Sirius XM Is in a Serious Bind

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Karmazin's tough talk was spot-on insofar as other radio companies face big hurdles. There's not a lot of room for growth in an industry that's already reaching 235 million weekly listeners, or almost 80% of the U.S. population, according to the Radio Advertising Bureau (RAB). Key advertisers, such as automakers and banks, are pulling back, cutting the radio industry's ad sales by 7% in the first half, according to RAB. Some radio companies' sales plunged by double-digit percentages. And one of the biggest owners of radio stations is awash in debt. CC Media, parent of the newly privatized Clear Channel, has $20.7 billion in debt, compared with $3.6 billion for Sirius.

Yet unlike Sirius, many terrestrial radio companies generate profit and cash. CC Media's net income increased in its most recent quarter, though the figure was boosted by gains from sales of radio stations. Beasley Broadcast Group, which operates 44 radio stations, reported a 12% increase in second-quarter net income. Cox Radio (CXR), which reported a loss in the second quarter, still generated cash. "We are really focusing on local [advertisers, who haven't pulled back as much as national companies]," says Cox CEO Bob Neil.

Growing Web Radio

Radio stations' prospects will brighten more when the economic slowdown ends. "There's no reason why they can't increase their margins" from the current 39.4% to 45%, says Erik Kolb, an S&P analyst who rates Cox Radio a hold. These margins could widen further as radio stations expand cheaper Web operations, he says. Traditional radio off-air revenue, a category that includes Internet radio, rose 12%, to $889 million, in the first half, according to RAB. That's roughly half the amount the industry receives from national advertisers.

Online radio is likely to account for a growing percentage of business in the coming years, analysts say. CBS Radio, the second-largest provider of radio service, recently began managing all of AOL's radio channels, becoming the largest Web radio provider in the world. "We have a lot of confidence that we can be profitable in this space," says Dan Mason, CEO of CBS Radio, which is owned by CBS Corp. (CBS).

Sirius XM doesn't intend to be left behind on the Web, either. The satellite radio provider already streams 80 radio channels online and provides unique Web content for $12.95 a month. "We will be the premier company in audio entertainment in the world," Karmazin insisted at the Merrill Lynch conference.

Maybe so. But he'll need to make progress on debt, growth, and turning a profit before many investors agree.

Kharif is a senior writer for BusinessWeek.com in Portland, Ore.

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