Wall Street Analysis

By Tom Watts, SG Cowen Securities

The year-end subscriber numbers recently reported by XM Satellite Radio [Nasdaq: XMSR] and Sirius Satellite Radio [Nasdaq: SIRI] once again demonstrate that satellite radio is on its way to becoming a mainstay for millions of Americans. XM ended 2003 with 1.361 million subscribers, beating SG Cowen’s estimate of 1.29 million. Sirius closed the year with 261,000 subscribers, far above our forecast of 230,000.

Even more important than the numbers, though, is the change in perception regarding these two companies. First, Sirius managed to turn the corner in the fourth quarter and finally can be viewed as an equal to XM. We recently returned to visit multiple retailers that only three months earlier told us we should choose XM. Each of these retailers now had life-size cutouts of Pamela Anderson decked out in Sirius gear. Each now said Sirius was selling as well as XM. New plug-and-play radios made a difference. However, I think awareness of Sirius is growing and having an effect. Notably, the new Sirius boombox, which was in short supply during the holidays, was not available at any of the stores we visited.

The second change for satellite radio is the increasing perception that it is here to stay. We still occasionally talk to radio broadcasters who deny satellite radio will work. Most others have begun to recognize what we believe strongly – ultimately, most new U.S. vehicles will come with satellite radio as standard equipment.

Aside from the subscriber growth, we also hear renewed commitments of support for satellite radio from General Motors [NYSE: GM]. Based on these reports, we refined our projected subscriber growth for the industry. We now project the industry will reach 29 million subscribers by the end of 2010. That’s a long way from the current 1.6 million. But the pieces are coming together for just that type of phenomenal growth.

The stocks pose a more difficult question. With such confidence already reflected in each of the company’s stock prices – XM has an enterprise value of more than $8 billion and Sirius of more than $3 billion, can these companies continue to generate enough news flow to raise expectations? Stay tuned.

Tom Watts is a managing director and satellite analyst at SG Cowen Securities. He can be reached by phone at 212/278-4260 or by e-mail at . Readers should assume that SG Cowmen Securities Corp. and/or its affiliates intend to offer services in investment banking to the above referenced companies within the next three months, and to seek compensation for such services.