A Serious Problem for SIRIUS XM

Satellite radio service provider SIRIUS XM Radio Inc. (SIRI) is facing a lawsuit from none other than its star performer Howard Stern. Recently, Mr. Stern has complained that SIRIUS XM failed to pay him stock awards that it granted based on a specific subscriber growth target. According to the SIRIUS XM management, the company was “surprised and disappointed by the lawsuit.”

Immensely popular radio-jockey Howard Stern hosts talk-show in SIRIUS XM. Many analysts considered the performance of Howard Stern as one of the primary reasons for the company’s gradual recovery in the last couple of years when it was facing bankruptcy threat due to severe recession. Stern’s earlier contract with SIRIUS XM was of $500 million for 5 years and was concluded in December 31, 2010. On December 9, 2010, SIRIUS XM announced that the company entered into a new 5-year agreement with Howard Stern. However, the company did not disclose the financial terms of the new contract.

Fiscal 2010 was a turnaround year for SIRIUS XM after a pathetic 2009 when the company almost went bankrupt. SIRIUS XM ends fiscal 2010 with a record high total subscriber base of nearly 20.2 million, up 8% year over year. As of now,after Comcast Corp. (CMCSA), the company is the second largest entertainment subscription service provider in the U.S. Management is expecting to add 1.4 million net subscribers in 2011.

However, we believe this fabulous target may remain unreachable to the company if any serious difference between Mr. Stern and SIRIUS XM occurs. Several industry researchers estimated that discontinuation of Howard Stern shows in SIRIUS XM may result in loss of approximately 1 million subscribers to the company.

SIRIUS XM is facing severe competitive threat from Pandora Internet radio. Pioneer System, a leading car information system manufacturer, unveiled a new car stereo, which can detect Pandora Internet radio settings from Apple Inc’s (AAPL) iPhones or iPods. Besides, the iPhones or iPods can be used to conveniently set customized music stations for individual users while driving. Pandora has 80 million registered users in the U.S. and provides a unique algorithm that increases the intrinsic quality of the music. In addition to iPhone, Pandora has also developed streaming services for BlackBerry devices of Research In Motion Ltd. (RIMM) and Google Inc’s (GOOG) Android-based smartphones.

In this juncture, we believe future financials of SIRIUS XM will suffer if its legal battle with Howard Stern lingered. This will affect both the top line in the form of loss of subscribers and also the bottom line with higher legal expenses. We maintain our long-term Neutral recommendation on SIRIUS XM. Currently, it holds a short-term Zacks #3 Rank (Hold) on the stock.

SIRIUS XM RADIO (SIRI): Free Stock Analysis Report

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