Larry Sarbit
Larry Sarbit

A Conversation with... Larry Sarbit & Tim Skelly

I’m always curious about trends. Now that the long tail theory has been declared extinct and much of what was projected as Internet profitable has failed to materialize, I thought I’d corner an old friend who seems to outsmart the competitors.

Larry Sarbit is the 62-year-old founder of Winnipeg-based Sarbit Advisory Services Inc. and he has spent 25 years running U.S. stock funds—overseeing $1.5 billion in assets. Tim Skelly is an Associate Portfolio Manager with Sarbit Advisory Services. He covers two funds: the IA Clarington Sarbit US Equity Trust and Corporate Version. He has been working with Sarbit for 5 years, first as an analyst and now as a PM. The two have been owners of SIRI for over 2 years. Those two funds together own approximately 32.5 million shares of Sirius XM. This represents over ½ percent of the company’s total stock. Sirius is the only American satellite broadcast company with over 27 million subscribers in the US.

Bill King: Why do you think Sirius/XM have been successful in attracting subscribers while a noticeable share of streaming services is struggling?

Larry Sarbit: What’s being offered is generally advertising free services and content that is unique to the marketplace. People don’t listen to all of the stations – each person has a few select stations that are their favourites and become very important to them and those stations for the most part aren’t available anywhere else: the business stations, Bloomberg radio, CNBC – and new stations from all over. It’s not just music without commercials – there is lots of that out there – it’s the sports content that’s unique. I think it’s the unique content and people aren’t afraid to pay for it. They are the only car/radio system out there and offer a system of delivery that just doesn’t get interrupted no matter where you are. If you are in North America, unless you drive in a parking garage you are going to get that satellite reception — the reliability of the service.

Tim Skelly: The main answer to that question is what Larry took you through. Music is a commodity nowadays. If you simply want to listen to music there are probably better options for you out there. Sirius has been successful luring people in – when you buy a car you get a free subscription from Sirius and after it plays out people think back to how much they enjoyed XYZ Show, Howard Stern, NFL football or something like that. This is why they are successful – forty percent of their trail customers turn into paying customers. With music there’s some free stuff out there – Apple/Google competing with each other and the services they provide are specific – the content Sirius provides is definitely differentiated. You can ask is that going to change or the content going to other mediums; it could, but Sirius pays so much in royalties per year — in excess of $200,000,000.

B.K: With Wi-fi and streaming coming to the automobile do you see that pulling listeners away from satellite radio?

L.S: I think there are some barriers to entry into that space. It’s not easy replicating that satellite structure that they have. Those satellites are in the air and have been paid for. To go out and compete and launch a satellite system like Sirius has would be a massive capital outlay. Secondly, I question whether that is free. First of all, you are connected with your telephone and to use your phone is not free. This idea this is all free radio – remember somebody’s paying for this. If you drive outside the zone of Wi-Fi coverage maybe in time it will become more universal but as it is — you endure drop signals. If you are driving outside your cities – the same. On top of this these quote unquote services, they are trying to pay for this with advertising. People pay money to companies like Sirius so that they don’t have to listen to all of that advertising. If you want free radio – it’s been around forever.

T.S: It’s definitely possible. The NFL have streaming rights they dole out through the Internet but what makes me think it’s not going to be anytime soon or affect Sirius’s business is – it’s a bundle of content Sirius sells you and they have their own streaming options as well. Even if a Howard Stern should decide to leave Sirius you are not going to see a bundle of content like Sirius has. It’s really difficult getting the rights to all of these things to get them going. You actually have to build scale in your subscriber base if you are not going to offer advertising.

L.S: Everybody is trying to get in the car and there is room. We’ve had competition before and there will be new competition in the future. Will Apple be in the car? Yes. Will Google? Yes. How you deliver the service and the quality of the service are huge differentiators. 

B.K: Cable television has found a formula getting around paid advertising – better shows. HBO, SHOWTIME, AMC, Netflix etc have returned us to the golden age of television. Will this come to radio? Both are still the most powerful mediums. 

T.S: I would say it’s already there for Sirius. When our opportunity came to get involved in Sirius in 2013 people said 'well Pandora is on the scene now — its free and a better music platform.' It was hard to argue Pandora was a better music system than Sirius, but we looked at all of the content Sirius has and in that time frame Sirius added over 3,000,000 new subscribers. There is room for both types of models. It’s still very expensive.

B.K: Does it worry you when contract negotiations with Howard Stern surface?

T.S: It doesn’t keep us up at night for the reason that Sirius owns all the content he puts out every year. If he retires or ends up leaving – he sort of does a dance around this every year – it would be unfortunate. But through our conversations with management at the company they say he doesn’t have to work that much and through his channel they play a lot of reruns. If he was to start brand new again he’d have to work a heck of a lot more than he does. I think most of the people that joined Howard when he came aboard – that’s not the only thing they listen to on Sirius. If he does end up leaving – we’ve run a few numbers and it’s not a huge loss for the business.

L.S: It would probably have had a much bigger impact ten years ago when he was a major force attracting new customers. I kind of do surveys where I go around and ask people what they are listening to on Sirius if you are a subscriber. Yeah, some are listening to Howard Stern but there are many listening to some sports channel they love or some specific news channel that keeps them on top of the news – the business news. I think that’s become much more important over the last ten, fifteen years.

B.K: In managing your Sirius/XM business portfolio, how are looking to generate future growth?

L.S: We are looking for the business to continue to grow. Quarter to quarter things change but if you are looking at it year after year over years – they keep adding subscribers. There are more and more cars on the road with Sirius functionality built into cars. I think there are about 73,000,000 on the road with Sirius built in. Every year they are adding about 11,000,000 new cars and that’s just going to happen year after year after year. Ten years down the road there could be 170,000,000 Sirius capable cars on the road. The ease of connectivity – just having the button on your dashboard to push and you immediately have the product. You get your three to six month free trial then it shuts off. In that time frame that channel you’ve been listening to has become an important channel to you and you will pay for it.

There’s also this growing used car market. They are making huge efforts with those dealers and the people who just bought a used car from them. They get that information and how to get a hold of them and the conversation rate is not quite as high at about thirty-thirty five percent buyers converted to becoming subscribers. That predictability of growth if we can look out three to five years we can see that Sirius is just going to be signing up more and more people.

T.S: If you look at the financial model Sirius has, it’s a very well run company. Basically, what you have is them adding 1.1 -1.2 million new subscribers each year on top of their base and that will help their revenue grow. They have actually been able to increase prices over the last couple years and the actual number of people leaving has gone down. The way a satellite business works is there are a lot of fixed costs so every new subscriber you add is a lot more profitable than the last you added. Their sort of profitability grows in excess of twenty per cent and what we look for as shareholders of Sirius is the cash flow of the business and the cash they can return to us. Over the past two or three years into the next two all of their capital requirements in launching the satellite have been paid for and from the merger of XM and Sirius back to 2007-2008 there’s a massive amount of tax shields there so they are not paying that much tax and it generates a pile of free cash each year that allows them to buy back their own stock. We are pretty large majority shareholders in Sirius U.S.

 

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