First of all I want to introduce a paradigm on how we think about this business.
The business model of the radio is such that, the listeners are the service/ goods, and it is the advertisers who are the customers of the Radio service, i.e. the consumers of radio service are not the listeners. The raw material is the content owned by music companies and the wisecracking RJs. In other words, this is a B2B model! More listeners means more output given the same raw material. When will the customers pay the channel more? When they know the actual listener base, i.e. “goods and services” is of a certain quantity and quality (number and demographics). The cost of the channel includes the royalties to be paid to the music companies for the content. I do not believe this cost is captured in the template. So we have periodic capex (radio waves, and equipment) and Opex (salaries of employees and royalties to content owners).
Now Sirius on the other hand, is a clear B2C model, with revenues directly proportional to number of subscribers and their monthly subscription. Listeners are the actual consumers – that pay for the goods/services which is the content purchased from content owners.
We can now think in this new paradigm, between a B2B and a B2C model, which one is more predictable? Which one is easier for a company to pass on costs? Where does a company have better pricing strength? Increasing 1$ per month for a subscriber or asking for 10% increase per advertiser?
On the local content, yes, undeniably FM wins hands down, but how much of it translates into realizable and proportional revenue? In other words is there a relationship between number of listeners and revenue and profitability? For every local station needed to gather local listeners, there is a linear cost associated. Being free, having habitualized listeners is all fine, but the key question from a business perspective is does any of the local-ness translate into predictable revenue & profit?
The weakness of the Satellite radio, i.e. its not being local can actually be a global strength. A channel can have listeners in Bangalore, Boston, Brunei and Botswana! Scaling does not need additional radio stations & employees. However, buying satellite footprint may still be needed. But this affords the possibility of non-linear, or quantum jumps as
opposed to FM which has a linear growth, albeit it can be a high ramp.
About Sirius trading at any particular price, I am not even considering it, since the discussion is more about the margins and how profitable the business seems to be, rather than the multiple the market assigns to this business.
So much for making the bear case for FM stations. I surely learnt new ways of thinking doing this exercise and thanks to Dhwanil & Rajul for affording me this opportunity !