By Jimmy Schaeffler

The spotlight for satellite radio now is shining on original equipment manufacturers (OEMs). The reasoning is that satellite radio’s prime success will come from units that are factory-installed in millions of new automobiles. Although many other forms of satellite radio distribution and hardware exist — such as the automotive aftermarket and consumer electronics stores, where vehicles are retrofitted with the radios – OEMs are the most important source of new subscribers.

At least for now, the OEMs are divided into two camps, with each aligning with one of the two U.S. satellite radio providers — XM Satellite Radio [XMSR] and Sirius Satellite Radio [SIRI].

OEMs are expected to be the dominant distribution form because they make it much easier for prospective customers to subscribe. Instead of shopping and buying separate hardware and content packages, followed by the hassle and unsightliness of a receiver installation, OEMs do all the work for a new automobile purchaser. OEMs typically offer satellite radio financing as part of the full vehicle financing that is bundled into one monthly payment.

Roughly 16 million to 17 million new U.S. automobiles are built annually. If a significant number have OEM-installed satellite radios ready for a car buyer to activate, the prospects for satellite radio’s long term success are greatly enhanced. As many of the more than 200 million registered vehicles in the United States are replaced, word-of-mouth from new vehicle purchasers about satellite radio will help to build sales. When satellite radios become standard new car equipment – which they will, as did AM/FM radios – then the true OEM machine will start revving up.

Finally, OEM car manufacturers also often make trucks and RVs. With current breakeven figures for each satellite radio company measured in the single-digit millions of subscribers, OEMs likely will play a big role in boosting the subscriber base for each to breakeven within a few years.

Sirius OEMs

For New York-headquartered Sirius, Senior Vice President of OEM Distribution Doug Wilsterman reports two of three of Sirius’ current exclusive OEM partners, BMW and Daimler- Chrysler, launched their products during 2002. Chrysler alone launched 16 different models of vehicles with Sirius radio as an original equipment option during 2002. Each vehicle model offers Sirius radios through its Mopar program. The Mopar program offers the radios via a factory-authorized dealer accessory program. BMW offers Sirius radios in its cars exclusively in its 3, 5 and 5x series.

Sirius also has non-exclusive arrangements with Nissan and Infiniti to place Sirius radios in certain models of their cars. The Nissan program was launched in the Nissan Pathfinder model in September of last year. It was preceded by non-exclusive arrangements involving VW and Audi, which were announced in April of last year. Specific model announcements from VW and Audi are expected before the summer.

Sirius’ partnership with Ford [F] has been exclusive since last October. However, Ford has yet to announce the specific models it will dedicate for the Sirius OEM product and service. These specific Ford model announcements are expected soon, and should allow some significant optimism for Sirius, whose stock has dipped recently, despite formalization of a financing plan that should keep the company running well into 2004.

Sirius expects to announce new subscriber numbers and other financial data points for the first quarter 2003 during April.

Pacesetting GM OEM

For Washington-based XM, its main OEM affiliation today is with the largest U.S. auto maker General Motors [GM]. The core of GM’s OEM operation resides in Troy, Michigan, where GM’s Executive VP of Satellite Radio Services Rick Lee and his 15 co-workers are spearheading the deployment of the satellite radio product within the GM line of vehicles. Despite the relative smallness of his staff, Lee said his division touches “hundreds of other GM folks” on a regular basis.

GM offers XM radios in 25 of its 57 total models. GM began factory-installing XM in November 2001 with two Cadillac models, DeVille and Seville. These factory-installed models were chosen because purchasers of these vehicles were deemed receptive to this kind of new service and technology. Additionally, these luxury cars already contained a good deal of technology- and telecom-related devices. One example was the GM OnStar location assistance and Global Positioning System. Lee expects the OnStar and XM boxes will eventually communicate with one another in the same vehicle. That connectivity should further enhance the value to drivers and passengers.

One way OnStar is lending a hand is by developing and managing customer satisfaction surveys. One such survey recently produced a satisfaction level of more than 80 percent among subscribers who had used the XM satellite radio service for at least 90 days. Roughly 91 percent of those queried would recommend the service to a friend or family member. Moreover, Lee said that those same studies show that 50 percent of these subscribers are demonstrating the new service to a friend or family member at least four times a month, while 25 percent are demonstrating it more than ten times a month.

Perhaps the most important piece of information coming out of the GM satellite radio sector – and the reason GM started backing the service in the first place – is that GM now is getting people to sit in GM vehicles who would not have otherwise done so. Satellite radio is the hook. Roughly 55 percent of satellite radio subscribers are likely to buy a multiyear service after 90 days of use, Lee said. In today’s ultra-competitive automobile sales market place, spending a few hundred dollars extra to get someone to buy a car that costs many, many thousands of dollars, is considered a good return on investment.

Automobile manufacturers help XM’s business model in a number of ways. They include enhancing investor confidence in subscriber forecasts, generating additional revenues to spread across the company’s fixed costs, aiding marketing and improving cash flows.

For 2004 model cars, which start coming off the production lines in late summer this year, a total of 44 GM models – or three quarters of its total line — will include OEM- installed XM satellite radios. Fifteen percent of the purchasers of new Suburbans are now activating their OEM-installed XM radios, GM officials said.

Other numbers that tend to impress include the $120 million sum GM has invested in the satellite radio business thus far. That total includes a hefty investment in XM itself that amounts to 18 percent or 19 percent of XM’s total equity.

XM soon will announce new subscriber numbers and other financial data points for the first quarter 2003. In recent times, XM stock has nearly doubled on news of its year-end 2002 subscriber gains and recent new financing.

Joining Together?

Today, XM and Sirius are working to engineer and build a new satellite radio box that is capable of working with both services. The Federal Communications Commission previously asked the companies to do so to benefit the public. Such an interoperable system would help to further drive OEM installations and sales.

Although XM and Sirius have been working together for a couple of years, there is no set date for the single-standard radio. At PBI Media’s recent Satellite 2003 conference held in Washington, DC, executives from Sirius and XM said no deadline had been set for the deployment of a single box. If the “single-box, single-standard” process ends up taking too long, both companies will lose credibility with the FCC and the agency will end up imposing a hard deadline. The FCC also will be less likely to offer up “voluntary agreements” to other companies in the future if this one between XM and Sirius is not fulfilled in a reasonable time period.

Jimmy Schaeffler researches, analyzes and writes this monthly report. He is a subscription services analyst at The Carmel Group, a publisher of industry databooks and the monthly newsletters Satellite Radio Investor and DBS Investor, as well as 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, [email protected], or by telephone, 831/643 2222.