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Automobile Makers Lift XM, Sirius

By | April 12, 2004

      XM Satellite Radio [XMSR] and Sirius Satellite Radio [SIRI] received a firm boost last week from American Honda and DaimlerChrysler [DCX], respectively, in the form of expanded commitments by the automobile manufacturers to factory-install satellite radio units in new vehicles.

      Sirius has been handicapped by its lack of factory-installed radio in new automobiles since it began commercial service in 2002. In contrast, XM has been blessed by incredible financial and sales support from its partner, General Motors [GM].

      The result is that XM has met or exceeded the new subscriber targets it has given to Wall Street every quarter since it launched commercial service during September 2001. Sirius has continued to slip further behind in generating new subscriber sales during the past year partly due to its inability to match up with the support is fierce rival XM has received from GM.

      Both satellite radio operators should benefit handsomely from last week’s announcements in which Honda plans to double its sale of XM-equipped factory installed vehicles to 400,000 between the 2004 and 2005 model years, while DaimlerChrysler promised to try factory installing 550,000 vehicles from among 11 models by June 30, 2006.

      The DaimlerChrysler agreement also calls for Sirius to pay for the cost to factory-install its satellite radios, as well as to give incentives to the automobile manufacturer for achieving agreed upon volume thresholds. In addition, DaimlerChrysler received warrants to purchase 21.5 million shares of Sirius stock at an exercise price of $1.04 a share, compared to the closing price of $4.02 a share last Wednesday.

      These warrants vest based on the achievement of various performance milestones that include the volume thresholds. The new warrants replace warrants previously issued to DaimlerChrysler in October 2002.

      Bob Peck, a satellite analyst with Bear Stearns, said the DaimlerChrysler deal is “positive” for Sirius and provides a more direct distribution channel for the service with factory installations.

      The announcements by American Honda and DaimlerChrysler coincided with the kick off of the New York International Auto Show last week. Also at the auto show, Sirius unveiled plans for its service to be offered as a factory installed option and a dealer-installed accessory on the 2004 BMW 7 Series Sedans across the United States. Sirius currently is available on select 2004 BMW 3 Series, 5 Series, M3, X3, and X5 models. BMW would sell the Sirius radio as a factory option for $595. The price would include a one-year, pre-paid subscription, plus two bonus months of free Sirius service and free activation.

      XM also made a bit of a splash at the New York auto show by demonstrating a new satellite data information service called XM NavTraffic. The service, powered by NAVTEQ Traffic, uses a product from NAVTEQ, a provider of digital map data for vehicle navigation systems. XM officials described the service as an innovative way to let a vehicle’s on-board navigation system display current traffic information about a chosen route.

      XM NavTraffic will debut this fall as the provider of traffic data to the AcuraLink communication system that will be a standard feature on the all-new 2005 Acura RL. Later this year, General Motors is expected to offer XM NavTraffic as an optional feature on select 2005 Cadillac CTS vehicles.

      Another positive move for XM was its announcement Thursday at the auto show that new Saab 9-7X sport utility vehicle will be factory-installed with XM equipment at GM’s Moraine Assembly plant in Ohio beginning in the first quarter of 2005. Saab this fall will offer XM as a dealer-installed option on all of its models and further expand the availability of XM as a factory-installed feature on additional Saab models in the 2006 model year.

      Fueling Growth

      The developments announced at the auto show give further lift to XM’s already robust sales growth. For example, XM reported on April 1 that it has amassed 1,680,000 subscribers through first quarter 2004. That total was fueled by a more than 320,000 new net subscribers during first quarter 2004 alone to mark a 230-percent increase in new subscribers compared to the first quarter of 2003, when XM netted 135,916 new subscribers.

      Sirius has yet to provide its first quarter subscriber growth numbers. However, it is well behind first-to-market XM in cranking up sales momentum. At year-end 2003, Sirius totaled just 261,061 subscribers, compared to 1,360,228 subscribers for front-runner XM at the same point.

      A net fourth quarter 2003 subscriber gain of 111,449 for Sirius accounted for a 74 percent increase from the company’s total subscribers at the end of the third quarter of 2003, and more than eight times the number of ending subscribers reported by the company at year-end 2002.

      Tom Watts, a satellite analyst with SG Cowen, said the DaimlerChrysler accord signed by Sirius last week could give the satellite-radio company a jumpstart to significantly tap into the OEM (original equipment manufacturing) automotive market.

      ‘Pushing’ Sales

      “This is great for Sirius and marks the first sign of moving to a ‘push’ model where the OEMs actually push Sirius [sales],” Watts told Satellite News. In the past, Sirius used a “pull” model that required consumers to ask their dealers or aftermarket retailers to install a satellite radio.

      The marketing onus on a satellite radio service provider is reduced significantly if a new vehicle buyer simply must agree to try using a system that already is factory- installed. XM has thrived, in part, due to GM pushing its sales with factory-installed units.

      The commitment from DaimlerChrysler to equip 550,000 vehicles with Sirius unit “exceeded” the estimate or 408,000 vehicles Watts had expected from the automobile manufacturer. The next big step for Sirius would be to secure a similar commitment from Ford [F], Watts added.

      Steve Blum, president of the Tellus Venture Associates consulting firm in Marina, Calif., said the DaimlerChrysler deal is “all to the good. It shows that the OEM market is finally supporting the category in a serious way.”

      Satellite radio has been commercially available in the United States for two-and-a-half years but it is still a fairly short period of time for the traditionally slow-moving automobile industry to embrace a new technology, Blum said.

      Sirius Optimism

      Prior to its deal with DaimlerChrysler, Sirius President and CEO Joseph Clayton had provided guidance on Feb. 12 that his company would attain approximately 1 million subscribers by year-end, up from an estimate of 860,000 subscribers that he offered the month before. He revised his forecast upward in February when his company forged an alliance with EchoStar Communications [DISH] and RadioShack [RSH]. Beginning in mid-2004, RadioShack stores and dealers, and distributors that offer EchoStar’s DISH Network, also will market Sirius products and service. The three-way partnership is projected to increase the availability of Sirius equipment from over 6,000 retail floors to more than 20,000 by the end of 2004.

      Clayton also raised his outlook for full-year 2004 revenue on Feb. 12 to more than $70 million, up from an estimate of slightly above $60 million that he provided during the company’s Jan. 28th conference call.

      Sirius officials are on record predicting that the company likely would reach the cash flow breakeven mark of 2 million subscribers by the end of 2005. XM executives are forecasting that their company will hit that level earlier that year.

      Indeed, XM officials told Peck last week during a meeting that the company is lowering its subscriber acquisition costs (SAC). These cost reductions, coupled with additional revenue streams, is likely to accelerate the company reaching free cash flow breakeven before mid-2005, he explained.

      Detroit’s Dedication

      However, OEM sales are a vital component of satellite radio’s growing customer base. GM’s role as an investor and a financier of XM has spurred the fledgling satellite-radio service provider.

      Jimmy Schaeffler, a satellite broadcasting consultant who heads The Carmel Group market research firm in Carmel-by-the-Sea, Calif., said, “The Holy Grail for both these companies at this stage in their life cycles is subscriber acquisition. Within that parameter, each company looks to the auto-company deals as the true thrust of that effort. Thus, major commitments by auto companies to install hundreds of thousands of the radios are critical to actual growth, and, importantly, the resulting word of mouth from new subscribers to their friends and families.”

      Tim Logue, a satellite and telecommunications consultant with the Washington office of the Coudert Brothers law firm, said, “As a result of these and the previous deals, I would predict that we are going to see the number of subscribers for both systems mushroom in the next two years. Factory installation is the key, because then it’s just too easy for the car buyer to include the system when they buy a new car. It’s obvious that the automobile industry is now approaching a situation where if they don’t have satellite radio as a factory option then they look behind the times.”

      In Blum’s view, the big sales boost will come from the factory-installed market segment, especially if the companies ultimately attain a total of 10 million to 20 million subscribers during the next five years.

      Long-term Relationship

      A challenge in the future will be for the satellite radio services to maintain subscriber loyalty, especially when they sell or trade-in their specially equipped vehicles, Blum said.

      “If a one-year subscription is bundled with the purchase of a factory-installed radio, that moves the selling job one year down the road when customer retention becomes an issue,” Blum said. The more embedded the technology, the bigger the churn problem, he added.

      If it is assumed people sell, trade-in or donate the vehicle they now drive every three to five years, the problem recurs multiple times during a typical subscriber’s lifetime, said Blum. One way Sirius recently has attempted to address that potential problem is by offering “lifetime” subscriptions, Blum said.

      “Making sure the subscriptions are renewed will be an ongoing challenge for both XM and Sirius,” Blum said.

      Although Sirius is roughly five quarters of sales behind XM right now, that gap may not be a problem long-term, Blum said. A key will be for Sirius not to lose any more ground, he added.

      If Sirius can match XM’s subscriber growth success by 12-15 months, it still would leave the market-trailing company in a good position, Blum said.

      “EchoStar started out 18 months behind DirecTV [DTV] and USSB,” Blum recalled, citing the U.S. satellite TV industry’s commercial rollout in the mid-1990s. However, EchoStar ultimately became wildly successful. The sales momentum just needs to be maintained, he added.

      –Paul Dykewicz

      (Jim Collins, Sirius Satellite Radio, 212/901-6422; Chance Patterson, XM Satellite Radio, 202/380-4318; Bob Peck, Bear Stearns, 212/272-6665; Tom Watts, SG Cowen, 212/278-4260; Steve Blum, Tellus Venture Associates, 831/582-0700; Jimmy Schaeffler, The Carmel Group, 831/643-2222; Tim Logue, Coudert Brothers, 202/736-1816)

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