SiriusXM CEO Mel Karmazin Calls Internet Radio 'Race to the Bottom'

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Outgoing SiriusXM CEO Mel Karmazin slammed the business model behind personalized Internet radio services during an otherwise upbeat third-quarter earnings call Thursday. While advertising-based Internet radio company Pandora has yet to turn a profit, SiriusXM is achieving record earnings with its subscription business model.

Without naming companies such as Pandora by name, Karmazin called them a "race to the bottom in terms of business model" because "those companies which can grow users and provide good customer experience usually have the worst business models." To fix their business models, he said, requires "a whole lot more commercials, and that means harming the customer's experience."

But Karmazin's statements won't stop SiriusXM from launching its own personalized radio service: Karmazin reiterated the company's intention to launch its version of personalized Internet radio service by the end of 2012. Karmazin added later that SiriusXM is adding the feature because customers want the service, "not because we think it's a good business."

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Karmazin announced last week he will step down as CEO in February. The company's board has formed a search committee to find a replacement.

The subscription model is working just fine for SiriusXM. The company achieved record revenue, adjusted earnings before income taxes and depreciation and amortization (EBITDA) and free cash flow during the third quarter. Subscriber revenue was $757.7 million, total revenue was $867.4 million and adjusted EBITDA was $245 million. Free cash flow was $195 million.

Analysts expected revenue of $867.4 million, according to Bloomberg. Shares of SiriusXM were up 3.2% in early trading Thursday morning.

The company has already generated more free cash flow in nine months -- $440 million -- than in all of 2011 and is on pace to generate $770 million this year. Some of the cash has been used to retire debt to its lowest level since Sirius and XM merged.

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Net income was $75 million, a decrease over the prior-year period because of a $107.1 million charge on extinguishment on debt. Net income per share was $0.01 compared to $0.02 a year earlier.

Year-to-date subscriber acquisitions through the third quarter were 1.47 million, up 27% from 1.16 million a year ago. The company ended the quarter with a record 23.37 million subscribers.

SiriusXM reiterated its guidance for 2012. The company expects net subscriber growth of approximately 1.8 million, revenue approaching $3.4 billion, adjusted EBITDA of approximately $900 million and free cash flow of approximately $700 million.

Liberty Media, which currently owns 48% of Sirius XM's common stock, has filed a request with the Federal Communications Commission in August in which it requested permission to convert its preferred shares into common shares and assume a controlling share.

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