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Sirius, XM Expect Robust Holiday Selling Season

By | November 24, 2003

      U.S. consumers interested in subscribing to satellite radio have a host of new receivers to choose from this holiday season.

      Sirius Satellite Radio [Nasdaq: SIRI] and XM Satellite Radio [Nasdaq: XMSR] recently rolled out new units aimed at enticing prospective customers and boosting subscriber ranks. The thrust comes as Sirius is raising new equity financing.

      Sirius is in a reasonably strong cash position after a recapitalization. The company now is trying to boost its financial war chest further by offering close to 73.2 million shares of common stock. The offering, underwritten by UBS Securities, is expected to close Nov. 24. Sirius intends to use the net proceeds of the offering for general corporate purposes, including investments in programming and retail and automotive distribution.

      With Sirius’ stock price trading at $2.00 at SATELLITE NEWS’ Friday deadline, the offering would raise approximately $147 million before expenses.

      Tom Watts, SG Cowen’s satellite analyst, said, “Sirius chose equity over debt because the equity markets were receptive to the stock and Sirius wanted to minimize the future risk associated with debt. Moreover, they should be able to borrow at much lower rates once they demonstrate their subscriber growth can take off.” Overall, the fourth quarter should be “very strong” for both Sirius and XM, he added.

      However, Sirius has some challenges ahead. It has been growing much more slowly than XM, the first to launch service. XM amassed 239,000 subscribers in the third quarter, compared to just 44,000 for Sirius. XM should be even stronger this quarter with its recent introduction of new receivers, the “Roady” and the “Commander,” aimed at broadening the retail availability of the units.

      In addition to strong retail products, more than 50 vehicle models currently offer XM as factory-installed equipment, said Chance Patterson, XM’s vice president of corporate affairs.

      “The selling process is much simpler and you don’t create a situation where the customer has to wait several hours or days to get the radio installed,” said Patterson.

      XM also recently began offering a new receiver, XM Direct, aimed at tapping BMW’s base of new car buyers. The units can be dealer-installed to work with a satellite-radio-ready BMW car.

      Jim Collins, vice president of corporate communications at Sirius, said that the introduction of XM Direct by his company’s rival is not “a major issue at all.” One risk is that the installation of the units could violate the BMW warranty, he said.

      “It is not manufactured by a BMW-approved vendor. It is also complicated to install. Parts of the dashboard would have to be removed for it to be installed properly,” Collins said.

      XM’s Patterson said he is not aware of any problems with dealers installing satellite radio units. In fact, XM plans to expand its distribution of XM Direct to dealers of other auto manufacturers.

      SG Cowen recently downgraded its rating on Sirius to market perform, in light of the obstacles that still lie ahead for Sirius (see Tom Watts’ column). Sirius recently scaled back its subscriber growth estimates for the fourth quarter from 300,000. “Rather than reaffirm the 300,000 number, we now are not sure how close we would get to that number,” Collins said. “We felt it was more prudent and cautious to say 200,000 was easily achievable.”

      Wall Street analysts have expressed concerns about Sirius taking more time than XM to crank up original equipment manufacturer (OEM) sales. The analysts have a clear preference for the strong commitment that General Motors [NYSE: GM] has shown in supporting XM financially and aggressively promoting the service, compared to the weaker ties Sirius has with its automobile manufacturing distributors.

      “Our OEM partners have a different relationship with us,” Collins acknowledged. However, he expressed confidence that GM’s early and extensive commitment to factory-install XM units can be countered by Sirius and its relationships with Ford [NYSE: F], DaimlerChrysler [NYSE: DCX] and other automobile manufacturers.

      “People don’t custom order their cars that much anymore,” Collins said. Dealers often already install Sirius units and have the cars waiting on the lot to be purchased.

      DaimlerChrysler’s new 2004 Dodge Durango will feature Sirius as a factory-installed option for $325 beginning this month. The monthly service charge is $12.95 per month, with discounts offered for up-front payments of a year or more. Sirius also is seeking to boost its cash flow by offering a lifetime subscription to its service for $399.

      Analysts have a right to their opinions, Collins said, but he and his Sirius colleagues still “very firmly” believe in the fundamentals of the business. It is natural for people to want to compare Sirius to XM, he said, adding that XM is further ahead on total subscribers and a number of other issues.

      “We expect many more factory programs to kick in during 2004,” Collins said. “We don’t see reason for concern. It is not a question of if – it is a question of when.”

      The market potential is “so huge” for satellite radio in the United States that Collins compared it to a “Coke and Pepsi situation” that allows room for two fierce competitors to survive and to thrive.

      The potential market for satellite radio in the United States is enormous, Collins said. It includes 200 million used cars, 15 million to 17 million new cars and light trucks built every year, 100 million U.S. households, three million heavy trucks, four million RVs (recreational vehicles), and three million big boats of 20-feet or longer.

      –Paul Dykewicz

      (Jim Collins, Sirius Satellite Radio, 212/901-6422; Chance Patterson, XM Satellite Radio 202/380-4318; Tom Watts, SG Cowen, 212/278-4260)

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