Many people love to make comparisons between terrestrial radio and satellite radio. We have ad based vs. subscription based, localism vs. nationalism, and censored vs. uncensored. Perhaps the starkest comparison comes in the revenue.

According to BIA Advisory Services today, the terrestrial radio industry will see a negative 7% revenue growth rate in 2008 with sector revenues falling to their lowest level in five years ($16.7 billion). Worse still is that the group expects the decline to continue through 2009, where it will bottom out at $15 billion before turning around. Thus, revenues for terrestrial radio are on the decline.

In contrast satellite radio is seeing revenues increase each year. While costs are high, the balance between losses and profits is beginning to shift. In Q3 the proforma EBITDA loss was $9 million for Sirius XM (excluding one time costs). The losses are expected to become profits in 2009, and revenue continues to grow quarter after quarter. The problem for satellite is that they are lumped in with media in terms of a category. Only a year getting lumped into media was desirable. Now, because of the poor performance of radio stocks, it is a group you would rather not be associated with. According to Inside radio, 50% of radio companies have stock trading at less than $1.00.

BIA's mark Fratrik notes, "The already low forecasts for growth in radio coupled with a generally dismal economic climate have also placed a particular strain on the valuations radio stations need to maintain their financing or to be sold." - "The waters are very rough right now, but the general profitability of radio keeps us optimistic that the industry will weather the storm providing it strategically invests in its online presence, which will prove to be its rescue as ad budgets continue to shift to more measurable online media."

If the on line media is a solution for terrestrial radio, perhaps it is something that Sirius XM should consider. XM had a pretty good start by having company sponsors with web pages with special ads for subscribers. This is one synergy management at Sirius XM should consider. Another is a general improvement to their on line version of the service to facilitate ads and sponsorships.

From a business perspective, satellite radio is still seeing top line growth. This aspect of growth has been missing from terrestrial radio for quite some time. With the ever-changing economic situation, and ad budgets being trimmed, it is little wonder that terrestrial has not yet reached the bottom. For satellite radio investors the question is whether or not the growing revenues from an ever increasing subscriber base will become convincing enough to change the valuation of the company. Right now, if your company has radio in their name, investors are nervous. the job for Sirius XM is to accentuate their growing revenues, and demonstrate synergies. They got off to a good start in Q3, but need to build on it in Q4.

If the company can change the perception, they could have an entire year to build confidence in investing in the subscription model vs. the terrestrial model. It is an uphill climb, but solid numbers quarter after quarter could become convincing.

The media sector is down, but therein is the potential for a few shining stars to become the darlings of the sector. Sirius XM is not there yet, and getting there will be hard, but if they do become a shining star, then the equity will respond in a positive manner.

[Via Radio and Records & Inside Radio]

Position: Long Sirius XM