constellation. This satellite will be in geostationary orbit, meaning that it will remain in a fixed position in the sky. The three satellites already in orbit are in a geosynchronous orbit, running a virtual figure eight pattern over North and South America.

Celebration for the fact that the satellite is in orbit is good, but investors should remember that there are a lot of moving parts and tests that need to be completed prior to popping the cork on the champagne.

Position:  Long Sirius XM

Karmazin, a long time radio industry guy, joined Sirius Satellite Radio in 2004. His deal was scheduled to expire in the fall of this year and could have been a potential worry for the street. Over his tenure, Mel was able to bring about a merger with XM, but has also been at the helm during a period where shareholder value has eroded. The new deal will likely be met with mixed emotions, as some have been critical of the share price as well as the merger.

The new options that Mel received will once again give him incentive to bring the share price of the stock upward. Karmazin recently donated back the options he had from the previous deal about a month ago, in a move that helped offset newly issued shares. Mel’s old options were so far under water that they would likely never provide the incentive for him to exercise his rights to the options. Instead, Mel had done a few purchases of stock on the open market.

With the new option price at $0.43, Mel once again has a huge incentive to make the stock price appreciate. He will effectively be able to buy 120 million shares over the next 3 years at what could promise to be a very attractive price point in the future.

Karmazin’s base salary will be heading north to the tune of $1,500,000. While it is a lot of money, it is not the level of pay that many big time CEO’s are accustomed to. The options represent the huge payday for Mel, and now that those options have a chance of becoming very valuable, all shareholders can rest a bit easier knowing that the CEO has a lot at stake in increasing shareholder value. Even shareholders who have previously felt that Karmazin was not on their side need to now acknowledge that the structure of the new deal has potential to be very shareholder friendly.

Yes, there are those that wanted a change in management. They may still feel that way, but clearly, the current board, which includes Liberty Media representation feels that Mel Karmazin represents the future of leadership for this company.

Position: Long Sirius XM

So how can Sirius XM make the app more of a success? In my opinion, they should make it more interactive. This weekend I found myself listening to Boneyard (Sirius 19 and XM 53). Boneyard is doing a countdown of Rush songs. The countdown was formulated by fan emails regarding the popularity Rush songs. I learned of this by cross promotion on Classic Rewind, and found myself tuning into Boneyard to catch songs from what is one of my favorite bands. This got me thinking.

I have always felt that Sirius XM has not done enough to utilize their web presence. With the iPhone app, the company has an opportunity to make the service more interactive for consumers. Why not upgrade the existing app to include some features that allow subscribers to feel more a part of the service?

Song request Function - A simple function that allows users to submit a song request. The subscriber can enter the channel and song. The company could then promote the $3 per month web tier by having a bumper such as ” As requested through the iPhone app”

Contest Function - A simple function that allows users to find all Sirius XM contests in one easy to use place. This function should be part of the app, as well as part of the web service.

“For Profit” Survey Function - A volunteer based function that connects subscribers with the companies that want to advertise to them. The company collects a fee from advertisers, produces a survey, and then gives subscribers points that can be used towards new hardware, or subscription costs. This gives value to advertisers as well as subscribers. Because it is volunteer based, those that do not want to participate do not have to.

Channel Specific Links - Provide links to specific channels. This would allow users to get a description of the channels, and submit comments, and even link to Twitter, Facebook and YouTube pages dedicated to that channel.

Search Function - This is a function that would allow users to enter an artist name, song name, or talk show host. The app would then tell the user where on Sirius XM that the artist, song or person can be found. An Eagles fan could enter “Eagles”, and be directed to the channels that play the most eagles songs.

New functions such would make Sirius XM far more interactive for fans, a key component to the popularity of services such as Pandora and Slacker which allow user customized stations. The more value consumers see in an app, the more frequently they will use it. Hopefully Sirius XM is considering such upgrades for not only the app, but for their general website as well.

Position: Long Sirius XM, No Position Apple.

The additional funds above and beyond what was announced last week will now take care of all of the Liberty Media loan to XM which was at an interest rate of 15%. The new facility improves that rate to 11.25% with a yield of 12.85%. The original $250 million that Liberty loaned to Sirius will still exist. This move cleans up the XM books moving forward and allows Sirius XM to better the overall balance sheet and improve cash flow. JP Morgan facilitated the deal.

Sirius XM stock traded higher on the news.

Position - Long Sirius XM, No Position Liberty Media

Rosie Radio is set to launch this fall and air Monday - Friday from 10am -12pm ET on Sirius XM Stars, Sirius ch.102 and XM ch.155. Rosie Radio is said to be a daily, two-hour talk show on which she will blend her many passions and interests - an eclectic mix of humor, pop culture and serious conversation.

“Rosie O’Donnell is a powerful, dynamic and entertaining voice and now you can only get her on Sirius XM,” said Scott Greenstein, President and Chief Content Officer, Sirius XM Radio. “Rosie’s millions of fans will hear her as they never have before, and have the chance to call in and talk to her and her intriguing guests. Rosie Radio will entertain, inform, surprise and delight.”

Now that she is “exclusively” on Sirius XM, does this mean her fans will no longer be able to see and hear her via the infamous Roise blog, where she has been known for her outspoken written and video rants over the years? At the time of this writing there was curiously no mention of her move to Sirius XM… I expected to see a maniacal video blog at the very least to let her fans know where they could catch her next, maybe it is coming soon.

LogMeIn is an application that allows iPhone and iPod Touch users to access their home or office computer from their devices. In the ad for LogMeIn Ignition, Howard touts, “If it’s on your computer, it’s on your iPhone.”

In theory, a consumer who downloads the LogMeIn Ignition app onto their iPhone has complete and unfettered access to their home computer through the device. A look at the LogMeIn Ignition website reveals that those that upgrade to the LogMeIn PRO function will allow users key features that should make listening to Howard 100/101, as well as other content not available through the iPhone app, very possible.

With LogMeIn Pro, you can do everything you can do with Free, but more. Pro also includes:

• Target-to-local printing: This means that if you choose to print anything from the target computer, you will receive it on your local printer.
• File Manager: With LogMeIn’s File Manager you can quickly and securely transfer files between the local and the remote (target) computer
• Mini Meeting: You can a trusted friend or colleague to remotely view or control your Local PC’s desktop.
• Remote Sound: You can hear any sounds locally (i.e. music, podcasts, email notifications) coming from your target computer.

While consumers would have to pay a small premium for such a service, the usefulness of a program such as LogMeIn Ignition goes beyond satellite radio. For hard core Howard Stern fans, baseball fans, etc. this could be a great solution.

The consumer aspect is quite obvious, but the interesting story is in the debate about Sirius XM not having the rights to include Stern on their iPhone app. Certainly Stern or his agent could not argue that an app such as LogMeIn Ignition violates his contract with Sirius XM, yet it is an app such as this that would allow consumers access to their already paid for Sirius XM subscription through their iPhone, via their home computer.

If you think about it, the iPod touch is nothing more than a mini computer, and the iPhone simply adds the ability to place phone calls. The Internet accessed on these devices is no different than the Internet accessed by a home computer, laptop, or the still smaller netbook computer. Thus, how much teeth could the Stern contract actually have unless it specifically excluded Apple, and even then there would seem to be a lot of holes in the stance. Howard broadcasts on the net, yet now he want to control what types of net connections are allowed to broadcast his show.

I have not yet tested whether the LogMeIn Ignition app will allow this, but in theory it should. There may also be aspects of the subscriber terms of service that would preclude a consumer from accessing Sirius XM content in this way, but in reality, how could the company ever police such use?

Clearly Howard and Sirius XM are trying to hammer out an agreement, but there is no telling how long that will take. Something tells me his own live read may be exhibit one in the contract debate. Fans of content such as Howard Stern, baseball, NASCAR, etc. may well consider a solution such as LogMeIn Ignition as a worth while alternative.

“If It’s On Your Computer, It’s On Your iPhone…” - Howard Stern

Position: Long Sirius XM, No Position Apple.

In a note issued today, Barrington highlights that the woes of the merger process and credit market took their toll on the equity, but that things are beginning to change, and that perhaps brighter days are ahead for satellite radio investors.

Barrington believes that investors should consider several core fundamental issues:

• A favorable swing in EBITDA of more than $500 million into positive territory this year should be followed by substantial, additional annual gains.
• Added revenue sources, especially a royalty recovery fee with broad application, should boost revenues.
• Cost cuts have been achieved across a broad swath of line items, with more to come.
• Top line opportunities have been a focus as well, despite the challenge imposed by a merger agreement that included no increase to the base subscription rate for three years.
• Sirius XM has added charges for the previously complimentary Internet service and it increased its price for additional subscriptions under the family plan.

“Now it appears there will be an added fee below the line labeled a Royalty Recovery fee permitted under terms of the FCC agreement to reflect both the higher level of royalty rates now in effect, as well as a catch-up of rate increases since the date the merger was announced. This particular fee is likely to provide meaningful additional dollars, though the phase-in will take several quarters. New initiatives like the iPhone App are being very well received. However, the revenue opportunity may be less important than the attention and added visibility it has provided to Sirius XM and the greater usage of the service it could spur.”

Barrington calculates what could be significant upside from current levels to $0.70 (post dilution), based on 2010 estimates and to $1.30 based on 2011 estimates. Given this upside, they now rate SIRI as an OUTPERFORM.

Position: Long Sirius XM Radio, No Position Apple.

With all of the excitement, news, and reviews, there is still one question on the minds of many. Why isn’t Howard Stern available. Speculation ran wild, and calls to Sirius XM were met with an overall silence with regard to the issue. Some felt that Sirius XM was holding back, others felt that there was a potential worry about bandwidth on AT&T’s network, and still others thought the issue may revolve around Stern wanting more money.

While any official confirmation has not been made, there are several indicators that would point to the fact that Stern is a central part in this issue.

1. The general lack of discussion of any kind regarding the app coming from the Howard Stern Show.

2. Indicators on Gary Dell’Abate’s Twitter page that indicate possible rights issues. Note, the page appears to be Dell’abate’s, but verification could not be made prior to publishing. Note: It has since be verified to be fake.

3. Sirius XM taking on a virtual silence, which would indicate that the issue is in some form of negotiation.

It would appear that the Stern contract, which likely has many stipulations, must have some clause dealing with “mobile media”, and the potential of third party operations. In short, there are various aspects of the app that may trigger a “no-go” for Stern inclusion unless the parties sit down at the table and negotiate. Such possibilities include, conflicts with In-Demand, mobile media exclusions and inclusions, or perhaps even something specific to Apple.

Now, before everyone starts talking about all of the money Stern already has, and labeling him as money hungry (which he actually is), we need to step back and understand the dynamics at play. If Stern, or his agent, was smart enough to see the potential moving forward, than I take my hat off to them. However, in this case, it is quite possible that Stern is biting the hand that feeds him, and his actions have squandered the possible exposure associated with the launch of the iPhone app.

To be fair to Stern, there is no way to know exactly where things stand. His possible demands could be very simple and doable, and if that is the case, shame on Sirius XM. Karmazin is known as a cost cutter, and perhaps the parties simply came to an impasse as time ran out for the launch of the app. The launch date would have been the leverage Stern had, and with that now gone, perhaps more realistic negotiations can happen moving forward.

Sirius XM can never recoup the lost exposure they would have had if Stern was part of the app. Let’s hope that the financial decision made was worth it, and the parties can hammer out the details moving forward.

Thanks Mike!
Position: Long Sirius XM, No Position Apple.