Satellite Radio Closes In On Milestone

By Jimmy Schaeffler

The overall U.S. satellite radio industry had an estimated 802,000 subscribers by the end of the second quarter. The sector’s rate of growth leaves it within weeks of its first true customer milestone: one million subscribers.

As the charts below indicate, a major difference remains between the subscriber acquisition gains of Washington, D.C.-based XM Satellite Radio [Nasdaq: XMSR] and those of New York City-based Sirius Satellite Radio [Nasdaq: SIRI]. Sirius obtained an estimated 110,000 total subscribers by the end of the second quarter, while XM notched almost seven times as many subscribers to amass 692,253.

The comparison may be unfair after Sirius’ belated start but Wall Street tends to emphasize total subscribers acquired as a key satellite radio benchmark. The early history of the direct broadcast satellite (DBS) industry suggests Sirius will be a long-term survivor. Sirius is in the same late-to-market position as EchoStar Communications [Nasdaq: DISH] was during satellite TV’s startup phase. Now, EchoStar is adding many more subscribers per month than industry leader DirecTV. In addition, EchoStar’s stock continues to thrive, while the stock of DirecTV’s parent company, Hughes Electronics [NYSE: GMH], has only recently begun to increase.

Sirius is planning a couple of key moves to catch up with XM. First, Sirius is unveiling new plug ‘n play devices. The new Audiovox brand plug ‘n play device includes the first of its kind wireless connectivity (i.e., no wires in the car). However, the device still plays through the radio’s FM modulator. This Audiovox device sells for $99 and is expected to help the consumer to integrate his or her new satellite radio, without the hassles of unsightly and awkward wires. The other plug ‘n play device is from Kenwood, which has been on the market since late June. Sirius is saturating the market with product choice. That approach offers consumers multiple choices to spur sales.

Another future focus of Sirius will be the launch of home-based receivers in the fall. Sirius’ first dedicated home units will include those with a yet-to-be-announced partner. New automobile receiving equipment also is expected.

Sirius’ second quarter subscriber numbers will be adjusted when the company holds an Aug. 6 conference call with analysts to discuss its second quarter results. At that time, a clearer picture should emerge about whether Sirius looks capable of reaching its milestone of 300,000 total subscribers by year-end.

XM’s New Subscriber Plays

XM believes its success is tied to its two-prong market attack: 1) working with the original equipment manufacturers (OEMs), and 2) continuing to push the deployment of new products, including XM’s SkyFi-brand portable boom-box.

Depending upon the success of General Motors’ [NYSE: GM] early July factory retooling efforts, new cars with XM radios should be in new car showrooms in August or September.

Just as it did during 2003, XM will look for GM to lead the automobile industry in offering satellite radio. For example, the vast majority of the 75 vehicles that will offer XM as a factory-installed option during the 2004 model year will be GM cars or trucks. That level of commitment from GM is a continuation from the 2003 model year when GM offered XM in 25 of the industry-wide 55 vehicle models that carried the service as factory-installed equipment. This year, GM will install XM equipment on 40-plus vehicle models.

The support from GM will mean increased sales volume for XM, and an expansion of the vehicle product line carrying the service. The top-end Cadillac brand was GM’s first to install XM radios in the factory, but GM now has extended it to car models as small as the comparatively inexpensive Chevrolet Cavalier. That wide availability of XM across the broad spectrum of GM’s product line is important because studies show that satellite radio appeals to a wide range of customers. GM typically produces around four million total vehicles yearly, so carrying XM in most of the automobile manufacturer’s models should be a big boost for satellite radio in general. Among the GM vehicles that had XM pre- installed, an average of 15 percent were activated in 2002.

In addition to the expected up-tick from GM’s broader deployment of XM in its vehicles, foreign automobile makers, such as Honda and Acura, will produce five models that offer XM as a factory installed option. Toyota will produce eight models, Nissan six, Infiniti six and Audi nine. Later in the year, additional announcements are expected about other car models.

Further, several new XM products are expected out in the next 60 days. XM already offers the industry’s top-selling satellite radio, the SkyFi. XM expects to introduce a strong array of new products heading into the year-end holiday selling season. Typically, this timeframe of three months amounts to about 40 percent of total year consumer electronics (CE) sales for the typical CE product. XM is sticking with its year-end estimate of 1.2 million total system subscribers. For the first and second quarters of 2003, XM has exceeded its estimates. XM’s analysts’ call covering the second quarter is set for Aug. 7.

Returning to the OEM side, XM states it is very encouraged with the added muscle GM is putting behind XM promotions. For the month of July, the Cadillac division is offering free XM equipment with one-year of free service. Plus, if a customer buys a Cadillac and XM is not pre-installed, Cadillac will offer a SkyFi boom box with one year of free service included. The reason this type of support is so critical is that GM is spending almost $2 billion a year as the world’s largest product advertiser. Furthermore, XM currently differentiates GM vehicles from those of other automobile manufacturers that have delayed their rollout of satellite radio. Certain consumers may buy a car based upon whether XM is offered as a factory-installed option. XM expects to reach its own million-subscriber milestone during the first half of the fourth quarter.

Looking at the specific details of the charts above and below, XM has added 345,000 total subscribers during the past two quarters. In the same time frame, Sirius has added just 110,000 subscribers.

It is important to note that in the early years of the satellite TV business, EchoStar’s subscriber growth was well behind DirecTV. Yet, with guerilla marketing, lower pricing and some pretty aggressive strategies, EchoStar overtook DirecTV in terms of month-to-month growth. To date, EchoStar remains substantially ahead of DirecTV in monthly and quarterly subscriber additions.

It is particularly interesting is to see some of the momentum building quarter-upon-quarter, especially for XM. During the second quarter, XM added 50 percent more subscribers than it added during the first quarter.

For Sirius, the second quarter estimates show a decline in subscriber growth momentum, quarter-over-quarter, from a confirmed 68,000 during the first quarter to an estimated 42,000 during the second quarter. Sirius added an estimated 110,000 net new subscribers for the first half of the year.

The two U.S. satellite radio service providers are at opposite ends of market share analysis. Sirius claims roughly a 14 percent market share, while XM has achieved a dominating 86 percent market share. Total first quarter additions for XM and Sirius came in at 551,000, while total second quarter additions registered an estimated 802,000 to mark a 45 percent quarter-over-quarter increase for the overall industry on the strength of XM’s robust growth.

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 as well as a consultancy based in Carmel-by-the-Sea, Calif. (http://www.carmelgroup.com). He can be reached by e-mail, [email protected], or by phone, 831/643 2222.