Media Money with Julia Boorstin

Sirius XM's First Profitable Quarter Post-Merger

Satellite Radio giant Sirius XM surprised Wall Street and swung to a profit, thanks to over 250,000 new subscribers and effective cost cutting. The company reported $14.2 million in net income compared to a $245.8 million loss a year ago, on six percent higher revenue of $684 million. CEO Mel Karmizan said that results are on track to improve in 2010, saying the company will add half a million subscribers this year, expecting adjusted income from operations to grow 20 percent.

Investors have their eye on a couple of fairly positive metrics that indicate the health of the business. The average customer now pays $10.92 per month, 27 cents more than a year ago. Though the number of subscribers declined slightly from 19 million a year ago to 18.8 million, the good news is that the cost of acquiring each subscriber dropped 4 percent, and those costs as a percentage of revenue fell to 19 percent. Meanwhile conversion rates for trial subscriptions increased slightly.

Plenty of the company's growth relies on the auto industry, which isn't a good thing. So the big question is how Sirius XM's iPhone and new Blackberry services fare. Sirius is facing off with Pandora, a free music streaming service, so the value of its premium content will really be put to the test. Pandora reacts to user preferences -- will Sirius create an interactive radio application to compete? But how does a subscription company compete with free?

Sirius XM stock is hovering around $1, putting it at risk of delisting from NASDAQ. CEO Mel Karmizan has been lobbying the index to make an exception for the company because its market cap is roughly $4.2 billion, despite its low stock price. The company carries about $3 billion in debt, but since there isn't any major debt due this year, the company should be able to pay it down as it matures.

It's amazing to think back on Sirius and XM's merger, which was announced back in February 2007. There was so much concern that combining these two satellite radio giants would create an unstoppable, competition-crushing behemoth. The FCC was right to grant approval of the merger. There's so much competition out there for consumers' time and entertainment dollars, a monopoly in an entertainment niche means nothing.

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