Not just one of J.K. Rowling’s best characters

I’ve written before that I love Sirius Satellite Radio. I own stock in the company, but more importantly, I’m a subscriber. I listen to Sirius while I’m at work and when I’m in my car. I only bother with terrestrial radio to listen to Howard Stern and Don and Mike. And in January, Stern moves to Sirius. So, yeah, I think the company has a future. And I think know it’s better than XM, which, having tried both services, I feel qualified to judge.

Banc of America disagrees. Consider:

In a preview of the satellite radio industry, Banc of America Securities reiterated a “buy” rating on XM Satellite Radio Holdings (nasdaq: XMSR) and a “neutral” rating on Sirius Satellite Radio (nasdaq: SIRI).

Banc of America noted that XM preannounced second-quarter net subscriber additions of 640,000 subscribers–a sequential increase of 18%. The research firm estimates net adds for Sirius will equal 420,000 subscribers–a sequential increase of 34%. “Our estimate assumes a higher retail share of 45% in the second quarter but based on our new proprietary retail survey we believe that our second-quarter net add estimate could be 20,000 to 30,000 too high.”

The proprietary estimate indicates a second-quarter share split of 40% and 60% for Sirius and XM, respectively, which is below the research firm’s 45% and 55% estimate. “Although Sirius likely gained retail share from first-quarter levels of 33% due to the $50 promotion, 40% would be viewed as slightly disappointing in light of the $50 promo for May/June–which was more aggressive than XM’s.”

I admit that I left my detailed stock analysis days behind when I finished my MBA. However, a simple point jumps out at me from reading the second paragraph. Of course XM’s retail share was higher in the second quarter. XM has baseball, which starts in March/April (depending on your level of lunacy affinity for the sport). A reasonable person should expect XM’s sales to jump when the baseball season begins. That’s especially true when factoring in that this was the first year of XM’s Major League Baseball coverage.

That leads me to the not-so-brilliant conclusion that content matters. I don’t just want the hip factor of satellite radio. I’m not going to spend $12.95 per month just to be one of the cool kids. It has to entertain me or I won’t bother; there are too many other options. As Sirius and XM gain subscribers based on offered content, the back-and-forth subscriber war will continue.

Banc of America (sort of) acknowledges this. Consider:

For the third and fourth quarter the research firm forecasts 47% and 51% share adds for Sirius, respectively, resulting from the introduction of Howard Stern. “Sirius, we believe, is expecting to ‘ride’ Stern versus engaging in direct price battle, as it cannot manage cost-per-gross addition in the same fashion as XM, in our view.”

And there you go. It’s obvious, of course, that Sirius is expecting to “ride” Stern. $500 million has a “betting big” connotation, but there’s the content concept again. Sirius isn’t engaging in a direct price battle; it’s engaging in a direct content battle. Which is the future.

Even XM knows this. If not, they wouldn’t go after baseball and all the other moves they’ve made. But if they thought like the analysts, assuming that price is the key motivating factor, XM wouldn’t have raised their prices to match Sirius. Short of collusion, that seems to indicate that Sirius may have judged that piece of the business better than XM. Analysts seem to forget this when they discuss the two companies.

I don’t want to imply that Sirius’ success is guaranteed. It faces huge costs in its business and has yet to reach positive cash flow. At some point, the positive trending numbers must cross from red to black and it needs to happen soon. Money going out must generate money coming in. I’m not sure Martha Stewart can achieve that. And, again, Howard Stern will cost $500 million over the next five years. Mel Karmazin may be a genius, but that’s a lot of ad revenue to generate, especially in a business that is moving from reliance on local advertising to national advertising.

Patience is necessary with a business this risky, but the necessity of providing compelling content, and all its ramifications, are the reality (and promise) of satellite radio. Past numbers may tell a story, but the true test will come later, when Sirius and XM deal with the lasting results of current content decisions. As a subscriber and investor, I’m happy with my commitment to Sirius.