Month: December 2005

Parnell: Yo where’s the movie playin’?
Samberg: Upper West Side, dude.
Parnell: Well let’s hit up Yahoo Maps to find the dopest route.
Samberg: I prefer Mapquest—
Parnell: That’s a good one too.
Samberg: Google Maps is the best!
Parnell: True dat!
Both: Double true!
Samberg: 68th and Broadway—
Parnell: Step on it, sucka…
—“Lazy Sunday” video from Saturday Night Live


The business story of 2005—if I may be so presumptuous as to declare it myself (and, since this is my blog, I will)—can, I think, be summed up quite neatly in the following URL:

http://www.youtube.com/watch.php?v=oZOsgQC8qqM&search=SNL%20

That URL takes you to a web site called YouTube (“Broadcast yourself. Watch and share your videos worldwide!”).

YouTube contains almost any kind of video you want to see—from Ashlee Simpson’s lip synch unmasking on Saturday Night Live to OJ Simpson’s car chase and the Beatles’ final gig on a rooftop in London—and many you don’t, particularly the bizarre and highly personal videos posted by individuals you’d rather not have your daughter bring home for dinner, if you catch my drift.

The video you will see at the above URL is a Saturday Night Live-sponsored “digital short,” called “Lazy Sunday,” and it shows two earnest young white Manhattan-ites rapping earnestly about going to see “The Chronicles of Narnia.”

And for those of us who have failed to find anything funny coming out of Saturday Night Live since, oh, Eddie Murphy or Martin Short left, the video is hilarious.

What does a YouBet video have to do with the Business Story of the Year?

Well, it was created, produced, filmed, edited and uploaded digitally, very likely without the use of a single product from Microsoft. Furthermore, it was searched for and downloaded by hundreds of thousands of individuals likewise without the expenditure of a single dollar going to Microsoft.

Finally, and not surprisingly, not one of the products shown or rapped-about in “Lazy Sunday” mentions a Microsoft product.

Which is why, in the category of “Most significant business story of the year 2005,” I nominate the undermining of Microsoft’s monopoly by a band of mostly anonymous individuals who did it with nothing much more than ideas in their head and lines of code in their computers.

Which is, I think, pretty cool.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

In the “no surprise to anybody” category, Sirius Satellite Radio yesterday announced it will have added more than one million net new subscribers in the fourth quarter of 2005.

The recent new-subscriber momentum at Sirius is, as we have discussed here, is a result of the “Howard Effect”: the legions of primarily young, primarily white, primarily male listeners now signing up to receive Howard Stern’s radio program when it begins digitally beaming from space on January 9th.

Most analysts expect similar upbeat news from XM Satellite—the Hertz to Sirius’ Avis—shortly, even given the fact that the “Howard Effect” has provided Sirius with a meaningful advantage in the near term. (The historic 3:1 XM-to-Sirius sales ratio at retail locations which I monitor has been reversed in favor of Sirius in recent months.)

But I wonder how “upbeat”—to use one of Wall Street’s Finest’s most hackneyed expressions—XM will really be when they report their Q4 subs.

My rhetorical question is based less on in-store observation of shoppers picking one versus the other and more on an XM email that recently bombarded friends who had purchased a car with the XM radio or just a plain old XM radio, but had not activated it:

If you received or purchased another XM Radio during the holiday season and haven’t yet activated the radio with service, what are you waiting for? Activate your new XM Radio online by December 31, 2005 and we’ll waive all activation fees (up to a $14.99 value.) Get started with XM today by activating online. Happy holidays from your friends at XM, and happy listening!

Translation: “We want to hit our subscriber numbers really, really badly.”

Now, perhaps I am over-thinking this one. Perhaps XM has its new sub growth in the bag, and the activation-free incentive is merely a way of ensuring what, to Wall Street’s Finest, is even better news than being merely “upbeat.”

Which is to say, “an upside surprise.”

Any first-hand observations of the efforts by Sirius and XM in the market place are welcome.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

Friday’s post, “Conspiracy of the Jews?—Part II,” quoted from Overstock.com CEO Patrick Byrne’s mid-December appearance on Christian Financial Radio Network (motto: “Prosperity…For God’s People”).

During that hour-and-a-half interview, Byrne fingered various criminal elements, including “the Israeli mob,” as being “at the bottom” of “every rabbit hole you go down” while pursuing the so-called Naked Short scandal which he believes engulfs his company and others.

I noted in my post with some disgust the fact that a Google web search, which Byrne suggested during the interview would back up a point about the long arm of the so-called “Israeli mafia,” leads to a gaggle of profoundly disturbing web sites from the likes of Al Jazeera, Radio Islam, Lyndon LaRouche and an Auschwitz gas-chamber-denying historian.

Byrne himself responded at length in a Motley Fool post flagged by a reader, and while I am not sure when Byrne’s response appeared it was probably some time after his Friday morning appearance on Bloomberg television, during which he disclosed to the Bloomberg-watching audience “disappointing” revenues for Overstock.com during the holiday season and a “negative” cash flow forecast for the year.

That negative cash flow forecast appears to be sharply at odds with at least one of Wall Street’s Finest (Craig Bibb of WR Hambrecht), whose last model (December 13) shows precisely $42.098 million of expected positive “Cash flow from operating activities” for Overstock.com in 2005.

Thus Byrne’s Friday morning disclosure appears to be a change of guidance compared to Wall Street forecasts, even though such disclosures are, I believe, supposed to be offered in 8-K filings with the SEC and not on Bloomberg TV according to my understanding of Regulation Fair Disclosure.

Regardless, in Byrne’s Motley Fool dismissal of “Conspiracy of the Jews?—Part II”), Byrne claims that he brought up so-called Israeli mob involvement in the ecstasy trade merely in response to a question from the interviewer about the reality of an Israeli mob.

Patrick writes:

Jeff omits precisely the part of the quote that makes the connection, and that is, after I mentioned the Italian, Russian, and Israeli mobs, and discussed the Russian mob, the interviewer said/asked, “I didn’t know Israel had a mob?” To which I replied that, yes it does: for example, it is widely thought to control the US ecstasy trade.

And that is where a correction is due: what Patrick wrote is not correct.

You can listen for yourself to the sequence of what Byrne said at http://cfrn.net/investigates/, but here is an approximate timeline of Byrne’s comments on that broadcast, about 13 ½ minutes into it:

13:35 “The Israeli mob and the Russian mob are the two ones who scare me…I think the Italian mob is part of this, but they’ve gone quasi-legit as far as Wall Street…”

The interviewer concurs with Byrne’s comment on the Italian mob going “from concrete to Wall Street,” and Byrne continues by bringing up the ecstasy trade issue:

14:15 “The Israeli mob—in fact I was just reading Ha’aretz, which is an Israeli newspaper, ah, and a very good one, and you can Google this– If you Google ‘ectasy Israeli mafia’ you’ll find articles that basically the Israeli mob…is thought to control 75% of the ecstasy trade in the U.S.”

It was not until after this, at 14:40, that the interviewer says, “I didn’t know there WAS an Israeli mob,” to which Byrne responds by launching into a bizarre and inaccurate discussion of Israeli extradition laws:

14:45 “Ah, well…in fact they are about to, they are about to, they are considering extraditing someone from Israel, and you know, Israel, I think it’s part of their constitution, or it’s one of their basic laws that if they, if a Jewish person reaches Israel they just never get extradited, and in Israeli history they’ve only extradited two people…”

Byrne compounds this whopper—which is not true—by expounding as follows:

“One is this fellow, I’m blocking his name…he oversaw the smuggling of 30 tons of MDNA, or ecstasy, into the United States…. The last time and only other time they ever did this was Meyer Lansky…”

For the record, it is not true that “if a Jewish person reaches Israel they just never get extradited.” And it is not true that “the last time and only other time they ever did this was Meyer Lansky.”

Eddie Antar—the famous fraudster also known as “Crazy Eddie”—fled to Israel in 1990 but was extradited from Israel in 1993.

Mail-bombers Robert and Rachel Manning were extradited and returned to the U.S. in 1993 after seeking safe haven in Israel.

The fact is that the Israeli law which Byrne claims does not allow extradition actually frowns on those who commit crimes before seeking Israeli citizenship under the “Law of Return.”

How do I know all this? I Googled it. Took ten minutes, max.

Tomorrow we move on to more interesting—but not necessarily more important—topics than setting right these inaccuracies.


Jeff Matthews I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

When I published “Conspiracy of the Jews?” two weeks ago, I was roundly criticized by many readers for going over the line.

In that piece I questioned why Overstock.com CEO Patrick Byrne had thought to slam the respected New York Times columnist Thomas Friedman for having a pro-Israel bias in his editorials, in a Motley Fool rant about ace financial reporter Herb Greenberg and star “Mad Money” host Jim Cramer.

It was hard to imagine any CEO bringing up an issue in a manner smacking of anti-Semitism, and I was skeptical even Patrick Byrne would have written the following about Greenberg and Cramer:

“They resemble Thomas Friedman’s write-ups on the Arab-Israeli conflict: “Let’s see, Arabs, Israel, Arabs… Israel, Arabs…….. Israel…… okay, I gotta call this one for the Israeli’s.” In op-ed after op-ed.”

What on earth, I asked, did Tom Friedman’s supposed pro-Israel bias have to do with the subject of Byrne’s rant, other than that all Byrne’s targets in the piece were Jewish?

Yet, while Byrne really did write that stuff, readers used the space below to call “Conspiracy of the Jews?” “hysterical” and “claptrap” and worse.

So in case you’re one of the hundreds of millions of Americans who do not listen to something called the Christian Financial Radio Network, let me “drill down,” as the analysts like to say, into the religious issue, by reporting here on an interview CFRN did with Overstock.com CEO Patrick Byrne, including a segment about who or what appears to be behind the naked shorting financial scandal he believes to be hurting his company.

The interview took place on Friday December 16th, and it lasted for an hour and a half. (You can listen to it at a speeded-up rate in far less time on the CFRN web site).

In the midst of the usual paranoid-sounding diatribe against the so-called naked short-selling scandal, Byrne is encouraged to get specific about the root causes of the problem. The host asks:

“Are we dealing with the traditional old-boy network or has organized crime gotten involved?”

To this, Patrick Byrne says the following, and I quote him:

“Every rabbit hole you go down leads to either [sic] the Italian mob, the Russian mob or the Israeli mob, and nobody’s ever asked about that, and I haven’t pressed the issue…but every rabbit hole you go down you end up in one of those three places….

“The Israeli mob and the Russian mob are the two ones [sic] who scare me.”

Those are the words of Patrick M. Byrne, CEO of Overstock.com. I am not making them up.

Byrne goes on to discuss, briefly, the “Russian mob” as a kind of band of marauders who perpetrate scams and then retreat to their “dachas” on the Caspian Sea for a break before the next scam.

He elaborates in far greater detail on the nefariousness of the so-called “Israeli mob”:

“If you Google ‘ecstasy Israeli mafia’ you’ll find articles that basically the Israeli mob…is thought to control 75% of the ecstasy trade in the United States.”

Now, as with Byrne’s bringing up Thomas Friedman’s supposed pro-Israel tendencies in a Motley Fool rant, I find it hard to understand how Israel’s supposed domination of the ecstasy trade in the United States relates to naked short-selling on the U.S. stock exchanges.

But let’s assume, for a minute, that it does.

And let’s do exactly what Patrick Byrne says: let’s Google ‘ecstasy Israeli mafia’ and see what we come up with.

Okay, I Googled the phrase and I got 30,600 results in 0.16 seconds.

Hmmm. Patrick Byrne appears to be right: when you type in those three words, you get articles that—this is incredible—accuse Israel of controlling the U.S. ecstasy trade!

Let’s look at the first page, one link at a time.

The first two links are to the web site of an author touting a book he wrote about the rise and fall of an Israeli kingpin in the ecstasy trade, but he doesn’t particularly focus on the Israelis-as-uber-mobsters angles that Patrick says “scare me.”

The third listed link resulting from this Google search recommended by Patrick Byrne—and I am not making this up—is to the web site of Al Jazeera.

Yes, you have it right: that Al Jazeera.

For a moment, let’s skip the fourth and fifth links and go to the sixth link of the Google search results: it is a Lyndon LaRouche web site, and it contains what it calls “a contender for the story of the new century: the investigation of the connections between detained Israeli spies and the events of Sept. 11.”

The article explains that the 9/11 attacks were “a coup d’etat” attempt against George Bush involving—you guessed it—Israelis. I am not making that up.

The seventh link on the Google search is to the web site of “Radio Islam,” and the web page is headed: Jews and Crime.

The sub-headings read as follows:

—Jewish Gangsters
—Jewish Money Laundering and Counterfeiting
— Jews and Drugs
—Jews and Arms Sales
—Israel a Haven for Jewish Criminals
—Jews and Scandals
—Jews and Slave Trade
—Jews and the Sex Industry

There are more, but you get the picture.

Sick as this these are, it is the fourth and fifth links that are the most disturbing to me, for they lead to a web site for something called “The International Campaign for Real History.”

Recall that Patrick Byrne said, and I quote:

“If you Google ‘ecstasy Israeli mafia’ you’ll find articles that basically the Israeli mob…is thought to control 75% of the ecstasy trade in the United States.”

Well, the article that comes up on “Real History” is called “The agony of the Ecstasy” by one Nathan Guttman, and it starts out as follows:

The most commonly heard estimate is that Israeli criminals control no less than 75 percent of the Ecstasy market in the U.S.

I don’t know if this particular web site is the one where Patrick Byrne got his alleged facts about the so-called Israeli mafia. I certainly hope not. Because if the phrase “The International Campaign for Real History” makes your throat tighten a little and your mind start to hope it’s not about what you think it’s about—well, I’m sorry.

That’s exactly what it’s about.

The site is historian David Irving’s, and if you have never heard of David Irving, then the following quote from him, which you can find on the links to this site, explains what he means by ‘Real History’:

“Until the end of this tragic century there will always be incorrigible historians, statesmen, and publicists who are content to believe, or have no economically viable alternative but to believe, that the Nazis used ‘gas chambers’ at Auschwitz to kill human beings. But it is now up to them to explain to me as an intelligent and critical student of modern history why there is no significant trace of any cyanide compound in the building which they have always identified as the former gas chambers.”

I am truly sorry to have published this two days before both Christmas Day and the start of Hanukkah, but until yesterday I had not bothered to listen to yet another seemingly trivial rant by the CEO of Overstock.com.

Patrick Byrne is scheduled to be on Bloomberg TV this morning to talk about holiday sales results.

I hope they ask him tougher questions than that.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

A tree fell on Wall Street yesterday.

Specifically, Electronic Arts, which has managed its way through the vicious cycles caused by fickle teenagers and rotating game platforms better than any other video game maker such that it has been legitimately accorded “best-of-breed” status by Wall Street’s Finest, guided earnings down by a magnitude normally associated with far lesser breeds of companies.

Citing an “abrupt” shift in the “demand curve” for video games, ERTS management guided this quarter and next quarter revenue and earnings “well below” a forecast given just short of two months ago.

And they weren’t kidding about the “well below” part.

Back half fiscal 2006 earnings (ending next March) got whacked roughly 40%, from the $1.40 area to the 85c a share area.

And First Call earnings estimates for fiscal 2007 began the week at about $1.75 and, depending on whether you deduct stock compensation, are going to end the week anywhere from $1.20 to $1.40 a share.

But a look at the calendar reveals we are approaching year-end, when portfolio managers around the globe focus anxiously on their own performance as well as whatever benchmark (the S&P 500 index, the Russell 2000 index, the R-Tango-Delta Mid-Cap Value-Growth-Dividend-Momentum-Day-Trader index) they are attempting to beat.

Furthermore, a look at the ERTS shareholder’s list reveals 10 and 15 and 20 million share positions among the Janus Capitals and Legg Masons of the world.

And what good sell-side analyst wants to—let’s use the polite word—annoy one of their firm’s largest customers by beating up on a “best of breed” company like Electronic Arts, which, not for nothing, recently announced a large, fee-generating acquisition of Jamdat, this close to year-end?

Answer: none.

And so Wall Street’s Finest put on a good face, called the ERTS announcement a “buying opportunity” because (I am not making this up) of the “reduced uncertainty” now that the bad news—foreshadowed last week when Best Buy reported earnings in which video game sales were an area of notable weakness—was out.

One of them actually said it was time to step up to the plate and buy, because ERTS shares were now trading at their “trough valuation.”

Net result: ERTS shares closed up 35c yesterday, at $53.46 a share.

Precisely what is the “trough valuation” that makes ERTS shares so attractive?

Well, the shares now trade at 45 times the low-end of the forward earnings range. And this assumes sales grow all of 12% next year, with the help of the Jamdat acquisition.

Google, for what it’s worth, trades at 48x the high-end of next year’s earnings range, with a sales growth more than 5-times that of Electronic Arts. (Divide everything Google-related by 10: it becomes a $43 stock with 90c of earnings in 2006, compared to ERTS at $53 with $1.20 of earnings in the year ending March 2007.)

Yet the general consensus on Wall Street would no more describe Google’s PE as a “trough valuation” than my dog Lucy would accept a piece of broccoli in place of a dog biscuit.

Don’t get me wrong: Electronic Arts is a very very well run company in a very very cyclical, but growing industry.

The fact that a tree fell on Wall Street yesterday and nobody heard it fall, however, has more to do with the calendar on the wall than the fundamentals involved.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

Pressure grew on General Motors Corp., with its shares falling to a 23-year low yesterday as rival Toyota Motor Corp. said it would boost production, potentially surpassing GM as the world’s biggest auto maker.—Wall Street Journal.

In the wake of GM CEO Rick Waggoner’s Wall Street Journal op-ed self-defense a few weeks back (described in “General McClellan Awaits Battle…In Detroit”), we now find financier and GM shareholder activist Kirk Kerkorian selling GM stock—12 million shares worth—for tax purposes.

Kerkorian simultaneously annoyed the Feds and spooked investors betting on a Kerkorian-led turnaround of what has been “the world’s biggest auto maker” that perhaps Kerkorian’s knees are buckling. Most likely, they are not.

But this fascination with being the “world’s biggest auto maker”—what’s the point? Frequently in today’s Journal article the wordsmiths revert to that sort of language to describe the beleaguered company:

GM, still the world’s largest manufacturer, remains a colossus, with more than $190 billion in annual revenue and 325,000 employees worldwide…

If being “a colossus” matters, however, why is General Motor’s market capitalization less than the $19 billion of cash the company’s automotive business had on hand at the end of last quarter?

In fact, it does not matter.

Perhaps it mattered in the 1960s—the glory years of American manufacturing and the apotheosis of “Man in the Grey Flannel Suit,” when “Made in Japan” held the same derogatory connotation that some now associate with cars made in Detroit.

But it does not matter today, when GM is fighting for its life on many fronts—trying, simultaneously, to lower its cost structure, raise quality, reduce its dependence on trucks and SUVS by introducing fuel-efficient models—and all the while avoiding bankruptcy.

When the Beatles’ uninterrupted string of Number One hits (starting with “She Loves You”) was bizarrely interrupted by the failure of the “Penny Lane”/”Strawberry Fields” single to outsell the reigning Number One, Ringo said it was the best thing that could have happened: it took all the pressure off.

The band went on to do their best work—the White Album—and take their place in history.

(“Penny Lane”/”Strawberry Fields” was held to Number Two by an entirely forgettable Number One song. Whoever identifies that song honestly, no Googling allowed, will be rewarded with nothing but their name on this blog.)

Far be it for me to prescribe a solution to the list of GM’s woes. But I suggest they stop worrying about staying “Number One.”

Get over it, already, and move on. The risk to GM, in my opinion, is not losing a few points of unprofitable market share to Toyota: the risk is becoming the Number One Chapter 11 filing in history.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

Tyco Nears Sale of Plastics Unit To Apollo Advisors for $1 Billion
—Wall Street Journal

It’s official!

Almost four years after first being promised to Wall Street’s Finest by the now-convicted ex-CEO and CFO of Tyco, the sale of Tyco’s plastics business looks set to happen.

The $1 billion reported purchase price, however, is $3 billion lower than the high end of the range promised by Dennis and Mark on January 22, 2002 at the New York analyst meeting announcing the proposed split-up of the conglomerate they had spent years smooshing together through serial acquisitions, showering millions of dollars worth of fees on the very same firms whose analysts were loudly touting a hodge-podge of unrelated stuff as “The Next GE.”

Current Tyco CEO Ed Breen, the widely hailed ex-Motorola turnaround “star” whose turnaround efforts at Motorola are being quickly undone by his successor Ed Zander, has not gotten very far creating value here.

And if the collapse in the value of the plastics division over the last four years is any indication, he may not get much further.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

Moreover, a technical analysis by AOL engineers two weeks ago raised questions about Microsoft’s advertising software…

That’s from an article in today’s New York Times describing one reason Microsoft’s attempt to secure a deal with AOL at Google’s expense appears to have failed.

I’ll admit to being surprised: I thought Microsoft would pay whatever the asking price was for AOL’s cooperation.

In the end, however, it looks like Microsoft’s own technology limitations and jumbled mass of acronym-infested web strategies—plus a billion in cash—are what caused AOL to stick with Google.

The Evil Empire may just have reached its outer limits. Score one for the “Do No Evil” guys.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

ON JANUARY 9 THE GLOVES ARE COMING OFF…AND MAYBE SOME TOPS.

That’s the headline for a full page ad running in the newspaper of record—The New York Post—above the image of a clenched fist that is the logo of the new Howard Stern radio show coming soon on satellite radio.

In the unlikely event you haven’t already heard, New York “shock-jock” Howard Stern will start his morning gross-out-o-rama January 9th on Sirius Satellite Radio—and he promises the uncensored setting will allow his inner-deviant to fully reveal itself via not one but two channels on the Sirius network.

Says Howard: “If it’s weighing a guy’s bowel movement, I can do it. If I want to be gross, I can be gross.”

Now that should be funny.

Financially speaking, Howard has already covered the cost of his five-year, $500 million contract with Sirius by virtue of the fact that at least a million of his 10-12 million Infinity Broadcasting listeners will have signed up with Sirius for its $13-a-month subscription service in order to listen to Howard weigh a guy’s bowel movement and whatever other hilarity he has in store.

$13 a month times twelve months in a year times one million new subscribers approximates $150 million of incremental annual revenue for Sirius. Even adjusting for subscriber churn (the rate at which subscribers drop the service), the deal was worth every penny to the Number Two satellite radio operator—which stumbled out of the gate thanks to being overly dependant on Ford Motor, badly lagging XM in market share.

And now that Sirius has Mel Karmazin as its CEO—Karmazin being the man Don Imus called “The Zen Master” when he was building Infinity Broadcasting into acquisition-bait for Viacom—satellite radio has truly come of age.

Judging by the recent moves in Sirius shares, a lot of people are betting on Howard to be the satellite-equivalent of Milton Berle—the comedian whose popularity drove millions of Americans to buy a television set.

But is Sirius worth the price?

Sirius has 1.3 billion shares outstanding, $1.1 billion debt and $900 million of cash, according to my Bloomberg. At $7.00 a share this yields and enterprise value of $9.3 billion.

That’s roughly $3,100 per subscriber based on Sirius’ stated forecast of hitting 3 million subscribers by the end of this month.

XM, meanwhile, has 222 million shares, $1.1 billion of debt and $750 million in cash, giving it an enterprise value of $7 billion at the recent $30 share price.

That’s $1,160 per subscriber based on the forecasted 6 million subscribers at year-end.

So, right now, Sirius—despite having a higher fixed cost base with the Howard Stern and NFL content deals, plus less desirable satellite coverage than XM (Sirius needs another satellite to ensure complete coverage in event of a failure)—trades at almost three-times the per-subscriber valuation of XM.

Is a Sirius subscriber worth three-times an XM subscriber?

Both Sirius and XM—the Avis and Hertz of the business—present essentially the same service, beaming 100-plus channels of content, mostly interruption-free, to most corners of the country.

And that service is, to use a cliche, a game-changer: you can hear almost anything you want to hear, plus a lot of music you haven’t heard before—but with no commercials, no idiotic disk-jockeys, no Clear Channel-type 20-song computer-selected playlists.

Once you’ve tried satellite radio, regular AM/FM radio sounds hopelessly ancient, and a twenty minute drive in a car without XM or Sirius becomes torture. Five years from now, I expect satellite radio will be standard on all cars and increasingly taking share at home.

In the meantime, however, the subscriber base of nine million is relatively low, though growing quickly. Both XM and Sirius lose money and lose a lot of it—thanks to the high up-front cost of putting up satellites and building the systems architectures and chip designs for the receiving units.

But the ongoing capital expenditure is remarkably small. There is no Cable Guy who needs to drive out to your house and string cable and drill holes to set up the service. So at some point down the road, the satellite radio business—unlike cable—should turn actual real no-pro-forma-type-nonsense cash profitable, and, later on, might actually generate earnings for shareholders.

So, is Sirius really worth three-times XM? Only if you believe that Howard will continue to accelerate Sirius’ subscriber growth rate and allow Sirius to, over time, become three-times as profitable as XM.

But that is doubtful, for three reasons.

First, XM dominates the factory-installed automobile market.

Second, Howard Stern is probably as big as Howard Stern is going to get—a point lost on many retail accounts now buying Sirius stock to “play Howard.”

Third, and this is more speculative, but the headline in the Sirius advertising campaign, plus Howard’s own interviews, indicate Howard is turning towards a much darker direction than maybe even Howard’s fans are going to be comfortable with.

He appears to rule out only bestiality and torture: “I’m not comfortable with somebody killing someone, I don’t want people being hurt.”

Most parents, given a choice of two satellite radio systems with essentially the same music, news and entertainment offerings for their car, will probably opt for the one that does not offer the sounds of human beings copulating, crack-addicted prostitutes debating sex, drugs and world events, and whatever else the uncensored Howard plans to broadcast on two Sirius channels, 24 hours a day.

That is not morality speaking, just practicality.
My guess—and I have no stake in the outcome—is that Howard’s value to Sirius has already peaked. In fact, he may be the best thing that ever happened to XM.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

Well, the temperature reads nine degrees outside right now, and yesterday it was ten degrees before sun-up, and the snow that fell a week ago Friday remains frozen in place on lawns and sidewalks across New England—just the kind of weather that brings out hokey newspaper cartoons and morning-radio weather-report blather contrasting fears of global warming with the unseasonably cold weather outside.

Those disk jockeys and cartoonists wouldn’t be joking, however, if they bothered to read the article in yesterday’s Wall Street Journal about the fate of polar bears.

Scientists for the first time have documented multiple deaths of polar bears off Alaska, where they likely drowned after swimming long distances in the ocean amid the melting of the Arctic ice shelf. The bears spend most of their time hunting and raising their young on ice floes.

In a quarter-century of aerial surveys of the Alaskan coastline before 2004, researchers from the U.S. Minerals Management Service said they typically spotted a lone polar bear swimming in the ocean far from ice about once every two years. Polar-bear drownings were so rare that they have never been documented in the surveys.

But in September 2004, when the polar ice cap had retreated a record 160 miles north of the northern coast of Alaska, researchers counted 10 polar bears swimming as far as 60 miles offshore. Polar bears can swim long distances but have evolved to mainly swim between sheets of ice, scientists say.

Hmmm. The polar ice cap is, in fact—no matter what the thermometer reads in southern New England on an early December morning—retreating.

Does it matter? I guess that depends on your point of view.

You could take the shorter-term view, as expressed by Thomas Schelling, a Nobel Prize winning game-theory economist, who told the Wall Street Journal last month:

In the U.S., if you don’t worry about ecological damage, species extinction and things of that sort; if you don’t worry about what happens in Bangladesh or Indonesia or Brazil; if you figure air conditioning will always take care of your weather problems; then I would say with one or two exceptions, you probably don’t have to get too scared.

In that case, you might look at the fact that polar bears are drowning and, therefore, the ice cap is retreating, as an opportunity to make money buying the oil drilling stocks that will eventually benefit from the opening of the Arctic oil deposits to exploitation as the ice cover recedes.

Or you could take the longer term view that Professor Schelling also provided—although I warn that it might make you spit out your morning coffee:

One exception is there is a body of ice in Antarctica called the West Antarctic ice sheet. It is anchored by some islands, but warming the water surrounding it might cause it to slide into the ocean. The estimate is that that would raise sea level by as much as 20 feet. That means to go from the White House to the Capitol, you go by boat.

In other words, the movement of one ice sheet could make the Berkshires beach-front property.

“In the long run,” John Maynard Keynes famously quipped, “we’re all dead.” The industrialized nations of the world are making sure the human race doesn’t go down alone.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.