The Forbidden Fruit
October 22, 2006
Apple is known as the forbidden fruit. For satellite radio one needs to ask whether the temptation of apple is worth the consequences.
Sure, apple is huge. Yes, they have sold millions of pieces of hardware, and have a loyal base of fans. The question is whether or not to give in to the temptation, or perhaps more importantly whether Sirius or XM need to.
Apple has a pretty simple business plan as it relates to music. Sell a simple and functional device that records songs which need to be obtained from your own service. There are no worries about the RIAA, or how the songs are recorded. The consumer simply browses music, makes a selection, pays Apple, and the process is complete.
What is impressive about Apple and tempting is the massive amount of hardware they have sold, and the loyal fan base they have. Music is music. You can get it from Apple, Napster, Yahoo, Urge, or any number of sources. It is not the content that makes Apple so tempting…..it is the name.
The question is whether that temptation is worth it. For example, if Apple wanted 50% of the revenue on any sub they brought to the table would you jump at that deal? Two years ago the answer was maybe. Now, I am not so sure. For Sirius and XM the business is on the cusp of becoming CFBE without Apple….plus, Sirius and XM can deliver something that Apple does not yet have…..IMPULSE BUYING. Hear a song you want, press a button, and it is virtually yours. Apple can not do this yet, and this is what their latest patent application is all about.
What Sirius and XM want is a taste of what Apple has in terms of hardware sales. What investors need to consider is what may look great in the short term may well siphon off profits in the long term. The idea with SDARS is to generate revenue, and to keep as much of that revenue as possible. With the Inno and the Stiletto, consumers have a capability that they simply did not have before. The trick is getting the loyal I-Pod fans to see the value in SDARS. The goal is to get those that have I-pods to consider SDARS for their next music device.
The problem of course is that Apple fans who have been I-pod users for some time have a decision to make. If they have invested $1,000 into downloading songs into their I-Pod, they have a library that can not be transferred. Cutting a deal with Apple would make the transition for I-Pod users far easier. However, if a deal were to be made, Apple would demand a cut of the subscriber action. After all, they are potentially giving up some download revenue. For SDARS, the gain is more subscribers, but at this point Sirius and XM seem to feel that they can do something to woo these subscribers anyway.
The bottom line is there would be synergies between Apple and either SDARS company, but are those synergies worth it in the long term. A deal is good if both parties see benefit from it. A deal is good if 7 years from now you can still feel good about the deal. Giving up a big chunk of revenue may not seem like a good business decision seven years from now.
At this point the speculation is simply fruitless. Each time the speculation arises, it is actually unhealthy for SDARS. Expectations become too high, and the rug gets pulled out from under SDARS as the rumors die off. Further, such speculation also weakens the SDARS business model in the eyes of investors. If the street feels that Sirius or XM “need” this deal, the current business model begins to fill with doubt.
In my opinion, there is nothing that will happen with Apple in the short term. SDARS is in a period of reaching financial metrics that may or may not validate the business models. If those models validate, it could be argued that there is no need to invite Apple to the party.
In my opinion, the speculation is good for a 4% or 5% bump, followed by an equal decline when the news turns out to be nothing. As an investor, you could still score pretty well by simply waiting for confirmed news regarding Apple. The good thing I see is that fewer people are falling for the Apple hype at this point. Only one year ago, an Apple rumor was good for at least a 10% pop in share price, and the rumor would have legs that would take the price up even further. Today, the rumor is down to a one day phenomenon.
I would say that Apple should be considered the forbidden fruit until such a time that concrete indications are made, and until such a time that CFBE for these companies can be demonstrated and maintained. Personally, I would be a much bigger fan of a merger between Sirius and XM rather than seeing a deal between Apple and either company.
10/22/2006 10:05:00 PM
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