| LOS ANGELES
LOS ANGELES May 30 Whether the two largest
satellite radio companies merge or not, the future of the
industry is riding on automotive contracts at a time when
competition for in-car entertainment is increasing.
Sirius Satellite Radio Inc.'s (SIRI.O) bid to buy XM
Satellite Radio Holdings Inc.XMSR.O for $4 billion would help
the two companies cut losses, compete more effectively and turn
profits faster, the companies have said. But they have also
stipulated they don't need the deal to survive since they
already have contracts in place to install millions of radios
in new cars in coming years.
To date, neither satellite radio provider has yet made a
profit. The companies have borrowed heavily to launch their
businesses and establish costly contracts with celebrity
personalities such as Oprah Winfrey and Martha Stewart, and
sports franchises like Major League Baseball.
On a stand-alone basis, analysts project that Sirius will
not post a profit until 2010 and XM not until 2011, according
to average forecasts from Reuters Estimates.
Both XM and Sirius expect the lion's share of their
business to come from automotive deals as retail continues to
soften. By 2012, upward of 75 percent of new passenger vehicles
sold in the United States are expected to have satellite radios
installed, versus 40 percent now, according to Egil Juliussen,
analyst with Minnesota-based Telematics Research Group.
"The in-car experience is the most important market for us
and will be for the foreseeable future," said David Frear,
chief financial officer of Sirius, which added 2.7 million
subscribers in 2006, with 42 percent from automotive channels.
For XM, 2006 was the first year it added more new
subscribers through automotive channels than retail.
"We expect the trend to continue, validating our early
automotive-centric distribution strategy," a company spokesman
While carmakers say they remain squarely behind the
satellite radio concept, citing good demand, some investors are
concerned about competition from in-car digital music players
such as iPods, free high-definition digital radio and other
Stifel Nicolaus analyst Kit Spring said he expects
satellite radio to attain a level of 75 percent penetration by
2012, but added that investors are growing nervous.
"Investors are seriously doubting those penetration metrics
due to fears that car companies may install iPod jacks
instead," he said. "People were absolutely sure two years ago
satellite radios would be standard and now they're unsure."
Other analysts cite concerns about the rate of conversion,
the level at which drivers choose to subscribe to satellite
radio service at the end of free promotions for installed
"It's not a slam dunk for satellite radio," said Phil
Magney of Telematics Research Group. "It might well be that 75
percent of vehicles are enabled for satellite radio, but the
question is whether 75 percent will subscribe."
To be sure, officials from carmakers DaimlerChrysler AG
DCXGn.DE and General Motors Corp. (GM.N) say satellite radio
is a keeper.
"We would definitely say that consumers have latched onto
this and we see this as a technology that's going to be
around," said Rick Lee, executive director of satellite radio
services for OnStar, a division of GM.
But April Horace of Janco Partners believes the auto
companies may take a hard look at their satellite radio
commitments halfway through current multi-year deals.
"At this point, the automotive roll-out of satellite radio
is pretty locked up for the next few years. But, by about 2010,
carmakers will look at the conversion rates and consumer
satisfaction to decide whether or not to renew," she said.
Jonathan Jacoby, analyst with BankofAmerica, recently cited
concerns about conversion rates for both companies. "Lack of
transparency on conversion makes it difficult to model
longer-term subscriber numbers," he wrote in a Sirius note.
He also cited the conversion rate as a concern for XM,
after falling to 51.5 percent in the first quarter from 52.4
percent in the fourth quarter.
"We recently lowered our long-term OEM conversion rate
assumption for XM to 45 percent from 50 percent given our
belief that higher radio installation rates could pressure
conversion rates lower," he said.
Tim Farrar, an analyst with TMF Associates, said he
believes that traditional broadcast radio, combined with iPods
and similar devices, will prevent satellite radio from ever
serving more than 20 percent of the estimated 250 million U.S.
cars on the road.
"It's not impossible for them to survive without merging,
but unless penetration goes a lot further than 20 percent,
their profitability will be somewhat limited," he said.