By Jimmy Schaeffler

Recent announcements by Washington-based XM Satellite Radio [Nasdaq: XMSR] suggest that its first quarter subscriber growth will be strong enough for it to meet aggressive 2003 projections.

The company’s rising stock price is one indication that investors agree. Since trading at less than $2 a share earlier this year, XM’s stock price recently topped $6 a share.

The opposite fate has befallen XM’s New York-based rival Sirius Satellite Radio [Nasdaq: SIRI]. Despite a successful financial restructuring, the share price of Sirius has languished and continues to trade below $1 a share.

XM’s Progress

XM’s early start and continued leadership in the satellite radio sector has left Sirius struggling to catch up. Sirius is up against XM’s early name recognition advantage. Similar to the way “Xerox” became synonymous with photocopying years ago, XM has gained stature among certain industry observers as another word for satellite radio.

That XM cache may not last long, however. Sirius plans to devote substantial marketing expertise and executive skills to get its new promotional messages out. Key roles in that effort will be taken by former direct broadcast satellite (DBS) executives and current Sirius Vice Presidents Stan Kozlowski, Mary Pat Ryan, and Larry Rebich. Sirius President and CEO Joe Clayton also is expected to help ensure that such consumer confusion will come to an end. Sirius soon should be able to carve out its own niche as a serious competitor to XM.

On the other hand, XM is forging ahead by expanding its original equipment manufacturer (OEM) agreement with General Motors [NYSE: GM], a key XM investor. This arrangement is expected to bring literally millions of potential subscribers face-to-face with the XM product and service during the months ahead. A special ramp-up is expected in late summer when GM adds XM as factory-installed OEM equipment to 44 of its 57 vehicle models for 2004. Agreements with car rental companies, including Avis, are expected to fuel the growth of satellite radio. Expect up to 50,000 XM-equipped vehicles in Avis’ fleet by year-end.

On the consumer electronics (CE) front, XM is rolling out its product in 2,800 Wal-Mart stores this month and next. Wal-Mart is expected to give XM’s SkyFi product, in particular, a prominent placement in its home and car audio sections. Delphi, the manufacturer of XM’s portable SkyFi radio, shipped 80,000 units to Wal-Mart during the first quarter. SkyFi is available for use in the home and in-vehicle.

Sirius’ Story

For Sirius, the highlight of the first quarter had to be the finalization of a new financing package. The new funding spared it from bankruptcy court and, more importantly, allowed its executives to concentrate on the job of obtaining subscribers. For the time being, Sirius has enough money so that it doesn’t have to worry too much about its weak stock price or creditors.

Sirius has plans to expand in the near term the number of Ford [NYSE: F] and Daimler-Chrysler [NYSE: DCX] vehicle models that offer Sirius radios as a factory installed option. Although Sirius, like XM, has arrangements with other auto manufacturers, the traditional “Big Three” auto makers are leading the way.

On the retail level, Sirius has been conducting a “free ride” program with Kenwood. This involves the inclusion of a free Sirius receiver with the purchase of any Kenwood radio. Sirius’ plug ‘n play units from Kenwood and Audiovox are due to hit store shelves in time for graduation and Father’s Day gift buying season.

Subscriber Surge?

Subscriber numbers of the satellite radio industry are showing respectable gains. The Carmel Group’s analysis of the U.S. satellite radio industry suggests that it had moved quickly past the half-million subscriber mark by the end of March. With an estimated 553,000 subscribers, the sector likely will pass one million subscribers by early in the fourth quarter. If Sirius gives Wall Street reason for optimism in the company’s future, passing that one million industry milestone should be positive for its stock price and for XM’s.

The share price of XM is expected to build steadily as the industry approaches one million subscribers by September. Bear Stearns’ satellite analyst Bob Peck is estimating a 33 percent rise in the price of XM’s shares to reach $9 by year-end.

The Carmel Group estimates that Sirius has amassed a 13 percent share of the U.S. satellite radio market, while industry leader XM is holding down an 87 percent share. Sirius added an estimated 40,000 subscribers during the first quarter, which, together with the 30,000 it posted at the end of 2002, brings its present count to 70,000 subscribers. Sirius officials are predicting they will have 350,000 subscribers by year-end.

XM confirmed 145,000 fourth quarter subscriber additions. Combined with the 136,000 subscribers added in the first quarter (according to Carmel Group estimates), XM’s total comes to an estimated 483,000 subscribers at the end of March. XM officials project a total of 1.2 million subscribers by year-end.

Estimates of net new satellite radio subscribers for the first quarter show that for every three and a half new subscribers XM gained, Sirius added one. With seven quarters of results since it first launched satellite radio services, XM is demonstrating the advantage of being first to the market and delivering on nearly all its promises to Wall Street. By comparison, Sirius had about 10 percent fewer subscribers in its first five quarters of operation than XM achieved in its first three quarters. The good news for Sirius is that its new financing package means that its slow start will not prevent it from having a chance to succeed.

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 at [email protected] or by telephone at 831/643 2222.