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Satellite radio showdown
Market is up for grabs as XM and Sirius scramble to sign automakers


AutoWeek |

The satellite radio business resembles a billion-dollar demolition derby -- featuring Howard Stern, Martha Stewart, Bob Dylan, Oprah Winfrey and NASCAR -- with automakers providing the main venue.

XM Satellite Radio Holdings Inc. and Sirius Satellite Radio Inc. are facing each other down in a battle for new subscribers. The two satellite companies are rushing to sign up more new-car buyers, their biggest potential source of new customers. To do that, they're spending large sums to expand their business.

Analysts give XM an advantage over Sirius in terms of the auto manufacturers it has signed to exclusive agreements. Sirius got a later start.

XM has General Motors, Honda, Hyundai and others, while Sirius has DaimlerChrysler, Ford, Volkswagen, BMW, Mitsubishi and others. Toyota offers XM in factory installations and Sirius as a dealer-installed option.

Automakers regard satellite radio as an ideal pipeline into the car for news and information. The two services offer commercial-free music and live radio to a combined 9.3 million customers. Both plan to expand information services, providing traffic, weather and other useful information for motorists.

Car companies also believe they can use telematics to alert customers when their vehicles are due for service.

Despite the proliferation of satellite radio, auto dealers say the option is not a factor in making most sales. But more customers expect it.

And so far customers are the only clear winners. The business is far from being profitable as XM and Sirius slug it out.

Says Karl Brauer, an analyst for "I guess the short answer is it's still up for grabs. No one company has locked up the automotive marketplace in terms of factory agreements. Nobody's got a clear upper hand."

Big losses
The stakes intensified last year when the two companies lost a combined $1.53 billion as they spent money to sell more radios, sign up more celebrity talent and lure new subscribers. In the fourth quarter alone, XM posted a $268.3 million loss, while Sirius lost $311.4 million. One reason: Both companies spend a lot to acquire customers compared with money they make from $12.95 in monthly subscription fees.

Sirius paid $139 to acquire each subscriber last year, down from $177 in 2004. XM paid $64, up slightly from $62 in 2004. The so-called "subscriber acquisition cost" includes equipment subsidies and sales commissions.

Steve Mather, an analyst for the Sanders Morris Harris Inc. investment banking and research firm in Houston, predicted those costs will drop to $109 per customer for Sirius this year and stay flat at about $62 for XM.

"At its most simplistic level, these guys are paying virtually everybody -- whether it's the chip set makers, the auto manufacturers or the retailers," says Stuart Kagel, analyst for Janco Partners, an equity research firm in Denver.

Analysts say the financial outlook for both companies should start improving this year and will get much better for the 2007 model year as automotive subscribers nearly double and revenues begin to balance with expenses.

Says Kagel: "The big lift for XM will come in 2007 and 2008 when their factory programs for Nissan and Toyota start to ramp up. Sirius will benefit as Ford and DaimlerChrysler start to increase. The Ford factory install program has been slow to ramp up but is now building momentum."

Ford is offering Sirius as an option on the F-150, Explorer and Mountaineer. Sign-up rates are exceeding Ford's expectations, says Doug VanDagens, Ford's manager of business operations and technical planning for electrical engineering.

"Sirius satellite radio has to rank as one of the most popular technologies we've launched in quite some time," VanDagens said in an e-mail statement.
Challenges loom
Seeking to supply drivers with entertainment and information, XM and Sirius face formidable competitive threats and challenges -- from iPods, HD (high definition) radio and other new technologies. Further competition could arise from Motorola Inc.'s emerging iRadio product, which uses cell phone technology to access 435 Internet channels.

Apple has sold 40 million iPods -- four times the number of satellite radio subscriptions. As more vehicle manufacturers offer iPod connectivity, satellite radio could lose customers.

VanDagens said the live nature of satellite radio coupled with the convenience of iPods has created strong demand for both.

"Our job as a manufacturer of automobiles is to meet all of our customer's needs," he says.

Moreover, XM and Sirius must persuade buyers to continue the service once the initial contract expires. XM says it retains 54 percent to 61 percent of subscribers who get promotional subscriptions, according to its 2005 annual report.

XM spokesman David Butler says XM also had an average monthly "churn rate" of 1.46 percent for 2005. That means 1.46 percent of total subscribers end their subscriptions at the end of each month. XM's most recent figure for total subscribers was about 6 million.

Sirius listed 3.3 million subscribers as of Dec. 31, 2005. Sirius churned about 1.5 percent of its subscribers a month in 2005, down from 1.6 percent in 2004, according to its 2005 annual report.

Says Mark Fitzgerald, senior automotive analyst with Strategy Analytics, a Boston-based multimedia consultancy: "It's a huge gamble. It's incredibly expensive to launch satellites and to add the talent as well."
Automotive growth
XM, which got off the ground first with partner GM in 2001, has an edge over its younger rival with car companies. GM and Honda own shares and have seats on the XM board.

"XM has enjoyed an early lead due largely to its alliance with GM," says Rick Lee, executive director of satellite radio services for GM's OnStar unit.

"Over time, once all OEMs are offering factory-installed satellite radio, each company's factory installation rate will closely resemble the cumulative market share positions of their aligned partners."

DaimlerChrysler bought $100 million in Sirius shares in 2000, but does not own a significant amount of the stock now, according to Sirius' public filings.

XM has contracts with car companies that give it about 60 percent of the satellite radios sold in new cars. Sirius gets the other 40 percent, according to Eileen Furukawa, analyst for Citigroup in New York. XM gets a boost because some of its partners, including Toyota, Honda and Hyundai, are among the fastest growing.

Sirius, with contracts with DaimlerChrysler, Rolls-Royce, BMW and Porsche, may have the advantage in the luxury car market, Kagel says. It also has exclusive contracts with Ford, Mitsubishi and Volkswagen.

Total automotive installations for the 2006 model year will be about 2.5 million, says Kagel. That number will double by the 2008 model year, he predicts.

Whether it's satellite radio, iPods or something else, the next generation of drivers will have the capability of getting everything they want without commercials. Jim Corwin, a Chrysler-Jeep dealer in Hickory, Pa., recently bought an iPod for a young relative.

"That just throws a whole new curveball at the entire entertainment scene," he says. "It really is scary. This is something I've been dwelling on -- how are we going to advertise to this generation who doesn't watch TV, doesn't listen to the radio and doesn't know what a newspaper is?"

605 Posts
We love or Sirius..I installed it along with our new Kenwood Kdc-mp5028,Kenwood components up from and Kenwood 6x9 3ways in the rear..Sounds awesome..
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