Satellite Radio Growth Beats Expectations

By Jimmy Schaeffler

The nascent satellite radio industry is showing strong legs and a knack for long-term success. Its early growth is second only to the early growth of digital video discs (DVDs). Surprisingly, satellite radio’s sales growth is quite a bit ahead of several other entertainment service rollouts, such as terrestrial radio, VCRs and even cable TV.

“If satellite radio is doing this well already, what does its growth relative to other American cultural mainstays say about its future?” The answer: a great deal. The industry’s growth is illuminated further in the chart entitled “CE-Telecom Product/Service Growth: The Number of Years To One Million Subs.”

It is important to remember that satellite radio has a potential audience that rivals any other product or service on the chart. Satellite radio providers pick from an orchard of 200+ million registered automobiles. They also have as a potential market RVs, trucks, boats, aircraft, homes and businesses. Satellite radio’s mobile capability means it ultimately may become as ubiquitous and portable as CDs, MP3 players, terrestrial radios and other such devices.

XM’s Critical Mass

There is clearly a sparkle in meeting milestones. One such instance occurred in late October when XM Satellite Radio [Nasdaq: XMSR] signed up its one- millionth customer. That achievement added new luster to an already special company. XM’s next major plateau will be the two millionth subscriber level, which will likely be attained in the third quarter of 2004. These kinds of numbers give validation to the service and its numerous product forms. The company presently is projecting a subscriber base of 2.4 million by year-end 2004, which brings XM within reach of breakeven in the 2005-2006 timeframe.

XM is focused on reaching a large potential subscriber base that spans a wide range of demographic groups. XM plans to do this by developing and distributing many different radio products, within several price ranges, as well as products that are mobile, semi-mobile and built into vehicle dashboards. XM remains especially proud of its Roady satellite radio, which it claims is “the most affordable complete satellite radio product available at retail.” The XM Commander and SkyFi are two additional XM radios that will retail for less than $199 during the holiday selling season.

North of the border, XM reports that it has entered into a joint venture with a Canadian satellite radio company. Together with the aptly named Canadian Satellite Radio, led by Canadian entrepreneur John Bitlove, XM believes it has found the next natural market, and a place where its service and infrastructure work quite well.

XM’s stock has reflected the company’s success, moving from roughly $2 and $3 a share earlier this year to more than $23 a share just before Thanksgiving. XM is especially pleased because this stock growth has come from investors responding to its subscriber growth, coupled with a decline in its subscriber acquisition cost (SAC).

Sirius’ Statistics

With more than 150,000 subscribers at the end of the third quarter, Sirius Satellite Radio [Nasdaq: SIRI] has about one-sixth the number of total subscribers as XM. The 150,000-subscriber base marks a 400 percent growth rate over its year-end 2002 numbers. Nonetheless, early growth numbers are easier to match with large percentage increases. The real staying power for Sirius will come from maintaining solid growth percentages once the subscriber numbers hit seven figures. XM has shown it can accomplish this feat. It will be up to Sirius to do the same. Indeed, one of Sirius’ most substantial milestones in the year ahead will be to reach the magic one million subscriber threshold. If it can do that, it will have drafted nicely on the success of XM. Getting Ford Motor Co. [NYSE: F] and DaimlerChrysler [NYSE: DCX] to offer factory-installed Sirius radios in a substantial number vehicles in the 2005 model year will be pivotal toward reaching that important million subscriber goal.

Other Sirius news for the quarter included a $150 million stock offering. This “shelf registration” was filed several months ago and executed recently to take advantage of the favorable capital markets. Sirius plans to use the funds for future opportunities in programming, original equipment manufacturing (OEM) installations, and product growth. Moreover, Sirius is the first satellite radio company to announce plans to offer its service to U.S. airline passengers. Sirius received Federal Aviation Administration (FAA) approval for this service during the third quarter.

Nonetheless, reports from the Sirius stockholders’ meeting during late-November indicate that the company plans to emphasize subscriber growth through retail consumer electronics stores and OEM-auto manufacturers. Sirius also faces the challenge of insuring that retailers have adequate product supply for the holiday selling season.

Sirius officials now say the company plans to reach cash flow breakeven in 2005, with a total of two million subscribers. In addition, Sirius’ customer satisfaction numbers report that 95 percent of Sirius’ users noted “overall satisfaction,” while 86 percent likely would recommend Sirius to others. This kind of positive feedback is critical to spurring further sales through word of mouth.

And The Numbers, Please

For the third quarter of 2003, the satellite radio industry added 282,000 net new subscribers. With this addition, the total subscriber base for the U.S. radio TV industry hit 1.08 million on Sept. 30. As noted in the chart entitled “Quarterly Satellite Radio Sub Growth,” gains during the prior four quarters brought the total industry subscriber base to 213,000 in the third quarter of 2002, 377,000 in the fourth quarter of 2002, 551,000 in the first quarter of 2003, and 797,000 in the second quarter of 2003. Thus, within the past year, the satellite radio industry as a whole has more than quadruped its subscriber count.

Looking at market share gained during the third quarter, XM accounted for slightly more than 86 percent of the total subscribers added, while Sirius gained slightly less than 14 percent. Those quarterly-percentage gains track those of the overall market place. XM today holds U.S. satellite radio market share of 86.8 percent, while Sirius holds 13.2 percent. The race for subscribers clearly is heating up.

Jimmy Schaeffler is a subscription TV analyst at The Carmel Group, a publisher of industry databooks and newsletters and a consultancy based in Carmel-by-the-Sea, Calif. (http://www.carmelgroup.com). The company specializes in telecommunications, computers and the media. He can be reached by e-mail at [email protected] or by telephone at 831/643 2222.