A Voice of Reason in a Bubble Gone Mad?

I love XM satellite radio. In fact, I haven’t listened to one second of ad-infested over the air radio since the day two years ago when I got XM in my truck.

Unlike all of the new tech companies whose only significant revenue source is advertising, XM actually has something for sale that I and millions of others want to buy. Anyone who reads this page knows that I am evangelically committed to my position that, outside of big media, basing a business plan on ad revenue alone is like building a house of cards in the eye of a hurricane.

But somehow even XM has decided to pretend that the laws of economics don’t apply to it. Otherwise, how in the world could they rationalize giving Oprah Winfrey $55M for a three year gig? At $10 a month, you would need about 460,000 people to sign up for one year just to break even, and that assumes every dollar is profit (which of course it isn’t).

At least one former member of XM’s board of directors seems to get it. Pierce J. Roberts Jr. recently resigned from XM’s board. According to the Reuters story, “Roberts believes the company should rein in its spending and instead focus on reaching positive cash flow even if that means slower subscriber growth.”

Amen, brother. At some point these companies have to figure out how to make a profit. If it costs me $5 to make a hotdog I can only sell for $3, then I need to rethink my business plan, if not my entire business. What is it about these companies that make them immune to these rules?

Want my opinion? Part of it is the greater fool theory that drives far too much of our capital and stock markets. All the machinery that’s in place to serve the start-up, funding, public offerings and stock sale process has too much at stake to tolerate any significant reform movement. And just like the wreck on the side of the road, everyone who finally makes it through that pipeline to where the money is slows down to look (and profit).

Witness this quote from an analyst contained in the Reuters story:

Unless this director knows something that the rest of us don’t, I just find his comments inflammatory in an effort to express his personal anger as opposed to anything that could be materially wrong with how the business is being run.

So now proposing that a company be profitable sooner is not only not required, it’s inflammatory?

Great.