U.S. DARS ON KNIFE-EDGE AS ALCATEL/WORLDSPACE EURO-DAB PROJECT TO GO AHEAD

By | October 10, 2001 | Feature

by Chris Forrester

Despite continuing DARS problems in the US, Alcatel and Worldspace have both confirmed their Euro-DAB project will continue with a provisional launch date of late 2004.

The two US-based DARS satellite radio services are in trouble barely days after the service commenced on XM Satellite Radio on September 25, with Sirius Radio yet to launch and – despite XM’s national roll-out still being slated for November – a note from Merrill Lynch downgrading both to “neutral”. Moreover, XM is also suffering from solar panel anomalies on its Rock and Roll satellites. Worse still, in a stinging comment within the note the senior analyst William Pitkin said: “we continue to be concerned about significant equity dilution for XM shareholders and expect volatility with little near term appreciation for the stock”. He continued by reducing Merrill Lynch’s 2002 subscriber forecasts for the overall DARS sector by 400,000 (of 1 million units, split 70/30 in favour of XM), arguing that the weakening US economy would impact on unit sales.

According to XM’s CEO Hugh Panero, some 400 of its audio units were bought in the two-week period to September 25. However, it now seems touch and go whether the company, whose ad campaign has been significantly reshaped following the events on September 11, can ride out the financial storm.

Pitkin thinks that while XM has enough cash to last until the beginning of next year at its current marketing pace, it is still in urgent need of “near-term funding”. Merrill Lynch “also expect investors will withhold judgment regarding commercial success until substantial demand is realized which, given the recession, is not likely until sometime next year. XM has stated it must successfully raise about $150 million (E163.1 million) to $200 million no later than 90 days prior to running out of cash in order to avoid receiving very unfavorable terms. Given that XM recently commercially launched and is expected to run out of cash as soon as February 2002, we see a fairly narrow window of opportunity for XM to receive capital from either private equity investors or the public markets.”

Although the rival platform Sirius is in better shape in terms of cash, with funding understood to be in place until Q3/2002, it has yet to launch its service, with Merrill Lynch suggesting this is being delayed “until the US economy improves”. While this could take some time, it will allow Sirius more time to perfect their chip-sets.

Merrill Lynch add that their marking down of the sector reflects these short-term challenges, and while the period may be perilous for investors, the banker’s longer-term view is more buoyant for DARS. Indeed, “once auto OEM channels are fully-on board, both companies should exhibit distribution leverage with satellite radios penetrating numerous fleet lines and meeting what we believe will be pent up demand, once the economy rebounds. We are maintaining our 2001 projections of 45,000 and 10,000 subscribers for XM and Sirius, respectively. In our view, the “early adopters,” who still want to be the first to own satellite radio, will likely be least impacted by economic uncertainty.”

This also seems to be the picture with the Worldspace/Alcatel plan to develop a European DARS system, which was announced last January in the form of a MOU to co-operate as part of a wider consortium for a European DAB service. Worldspace and Alcatel expect the 100-channel radio system to provide seamless coverage over the European continent, and according to Atef Awad, Worldspace’s business development director, the project is very much alive, with a satellite likely to be in position “within two years or so”.

Alcatel’s outline timetable nevertheless places the launch a little later and puts the first of the two satellites in orbit by the end of 2004. They have estimated project costs to be in the region of E1.1 billion, which include two satellites, ground segment, radio receiver development and ground-based repeaters, and in many cases replicate the XM model. According to sources at Alcatel, discussions are currently taking place with potential “major” partnering investors and a likely line up of these should emerge later this year.

Alcatel Space has meanwhile been selected by the Brazilian satellite operator Star One to build a new regional telecommunications satellite system in the Ku-Band for Latin America. Based on the SpaceBus 3000B3 platform, it will be located at 67 degrees West and have 44 (equivalent) 36 MHz Ku-band transponders to provide multimedia and high-speed Internet capacity to the region. Star One, which is owned by Brazil’s Embratel (80 per cent) and SES/Astra (20 per cent), expects the satellite to be delivered in 27 months.


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