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Old February 20th 05, 06:21 PM
Mike Terry
 
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Default Satellite radio growth projections stir concern

19 February 2005

San Francisco

The satellite radio industry, with commercial free music, pro football and
baseball -- and soon, shock jock Howard Stern -- has achieved startling
subscriber growth in the four years since it was launched.

The hype surrounding the new subscription medium is reminiscent of the kind
of euphoria that surrounded dot-coms in the late 1990s, with cadres of
ferociously loyal admirers, growth projections of several hundred percent
and volatile share prices on heavy volume.

But some observers are beginning to wonder whether there really is that much
long-term upside.

"There's going to come a point where you've maximized the people that are
willing to pay for radio," says Christopher Reed, chief executive of radio
programming consulting firm CSR Media in Denver. "Because a traditional
radio requires a $10 clock radio, and you can pretty much get it. But the
fancy equipment fee, plus the service fee, really goes after a certain type
of customer."

Stifel Nicolaus & Co. analyst Kit Spring estimates that satellite radio will
have 35 million to 40 million subscribers by 2013, up from the current total
of around 4.5 million. RBC Capital Markets analyst David Bank sees the
medium having 33 million subscribers by 2010.

However, in a climate where MP3 players, handheld video games and other
portable electronics pose a threat to all radio companies, including
traditional ones, J.P. Morgan analyst Barton Crockett suggested in a recent
research note that consumer interest in satellite radio may already be
declining, based on data his firm compiled.

The debate has played out in the form of shares of Sirius Satellite Radio
and XM Satellite Radio, the two satellite radio companies, which have been
on a rollercoaster ride often reserved for Internet stocks for the last
several months.

Sirius shares, which closed at $2.33 on Sept. 29, had shot up to $9.01 by
December 7, amid news that raunchy morning radio host Stern would jump to
Sirius in 2006, and that tough radio executive Mel Karmazin would be the
company's chief executive. Sirius' average daily volume is a whopping 115
million shares.

XM, boosted by news of a major deal with Major League Baseball, and the
run-up toward its unveiling of a new portable device called the MyFi, rose
from a May 10 close of $21.62 to $40.05 as of Dec. 20.

Both stocks gathered momentum ahead of last month's Consumer Electronics
Show in Las Vegas, but have since eased. XM shares closed at $32.62 on
Friday. Sirius shares closed at $5.87.

Satellite radio has gotten off to a fast start since XM Satellite Radio's
launch four years ago, as listeners bored by endless repetition and
commercials on traditional radio have begun to embrace the newer medium.

XM offers more than 130 channels of digital radio programming for $9.95 per
month, covering every major music format, as well as news, sports and talk.
Sirius offers 65 music channels and 65 channels of news, sports and talk
subscription for $12.95 a month. Both services offer commercial-free music.

The radios can be purchased pre-installed in a car or truck. Or, in the
$100-$600 range, you can buy satellite-ready receivers from manufacturers
like Kenwood and Panasonic to install in the car or at home; or portable
devices, such as boomboxes or smaller units.

According to J.P. Morgan's survey of more than 1,600 non-subscribers to
satellite radio, taken in December, 35 percent said they had interest in
subscribing, down from the 43 percent of that same group who expressed such
an interest in a May poll.

Crockett said the data indicated that expensive, exclusive content isn't
widening the overall market for satellite radio; that new subscribers are
more concerned about price than early adopters; and that Apple's iPod and
other new devices could be having an adverse impact on interest in XM and
Sirius.

XM last week reiterated its forecast that it will end 2005 with 5.5 million
subscribers, which would be a 41-percent increase from its total of 3.23
million in 2004. Sirius said its subscriber total would more than double
from last year's 1.14 million, to 2.5 million subscribers.

That growth rate will be fueled, the companies say, by the increasing
rollout of automobiles that have XM or Sirius radios factory-installed. It
will also be helped by the presumed appeal of prominent on-air talent like
Howard Stern, who brings his raunchy morning program to Sirius in 2006;
sports like Major League Baseball, which debuts on XM this year; and
wearable devices like XM's MyFi and Sirius' Sportster.

Crockett says the main appeal of satellite radio is commercial-free music,
rather than unique talk-related content, suggesting that the companies might
have overpaid on sports and on-air hosts.

But Don Hodges, of the Hodges Fund in Dallas, said it's vital that the
medium offer compelling non-musical content, because "there's going to be
downloadable music from a lot of sources over the next few years."

The problem with that thesis, says Harry DeMott, a partner at Gothic Capital
Management in New York, is that every major sport is now covered by one or
the other satellite radio firms, and there are few remaining radio
personalities capable of attracting a huge audience that would be available
for an exclusive satellite deal. "I don't know what compelling content is
out there that can be acquired for satellite radio that can't be heard on
terrestrial radio," DeMott said.

Stern has a $100 million deal to join Sirius, after his contract expires
with Viacom's Infinity Broadcasting. Sirius also has a $220 million
agreement to broadcast NFL games, while XM has paid $650 million for the
rights to 11 years of Major League Baseball broadcasts.

Karmazin indicated that Sirius is unlikely to spend so heavily for content
in the near future. "There is nothing that is on our list today that would
be of a scope of Howard Stern or the NFL or Major League Baseball," he said.
Though he also quipped that if talk show queen Oprah Winfrey ever considered
having an exclusive program on Sirius, an exception might be made.

Analysts say XM is probably just as unlikely to pay so much to buy content
anytime soon.

Given all of this, though, the question of which kind of content drives
people to satellite radio isn't really the main issue, says Jim Goss,
analyst at Barrington Research in Chicago.

Satellite radio is not expected to replace traditional radio. In Goss' view,
people will merely use satellite as an adjunct to the older medium, much in
the way they watch both cable and broadcast television.

"Think of HBO and 'The Sopranos,'" he said. "Some people may buy HBO just
for 'The Sopranos,' and they may not watch it aside from that. That really
isn't going to matter to HBO because they've got a paying subscriber. So if
they super-serve enough niches, they can develop a big subscriber base.

"Because satellite radio is subscription-based, and not advertiser-based, on
the music side, they're depending on the fact that there's just something
you'll want enough to keep your subscription," Goss said.

Certain radio formats are more likely to lose customers to satellite than
others, due to the demographics of the audiences they attract, says Reed.

"Formats that target higher, more affluent customers -- Smooth Jazz, for
example, the talk formats, classical, public radio to some degree -- those
are the people that can afford satellite radio, so I can see them switching
to satellite," Reed explained. "I'm not convinced it's going to be a problem
for your run-of-the-mill top 40 station."

As for price, Goss said that at price points of $9.95 a month, for XM, and
$12.95, for Sirius, the medium is therefore "not that expensive, if you find
something of interest."

In RBC Capital analyst David Bank's projection of 33 million satellite radio
subscribers by 2010, he estimates that about half of that number will be
customers acquired in the retail market, rather than through buyers of cars
with radios installed at the factory. That aftermarket will be largely
driven by the descendants of the MyFi, and other portables, he said.

"Not all listening takes place in the car," Bank said. "So, if 25 percent of
listening occurs in the office, how is one going to do that? Through a
boombox, or some other non-auto based device."

The iPod and other MP3 players, with their ability to allow users complete
control over the music they hear, concerns all radio companies. XM and
Sirius, realizing the need to have a viable handheld strategy, have
approached Apple co-founder Steve Jobs about possible alliances, but Jobs
has spurned their advances thus far.

XM made a big splash in the wearable device market in December when it
introduced the MyFi, a handheld receiver that allows users to save, pause,
fast forward and rewind songs they hear on XM.

Because it's so important to keep improving the MyFi in an iPod-dominated
landscape, the company is working on ways to broaden the unit's appeal.

"I think there's a number of areas that are obvious from product reviews or
things that," said Hugh Panero, the company's chief executive, during XM's
quarterly call earlier this month. "We would like to have MP3 capabilities,
greater memory, things of that nature. I think across the board you'll see
numerous improvements."

Right now, about half of XM's new subscribers come from people who buy cars
equipped with XM radios; at Sirius, the figure is around 25 percent, though
as Ford and DaimlerChrysler ramp up their rollouts, the percentage will
increase.

The firms are getting high take rates from people who opt to keep the
service in their cars after a trial period. XM says take rates were about 60
percent in January, a figure Goss called impressive.

XM has major agreements with General Motors , Honda , Toyota and other
automakers, while Sirius' partners include DaimlerChrysler , Mercedes, Ford
, BMW and Nissan .

Bank agrees that factory activations will be the key factor in widespread
acceptance of satellite radio. "If you want a white Tahoe on the lot, and
the only one on the lot has XM activated in it, are you going to wait three
days for a white Tahoe without an XM in it? Something like a third of the
models delivered to the floor from GM today are factory-activated," he said.
"I think that makes the sale a lot more passive, and a lot easier to make."

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  #2   Report Post  
Old February 21st 05, 07:38 PM
Robert J Carpenter
 
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Default

The talk about volatility of sat radio stock prices it a bit
broad-brushed.

If you bought XM exactly five years ago - when they were still a
glimmer in the eyes, Every dollar you invested would be worth would be
worth about 75 cents today - not horrible for an extremely
speculatative stock.

OTOH, every dollar you invested in Sirius exactly 5 years ago would be
worth 5 cents today!! In other words, Sirius hugely diluted their
stock to avoid bankruptcy.

XM has also been issuing stock to keep up their momentum - but not to
anywhere near the extent of Sirius.

Both companies are still at the stage where they are "buying
customers".

By comparison, every dollar invested in General Electric exactly five
years ago is worth about 75 cents today (about the same as XM) - and
GE is a "solid" company.





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