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September 07, 2006

A Sirius Stab at XM

(BusinessWeek Online Via Thomson Dialog NewsEdge)
Sirius Satellite Radio (SIRI) is stepping up its attack on XM Satellite Radio (XMSR). It's doing so with stilettos -- the Sirius Stiletto, to be exact. The portable radio, due for release this month, is expected to have features that comparable XM gadgets lack.

While Sirius isn't yet saying much about Stiletto, the online Crutchfield electronics catalogue says the device will sell for $349, receive satellite radio broadcasts, and function as an MP3 player that holds hours of programming. The Stiletto will offer up to 100 hours, or 2 GB, of storage, and feature a built-in antenna so users won't have to put it in a dock to download programming.


A comparably priced XM portable also has a built-in antenna, but stores only half as much content. Stiletto also has built-in Wi-Fi capabilities, letting users download content from the Web at cafes and airports. That will make it easier for Stiletto owners to download Sirius online radio channels, including Howard Stern and Martha Stewart content, as well as music through online music services.

Inclusion of Wi-Fi in the Stiletto puts Sirius at the front of a pack of electronics makers expected to feature the wireless broadband connectivity in devices in coming months. Microsoft (MSFT) is expected to include Wi-Fi in its Zune music player. XM wouldn't comment on plans, but it's portable lineup doesn't currently include Wi-Fi capabilities.

A successful launch of Stiletto would be a key turnabout for Sirius, which has had a reputation for lagging behind its bigger rival in technological capabilities by as much as two years. This is the same company that in 2005 introduced the Sirius S50, a new handheld radio that still couldn't receive live satellite feeds -- a function XM devices had handled since late 2004. "Sirius has not just caught up with XM but raised the bar," says Frank Viquez, an analyst with consultancy ABI Research.


Clearly, the Stiletto still has a lot to prove. The model's battery life, quality of reception, coverage, and ease of use will determine whether it can genuinely be called a success. "The Stiletto isn't out in the marketplace yet," says an XM spokesperson. "We are the leader, period."

Not if Sirius has anything to say about it. In May, XM lowered its full-year subscriber forecast to 8.5 million, from 9 million, citing softness in the industry. But in August, Sirius did the opposite, increasing its 2006 subscriber forecast to 6.3 million. Another case of one-upmanship: in March, Volkswagen said it would install only Sirius radios into its autos, ending a four-year arrangement whereby it worked with both satellite players. Viquez speculates that Sirius might have offered Volkswagen a sweeter revenue-sharing deal -- and that it may also be closer to rolling out the satellite video services carmakers crave.

Sirius's latest advances come at a particularly bad time for XM. In a Sept. 5 regulatory filing, XM reported that the Securities & Exchange Commission has asked for documents related to the company's subscriber targets and costs associated with reaching these targets for the third and fourth quarters of 2005. XM believes the subject of the informal inquiry is similar to those raised by a securities lawsuit filed earlier in 2006. The class action alleges that XM misled investors by, for example, promising to hit a subscriber target that it ultimately missed. XM says it's cooperating with the SEC. David Bank, an analyst with RBC Capital Markets, believes that, "whatever the outcome, it shouldn't have a material impact on [XM's] outlook."


XM is also battling a lawsuit by the Recording Industry Association of America over its Inno player. The RIAA says the device works like a music service and therefore XM should pay licensing fees for music recorded by users. "We are expecting the case will be dismissed," says an XM spokesperson.

XM is also butting heads with the Federal Communications Commission. In August, the company suspended production of eight radios after the FCC requested more information about them to determine whether the devices complied with federal radio emission regulations [see, 8/14/06, "XM Tunes into FCC Trouble"]. On Aug. 25, XM announced the FCC gave a green light to three of its radios -- by far the most popular of the eight -- and that its manufacturer partners are resuming production. "We are determining what is the next step with [the remaining five] products," says an XM spokesperson. Sirius faced similar troubles earlier in the year, though on Aug. 10 it announced it's corrected the emission problem.

Taken together, the inquiries could mean "it's likely that XM will be distracted," says Susan Kevorkian, an analyst with consultancy Interactive Data (IDC). "There's an opportunity for Sirius to capitalize on XM being distracted." An XM spokesperson counters, "We are focused on executing our business plan."


Still, Sirius's market-share gains could accelerate in coming months. "They have momentum going," Viquez says. "I think a big defining moment will be right after the holiday season." With Stiletto holiday sales ramping up, and with 2007 car models with Sirius radios rolled out, Viquez believes that Sirius could reach 50% market share as early as the first quarter of next year. By yearend, Sirius expects to control about 42% of the market, where XM will hold 58% share [see, 3/7/06, "Star Potential for Sirius Stock"]. The number of satellite radio subscribers should grow from 9.25 million at the end of 2005 to 34.6 million by the end of 2009, according to Interactive Data.

That's particularly important since both Sirius and XM are still losing money; Bank at RBC Capital Markets expects XM to turn profitable on an operating basis in 2008, a year before Sirius. Shares of both companies have been slumping this year amid concerns over how soon they'll reach profitability. Since January, XM's shares have tumbled 56%, to $12.36, while Sirius stock dropped 37%, to $4.09.


There's a lot riding on the Stiletto. And success will hinge in part on whether and how soon Sirius announces a service to go with the device, akin to the way Apple (AAPL) ties its iPod to iTunes and XM offers Napster music downloads for devices like the Inno. Sirius could roll out its own music service or team up with a partner such as Yahoo! (YHOO) Music, says Viquez.

Meanwhile, XM isn't sitting idly by. At the beginning of August, XM said it would distribute radio content through carrier Alltel (AT) and it recently allied with Google (GOOG) to let advertisers place ads in XM programs.

XM has been taking steps to remove many of the clouds overhanging the company. Over the past two months, XM has also been reorganizing its marketing team. In July, the company added several vice-presidents for marketing. Then, on Sept. 5, it added a dozen more executives to the marketing team, has learned.

But Sirius is gearing up for battle. And like the lethal dagger it's named after, the Stiletto could inflict pain on contact.

Copyright 2006 The McGraw-Hill Companies, Inc., All rights reserved.


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