A Comprehensive Study of the Satellite Radio Indus

try:TABLE OF CONTENTS
HOW SATELLITE RADIO WORKS5
How XMs System Works6
How Sirius System Works7
TERRESTRIAL RADIO8
SIRIUS SATELLITE RADIO CORPORATION12
History12
Demographics14
Product Offering15
OEM Vehicle Manufacturers Partners16
Hardware Partners17
Financials17
XM SATELLITE RADIO CORPORATION18
History18
XM Satellite Radio Holdings, Inc.19
Demographics20
Promotions20
OEM Vehicle Partners21
Hardware Partners22
Financials22
SIRIUS AND XM; A COMPARISON23
RECOMMENDATIONS29
INTRODUCTION
Would people be willing to pay $12.50/month for commercial free radio beamed right to their car or home. Well two companies and many big investors are betting about $3 billion dollars that people are willing to do just that. In 1997, the Federal Communication Commission (FCC) granted a portion of the S-band spectrum for satellite radio and two companies purchased use of these bands and started the only two companies competing in the satellite radio business today, namely Sirius and XM. Analysts like William Kidd of CE Unterberg Towpin, predict satellite radio will generate about $10 billion a year in revenues by 2007 (McClean, 2001). However, to date neither of these companies has earned a dime. According to industry analyst though, its not whether satellite radio will take off-rather its a matter of how fast. (Helyar, 2004). Despite lofty predictions, satellite radio has some big issues to overcome before it becomes a serious threat to the $19.6 billion per year terrestrial radio industry.

The article that appeared in Fortune entitled Radios Stern Challenge by John Helyar discusses Sirius marketing strategy to not only take market share from the entrenched and free terrestrial radio industry but also to beat its only competitor, XM. The Fortune article presents how a fat and lazy radio industry has failed to react to an eroding listening base and an increasing number of competing technologies. Issues like lack of attention to programming, no on-air talent, and an increase of 166% in the time devoted to commercials have driven listeners away from radio. Teens aged 12-17 spend 11% less time listening to radio compared to five years ago and adults 18-24 spend 13% less time compared to five years ago (Helyar, 2004). The article further discusses that terrestrial radio has much to fear from competing technologies like satellite radio, streaming digital radio on the Internet, and Apples iPod. What terrestrial radio does have in its favor is that its free compared to any of the current competing technologies like satellite radio.
However, satellite radio is banking on a commercial free format to steal listeners away from terrestrial radio. Sirius offers 65 commercial free channels of music and 55 news, sports and talk stations. And the one thing that satellite has over its less lofty competitor is that you cant loose the signal as you drive across America. The two major competitors for the satellite radio listeners are Sirius and XM.
Sirius strategy to beat XM centers around attracting big on-air talent like Howard Stern who Sirius has agreed to pay $500-million dollars over five years. In addition, Sirius has locked up deals with the NFL for $220 million dollars to air every NFL game on Siriuss satellite radio stations. Sirius is spending big money in order to catch up with its only competitor XM.

XM was the first to enter the market and has struck deals with General Motors and Honda to install their receiver in all of its new automobiles. This represents about 50% of its new subscriber base. XM spends about $57 for each of its subscribers compared to the $227 that Sirius spends. However, the fortune article concludes by stating that Sirius threat may not be terrestrial radio or XM, rather the growing number of new technologies poised to cash in like Apples iPod and the digital streaming radio.

To better understand the assertions made in this Fortune article one must first understand the general trends in the current terrestrial radio technology. Then one must understand how satellite radio technology works in general and how XM and Sirius use this technology within each of their respective companies to gain the competitive edge over each other. In addition, the history, company structure, financing, and strategy of both XM and Sirius are presented in order to further understand the two companies. And finally a comparison between XM and Sirius is made so that the reader can understand how the two companies are approaching the problem of starting a satellite radio company.
HOW SATELLITE RADIO WORKS
Most of us have traveled too far in our cars when listening to the radio, to find that our favorite station turns to static and we can no longer listen to it. This is because conventional radio signals can only travel 30 to 40 miles from their source (Bonsor, 2004). Fortunately, similar to television before it, since radio is now available by satellite, there is a solution to this problem. Satellite radio can launch its signal greater than 22,000 miles with extreme clarity and often little or no commercials to interfere with your listening program (Bonsor, 2004). Basically, satellite radio, also known as digital radio, offers uninterrupted, near CD-quality music transferred to your radio from space.

How satellite radio actually works is simple on its surface. According to Silverstein (2004), satellite radio providers take a music, news, or talk station, beam the signal up to a satellite, and overcome the limitations of ground-based transmitters whose signals generally drop off as distance increases. Then make sure the programming is more appealing than traditional radio stations and cut down on the number of commercials in exchange for a monthly subscription fee. However, it is slightly more complicated than this. It took numerous years to develop the cutting-edge technology to make the satellite radio systems used by Sirius Satellite Radio and XM Satellite Radio actually work. Sirius and XM each take somewhat different approaches with their systems, although the end result from a listeners perspective is the same: 100 channels of music, news, sports, and other programs available virtually anywhere in the continental United States.
How XMs System Works
XM Radio uses two Boeing HS 702 satellites, appropriately named Rock and Roll, placed in parallel geostationary orbit, one at 85 degrees west longitude and the other at 115 degrees west longitude. Geostationary Earth orbit (GEO) is about 22,223 miles above Earth, and is the type of orbit most commonly used for communications satellites. XM Radios ground station transmits a signal to these two GEO satellites, which bounce the signals back down to radio receivers on the ground. The radio receivers are programmed to receive and unscramble the digital data signal, which includes the digital audio, the song title, the artist, and the genre of music. All of which are displayed on the radio (Bonsor, 2004).
Since GEO satellites are above the equator, the terminals on the ground must have a good view of the sky to receive signals from them. This posed a challenge for XM, since obstacles on the ground, such as buildings or tall trees, can block listeners traveling in their cars from receiving the GEO satellites signals. Their solution was to supplement their system with a network of repeaters, ground transmitters consisting of antennas on buildings and other sites that receive satellite signals from an optimally placed antenna and retransmit them (Silverstein, 2004). These repeaters are primarily located in urban areas where the loss of the satellite signal most commonly occurs.

Each XM receiver contains a proprietary chipset, consisting of two custom integrated circuits designed by STMicroelectronics and uses a small, car-phone-sized antenna to receive the XM signal (Bonsor, 2004). Each of these XM receivers is equipped to receive signals from both of the Boeing satellites as well as from a repeater simultaneously. Provided one of these sources is available, the radio will play with no interruptions. In the event a signal is briefly unavailable, the receivers also have buffers that store programming for several seconds to ensure continuing programming (Silverstein, 2004).

How Sirius System Works
Unlike XM, Sirius does not use GEO satellites. Instead, Sirius uses three Loral FS1300 satellites in unique elliptical orbits in an effort to avoid the problems presented by GEO satellites (Silverstein, 2004). The elliptical path of these satellites ensures that each satellite spends approximately 16 hours per day over the continental United States, with at least one satellite above the US at all times (Bonsor, 2004). Furthermore, the orbits allow the satellites to appear higher in the sky than XMs satellites, reducing the potential for a listener to be out of range of the satellite signal, thereby allowing Sirius to have a fewer number of repeaters (Silverstein, 2004). Similar to XM, the Sirius system involves programs that are beamed to one of the three Sirius satellites, which then transmits the signal to the ground, where the radio receivers pick up one of the channels within the signal (Bonsor, 2004).
The Sirius receiver includes an antenna module and a receiver module. The antenna module picks up signals from the satellites or the ground repeaters, amplifies the signal, and filters out any interference. The receiver module, which consists of eight chips, then picks up the signal. This chipset converts the signals from 2.3 gigahertz (GHz) to a lower intermediate frequency. Sirius also offers an adapter that enables traditional car radios to receive satellite signals (Bonsor, 2004).

TERRESTRIAL RADIO
Traditional terrestrial radio broadcasting has been around since 1919. Today two of the top broadcasting companies are Clear Channel Communications, Inc. and Infinity Broadcasting Company. Clear Channels history begins in 1972 with the birth of the San Antonio Broadcasting Company. Three years later, the first Clear Channel radio station, WOAI-AM, was acquired it had its own nationwide frequency. In the late 1980s, the Company entered the television business and acquired half a dozen television stations. In 1994 it became listed as Clear Channel Communications, Inc Common Stock and owned 43 radio stations and 16 television stations in 32 markets. Today, the company is headed by Lowry Mays (Chairman of the Board), Mark Mays (President and Chief Executive Officer), and Randall Mays (Executive Vice President and Chief Financial Officer). Randall Mays has either owned or programmed more than 1,376 radio stations throughout his career.

Infinity Broadcasting is a division of Viacom International, Inc. It currently owns more than 185 radio stations, most of which are in the U.S.s top 50 markets. The stations range from news to FM talk, modern rock to oldies, and classic rock to hip-hop and rap. Infinity allows owns 29 of the nations top sports franchises, such as the New York Yankees, New York Mets, Dallas Cowboys, New York Giants, and the Chicago Bears. Further enhancing Infinitys programming exposure is the companys long-standing alliance with Westwood One, which provides stations with news, sports, weather, music, talk and entertainment programming and content, and presents an unparalleled menu of events such as the Olympic Games, NFL football, NCAA basketball, the Grammy Awards, and the Academy of Country Music Awards (Infinity).

The major governmental agency regulating these two broadcasting companies, as well as all the others, is the Federal Communications Commission (FCC). Since 1934, the Federal Communications Act has given the FCC the power to regulate the subject matter broadcasts and administer penalties for noncompliance with those regulations. The FCC is responsible for censoring the media available to citizens. It ensures that foul language and inappropriate and offensive content is not available to vulnerable audiences, such as children. The Commission has the power to issues fines to or revoke the programming licenses of violators who fail to comply with the regulations. One big-name program currently facing persecution for its content is the Howard Stern Show which is broadcast through Clear Channel Communications. In April 2004 Clear Channel Communications was fined a proposed $495,000, for indecent remarks made on the Howard Stern show. This breaks down to $27,500 for each of the eighteen alleged indecency violations; the maximum allowable fine. The Commission fined Clear Channel at the maximum amount allowed by law because of Clear Channels history of airing indecent programming (Dietz, 2004). When the Howard Stern shows producers and creators refused to make assurances that the content and language would be cleaned up, Clear Channel terminated the show.

Stern is currently making plans to air his controversial show on Sirius Satellite Radio. Stern can now revel in his escape from the FCCs regulations since satellite radio does not fall under the FCC jurisdiction. Not only will Sternbe able to say whatever he wants, he also plans to launch an assault on all his terrestrial radio enemies, namely Clear Channel and Infinity. Sirius cant wait for the shows January 2006 debut to boost subscriber growth and really get the system on an aggressively competitive level with traditional terrestrial radio.

The satellite stations arent too worried about the competition, because they know theyve at least won the battle over commercials. Although their talk, sports and news station do have commercials, both Siriuss and XMs music stations are aired commercial-free. Satellite radios costs, such as salaries and technology and equipment are funded by subscription fees — $12.95 a month for Sirius and $9.99 a month for XM plus satellite radio and antenna purchases, and advertising spots on the other stations.

Terrestrial radio has a more difficult job when it comes to funding and therefore has increased commercial play time. Unlike most other media channels, radio is free to listeners, so there are no subscription fees to pay the bills. Add rising costs to that, and the only solution is to increase commercial-time, while trying to cut costs in other areas. Many times, stations will replay pre-recorded shows or pre-recorded contest call-in winners. This saves at least a days salary for each program deejay and attracts more listeners because there appear to be more contest winners than there really are. The remaining time is devoted to music and commercials.

Because of the increase in commercial time, it is not unusual for stations to play up to 15 or 20 minutes of ads per hour.
Among advertisers choicess, radio is seen as one of the best mediums for promoting a product or service. A 2001 study by Arbitron, Inc., an international media and marketing research firm found that radio leads in the criterion advertisers consider to be most important for selecting a medium: the ability to reach a specific consumer (McWhorter, 2001). Based on the content of the program being aired, it is reasonably simple to determine the age, gender, political party, and/or preferences of the majority of the listening audience. This allows advertisers to specifically tailor commercials for their target audiences. Target marketing and the lack of visual requirements for radio spots also mean that air-time costs a lot less than other mediums for advertising, such as television. Cost efficiency is the number two reason many advertising firms choose radio, according to the same study. The economic efficiencies of radio advertising enable you the advertiser tosustain a longer on-air presence and maintain top-of-mind awareness with you target audience (Vasey, 2004). Because of the reduced advertising costs, more commercials are made and more time must be devoted to the increased number of commercials and the increased number of re-aired commercials. Until terrestrial radio stations can come up with other ways to fund programs, they have no other choice than to play commercials
To further combat an eroding listener base terrestrial radio is developing a means to broadcast a digital signal. More than 140 stations across the country are developing and testing new digital terrestrial systems. Digital signals will be sent on the same frequencies as the AM and FM stations. iBiquity Digital Corp is the leading the development and testing of the new digital radio technology. iBiquity was born in August 2000 as the result of a merger between Lucent Digital Radio and USA Digital Radio the leading AM and FM digital broadcasting technology developers. IBiquitys goal is to commercialize digital radio and provide audiences with CD-like sound and wireless data servicesand to assist broadcasters in making the transition to digital in a cost-effective manner (iBiquity.com). The actual digital radio receivers were first introduced to the market early this year. Prices run about $200 and up for a digital car radio, but are expected to start dropping within a few months. With the required digital radio, listeners will receiver information about a songs title and artist, as well as stock updates, news, weather, and local traffic.

Although terrestrial radio does seem to be reacting to the competition from satellite radio and other technologies like the iPod, it still is number one in the medium. Commercial play is getting longer due to the fact that terrestrial radio costs are going up and there does seem to be a migration of on air talent like Howerd stern, but terrestrial is the entrenched technology with more then $19.6 billion dollars in annual revenue compared to satellite radios collective 2003 revenue of $111.6 million dollars. Satellite radio will have a long way to go before it seriously threatens terrestrial radio.

SIRIUS SATELLITE RADIO CORPORATION
History
Long before Sirius was the Sirius Satellite Radio Company, it was known as CD Radio Inc, which started in 1990. Robert Briskman, a former NASA engineer and former chief at GEOstar, designed the core technology for satellite radio. Briskman and another former GEOstar employee started Satellite CD Radio Inc. However, the company really didnt take-off until David Margolese joined the company as the first CEO (McClean Fortune Magazine Jan 22 2001).

David Margolese has a long history in the telecommunications industry. David was a Canadian who dropped out of college in 1978 to start a Vancouver based paging company. Margolese purchased licenses for Canadian cellular phone rights and joined forces with Ted Rogers, a well know corporate raider. Together they started what is now known as Rogers Wireless, Canadians largest cellular phone company. During the late 80s, Margolese sold his stake in Rogers Wireless to become a venture capitalist. In 1991, Margolese joined CD Radio Inc as their CEO and president.

In 1994 CD Radio Inc changed its name to Sirius Satellite Radio. The early intentions of the company were to offer the U.S market a subscription based satellite radio system. This system would offer 30 commercial free music channels at near CD quality and 20 other channels with all news, sports and talk (LexisNexis). In 1994 Margolese predicted the company would be operational by 1997 and would cost around $500 million dollars (McClean Fortune Magazine Jan 22 2001). In retrospect Margolese was not even close to accurately predicting the amount of money Sirius has spent so far.
In 1997, the FCC auctioned off the rights to a portion of the S band (satellite) frequency. Sirius won the auction for one of the two licenses, for $83.4 million with the second license going to what now is called XM Radio (Corrigan, 1997). A month after sealing the deal for the S band licenses, Sirius was working with Space Systems/ Loral to design four state of the art digital audio radio service (DARS) satellites for launch in 2000. Three satellites would orbit the earth and be the backbone of the satellite radio industry for Sirius, while the fourth would sit on the ground and be a spare if needed (Krebs, 2004). Sirius joined up with Agere Systems, Inc a world leader in semiconductors and networking, to design and produce its chips for all its receivers. Just this year Sirius and Agere released its second-generation chips, which made plug and play receivers possible (Electronic News, 2003).

It then set up its corporate headquarters in Midtown Manhattan in a 37-story building designed by Margolese. The ultramodern headquarters cost about $38 million to build and presents sate of the art studios and broadcasting equipment. Sirius does a majority of its broadcasting from this location, but they also have smaller broadcast studios in Los Angeles CA, Memphis TN, Nashville TN, New Orleans LA, Houston TX and Daytona FL this as they say, brings SIRIUS listeners in touch with the centers of music, entertainment and information across America (Sirius, comp.info). This assortment of locations and diversity allows for some 120 channels, 65 channels of which are 100% commercial free music and 55 channels which are all talk, sports and news. With major musical, talk and sports talents such as Howard Stern, Eminem, Lance Armstrong, and Bam Margera (Sirius). With multi studios and numerous well-known talents, has allowed in just a few years satellite radio has launched a multi-billion dollar a year industry with numerous way for future growth (Sirius, comp.info).
Demographics
Sirius is targeting the more than 200 million people that still tune in to AM/FM radio (helyar, 2004). In the past few years studies have shown that across all age groups, weekly listening has fallen 8% (Haylar, 2004). While XM has over 2 million subscribers Sirius is behind the ball, with only 800,000 subscribers. They have invested heavily in bringing Howard Stern to Sirius because of his 12 million devoted followers, in hopes they will become a member. However, disc jockey talent like Howard Stern is not enough to allow Sirius to become a serious player in satellite radio.

Sirius main goal is to expand subscriber base since this is the primary source of revenue for the company. As of Sept 30, 2004, Sirius had 662,289 subscribers that pay an average of $11.15/month for commercial free radio (Sirius Quarterly Report Sept 30, 2004). Over the past five quarters Sirius has added about 500,000 new subscribers with an average deactivation rate or churn rate of 2%. For the prior two quarters ending Sept 30 2004, the churn rate was 1.2% and 1.5% respectively suggesting a healthy sign for the company. On November 24, 2004 Sirius announced it had signed up 800,000 subscribers (Clendenning, American Intelligence Wire Novemer 25, 2004). Bob Peck of Bear Stearns states that Sirius is poised to achieve one million subscribers by the end of 2004.
Product Offering
Sirius offers 99 individual 100% commercial free music channels. The music section is broken into numerous genres such as Pop, Rock, Country, Hip-Hop, R&B/Urban, Electronic/Dance, Jazz/Standards, Classical and Latin & World. Each of these groups is then broken down into various channels ranging from 3 to 17 channels. They also offer 8 dedicated sports channels were you could tune in anytime to hear the latest scores or up to the minute sports news. The major partnerships within sports are the National Football League (NFL), National Hockey League (NHL), and also college sports with all the big conferences such as PAC 10, SEC, Big Ten, Big 12 and Big East. They additionally offer 14 channels of worldwide news coverage. With service from many of the biggest well respected names in the world such as CNBC, Bloomberg Radio, CNN, Fox News Channel, NPR Now and NPR Talk, PRI Public Radio World, Weather Channel Radio, C-SPAN Radio, BBC World Service and World Radio Network. Sirius offer 22 channels for talk and entertainment with comedy to politics by way of partnerships with, Radio Disney, Our Time, Wisdom Radio, Radio Classics, Court TV, Discovery Channel Radio, E! Entertainment Radio, WSM Entertainment, Trucking Network, ABC News & Talk, SIRIUS Patriot, SIRIUS Right, SIRIUS Left, Air America Radio, Maxim Radio, Cracked Up Comedy, Raw Dog, SIRIUS Talk Central, SIRIUS OutQ, EWTN Global Catholic Network, The Word Network, Radio Catolica, Mundial, Hispanic Talk and BBC Mundo. That gives Sirius with 143 channels that of a wide spectrum, this gives them a lot of different ways to target their markets.

OEM Vehicle Manufacturers Partners
Sirius has made strategic alliances with automobile manufacturers to install their satellite radio receivers in new cars. The biggest relationship Sirius is banking on is with Diamler Chrysler and Ford. Diamler Chrysler has agreed to install Sirius tuners in 500,000 automobiles which represents about 12% of its annual production. Other manufacturers have also struck deals with Sirius. BMW of North America will make Sirius Satellite radios available as a factory installed option on the 2006 model year BMW 3 series for about $595. This will come with a one-year subscription to Sirius Satellite Radio. Mercedes-Benz will design its 2005 SKL350 with a fully integrated satellite radio which will be available as a dealer-installed option. The price will be about $679 and will include a one-year subscription to Sirius Radio. Volvo, Chrysler, DiamlerChrysler, Ford, Dodge, and Audi will all offer some of its models with Sirius radios as options.

However, one the most strategic moves Sirius has made lately was an alliance with Hertz Rental car. Hertz will offer Sirius satellite radio in 53 of its major city locations. This will have a two-fold effect for Sirius. First it will boost its subscribers through the Hertz agreement. But secondly, it will give drivers of Hertz rental cars an opportunity to try out Sirius satellite radio with out committing to a purchase. Hertz is the largest and best-known rental car company in the world. This gives Sirius serious exposure and publicity.

Hardware Partners
Sirius does not manufacture its own hardware. Rather, Sirius has made strategic alliances with many different hardware manufacturers. Sirius has partnered with companies such as Delphi, the worlds largest producer of audio systems for automobiles, Clarion, Audiovox, JVC, Kenwood, Sanyo, and Kenwood. Each of these companies has either marketing or manufacturing expertise that Sirius requires.
This will allow them to have access at the millions of new car and truck buyers each year. Also Sirius has what they call plug and play units where the receiver can be taken and moved from the automobile to the home with every little effort or cost. Finally, Sirius has made itself available to DISH Network satellite TV. This has made Siriuss service available to over 10 million satellite TV viewers. All of these marketing tactics will lead to a much more rapid growth and increase Siriuss number of subscribers at hopes of grabbing a bigger piece of the market share of satellite radio.
Financials
Launching a satellite radio company requires a tremendous amount of cash. During the month of September 1994, Sirius made its first initial public offering of 2 million common shares at $10 per share (LexisNexis). It now has over one and a quarter billion shares outstanding through five total public offerings. Through these five public offerings Sirius has produced raised some $500 million for the company. Also the company insider executives hold over 17 million shares in the company accounting for almost a hundred million in value. Sirius has found two major institutional investors to finance the company for its future. The first investor is DaimlerChrysler who invested $100 million and the second investor is Ford Motors who invested $20 million. While this is an incredible amount of cash for a company to raise, Sirius still has $500 million in holdings in cash.

Bob Peck of Bear Sterns upgraded Sirius stock on Sept 29, 2004 and has projected the stock will hit $5/share by year end (American Intelligence Wire Christine Romans Nov 1 2004). David Kestenbaum an IRG Research Analyst raised his year end price target from $4.5 to $6.75 (American Intelligence Wire Nov 23, 2004). On November 26, 2004 Sirius was trading at $6.51/share, exceeding some analyst estimates.
Analysts have given credit to Sirius for the subscriber gains and expanding Sirius subscriber base is of paramount importance for the survival of the company. Sirius has lowered its breakeven estimate of 3 million subscribers to 2 million subscribers (Lexis Nexis). Although Sirius does derive revenue from activation fees, sales of advertising on non-music channels, and from direct sales of its radios and accessories, subscription revenue remains the primary source of revenue for the company. Sirius has recently pledged to spend $700 million dollars to upgrade programming.

XM SATELLITE RADIO CORPORATION
History
XM began as American Mobile Radio Corp. (AMRC) founded June 6, 1992. The intention was always the same, To provide a multi-channel, nationwide audio service with high-quality digital sound and an unprecedented variety of programming (XM History). The opportunity to offer such a product materialized on April 1, 1997 when the Digital Audio Radio Service (DARS) and the Federal Communications Commission (FCC) auctioned 12.5 Mhz of S ban (Satellite) frequency. The bidding began at $8 million and went on for days. Bids eventually soared above $80 million; the winners were CD Radio, Inc. and AMRC (Behrens, 1997). After the initial investment of $89.9 million, AMRC was faced with the daunting task of pioneering an entirely new industry and managing immense start up cost.

Approximately one year after having acquired the license to broadcast satellite radio AMRC contracted with Hughes (now Boeing Space Systems) to create and launch the two 702 satellites, Rock and Roll previously mentioned. Boeing is an industry leading aerospace company who specializes in commercial and military aircraft, satellite, and rock manufacturing. For development of the receivers and chip sets, AMRC enlisted ST Microelectronics. ST Microelectronics is a company specializing in semi-conductors and experience with flash memory and peripherals. It was ST- Microelectronics who developed the first ever chip set for automotive uses (XM History).
XM Satellite Radio Holdings, Inc.

AMRC was in a race with the only other company with license under DARS and the FCC, CD Radio, Inc. The company began to evolve, naming Hugh Panero to CEO & President, then changing the company from AMRC to XM Satellite Holdings, Inc. (XM). Start up costs were being assisted by subsidy from private investors, like a $250 million dollar investment from companies like General Motors (GM), Direct TV, and Clear Channel Communications. XM was in need of additional funding to continue with its mission. It was on October 5, 1999 that 10,000,000 shares were offered to the general public at $12ea., as XM launched its initial public offering. Soon after XM moved into what is now there corporate headquarters, a 150,000 square foot building in Washington, D.C. that is state of the art and is equipped with 82 all-digital studios. This facility along with broadcasting facilities in Nashville TN, Boca Raton FL, Southfield MI, and Yokohama Japan provide XM customers with over 120 channels of programming. They began developing an in-house talent pool and assembled a member team that they claimed would, bring the nation a revolutionary new audio experience. (XM History). This sparked interest in partnerships with hardware manufacturers, automobile manufacturers, programming companies, and investors.
Demographics
XM is targeting 200 Million automobile and truck drivers and home radio users in hopes of capturing the declining terrestrial radio users (XM Corp Info). An obvious play on the 221 million cars on the road in the US last year, XM has established Original Equipment Manufacturer (OEM) relationships with a number of automobile companies. XM has reason to believe that customers are willing to pay for the hardware and monthly service fees to have the next level of audio broadcasting. With 1.37 million users subscribing as of January 1, 2004, the customer base is continually growing and reported to have exceeded 2 million to date. XM has programming that appeals to all consumers though various genres of programming and an increasing number of hardware configurations.
Promotions
XM has 121 channels of music, sports, news, talk, entertainment, and traffic and weather. XM has partnered with some of the largest broadcasting companies in the world, Clear Channel Communications and Radio One. The 68 channels of music offerings are all commercial free and vary by genre and range from Country, Hits, Jazz, Urban, Christian, Rock, Classic, Latin, Dance, and Decade specific. In addition to the traditional music offering, XM offers a wide variety of sports programming from NASCAR, Major League Baseball, Motor Racing Network, ESPN, Fox News, Atlantic Coast Conference, PAC-10 Conference, and Big Ten Conference College Sports. To provide a wide offering of 33 world and national news programs, XM has partnered with CNN, Fox News, ABC News and Talk, The Associated Press, The Weather Channel, CNBC, National Geographic, Bloomberg, MSNBC, BBC World Service, and XM Public Radio. For relief on those long holiday trips to visit relatives, XM offers kids programming from Radio Disney and XM Kids. The light hearted have comedy at their fingertips with XM Comedy, Laugh USA, National Lampoons and Extreme XM. Talk Radio is often a welcome retreat for morning commutes and XM is offering a variety of channels including Discovery Channel Radio, E! (Entertainment) Radio, Sonic Theater, Radio Classics, Ask?, America Right, American Left, MTV Radio, VH1 Radio, The Power, Family Talk, and Open Road. For the customers convenience XM offers 21 channels of in-depth traffic and weather reports for specific metropolitan areas available 24 hours a day. The latest arrivals to XM are Premium Channel offering at an additional subscription fee of $1.99-$2.99/mo. Shock Jocks, Opie & Anthony once removed from the airway by the FCC now have their own station called High Voltage with XM. The gentlemens magazine Playboy has a channel offering mature programming.

OEM Vehicle Partners
XM pioneered the automotive application for satellite radio with their first relationship with General Motors (GM). Currently models from Buick, Cadillac, Chevrolet, GMC, Oldsmobile, Saturn and Pontiac are offering XM Satellite Radio. GM expects to have XM available on all its models in the next two years: (XM Corp Info). This type of relationship has expanded to include Nissan/Infiniti, Toyota/Lexus, Honda/Acura, VW/Audi, Subaru, Suzuki, and Isuzu. At this time OEM product accounts for an approximate 50% of XMs subscribers and a growing portion of their business (XM Corp Info).

Hardware Partners
XM began providing chip sets to partnered hardware manufacturers for development of mobile, automotive, and home applications. They developed hardware partnerships with companies like Delphi, Sony, Alpine, Audiovox, Blaupunkt, Clarion, Panasonic, Sharp and Sanyo, to name a few. They are broadcasting to mobile receivers called MyFi, a product of Delphi and is similar what the Walkman was to the cassette. XM has developed adapters for home and automobile for various applications and degrees of mobility with the above mentioned manufacturers. These products are available though a variety of retailers including Best Buy, Car Toys, Inc., Circuit City, Crutchfield, Good Guys, Sears, Tweeter, Sound Advice, Mobile One, and Ultimate Electronics.

Financials
Although XM has an enterprise value of $7.76 Billion, their operating expenses are substantial. Fiscal year 2003 XM experienced operating losses of $454 million which more than outweighed the $92 million in revenue. Despite the $163 million in operational losses, the trend in revenue is favorable considering they finished 450% of 2002 (20 million) and even more significant growth from 2001. The natural assumption would be that such a trend in revenue would be mirrored in the operating expenses. The operating expenses grew only 18% from 2002 to 2003. If such growth continues, XM may find that their net-income is very much in the green and eating away at the long term debt they have incurred.
Their current ratio of 1.636 is largely the result of $418 million in cash on hand. XM has $1.5 billion in total assets and only a small fraction of which are intangible. The company is combating large amounts of debt, both short and long term. XMs long term debt is $743 million and their short term debt is $39 million. Despite the immense long-term debt the company maintains a Debt to Equity Ratio of 1.706. This long term debt is most likely caused by investments in technology, high start up costs, satellite purchases, investments in technology, as well as the cost of facilities and equipment.
XM may have been off to a bit of a bumpy start with a significant start up cost and large overhead for such an exploratory business venture. They are now starting to build momentum and show a significant return on the early investments.
SIRIUS AND XM; A COMPARISON
The battle between Sirius and XM is reminiscent of many of the battles from the past like Coke versus Pepsi, VHS versus Beta, or IBM versus Apple. Currently Sirius is the underdog and spending heavily to make-up the large gap that exist between the two satellite contenders. Sirius made the fatal mistake of allowing XM to launch its satellite product one year ahead. This has allowed XM to gain advantage in many different areas including subscriber base, automaker relationships, strategy, brand name recognition, and overall financial health.

Sirius was not always playing catch up to XM. Sirius was founded in 1990, two years before XM, Sirius went public in 1994, five years before XM, Sirius was the first to secure the S- Band FCC license, and Sirius was the first to launch its satellites into orbit. Sirius ran into trouble in the development of its microchip that was needed for the radio to communicate with the satellite. Agere, a spin off of Lucent technology, was the developer of this chip. They ran into technical problems developing the communication microchip and fell more then a year behind allowing XM to catch up and pass Sirius. This mistake has allowed XM to acquire more then three times the number of subscribers compared to Sirius.

Wall Street has decided the key performance indicator for satellite radio companies is subscriber gains (Romans and Clarkson, 2004). Right now, the strategy for both XM and Sirius is to add subscribers and both companies have committed to spend collectively $1.35 billion to gain the coveted subscribers (Tsao, 2004). On November 24, 2004, Sirius announced that it had over 800,000 subscribers (Clendenning, 2004). Between September 30, 2003 and September 30,2004 Sirius added about 500,000 subscribers compared with the 1,566,000 subscribers that XM added during the same time period. Sirius has committed to achieve one million subscribers by the year-end. However, XM still leads Sirius in subscribers three to one (Helyar, 2004). One contributing factor that may sway potential subscribers is Sirius $12.95 monthly subscription price compared to XMs $9.25. The higher subscription costs required by Sirius are reflected in its higher subscriber acquisition cost.
XM spends about $57/subscriber in subscriber acquisition cost compared to the $229/subscriber that Sirius spends. Sirius subscriber acquisition costs have declined from $522/subscriber a year previously (September 30, 2003) to its current $229/subscriber as of September 30, 2004. During the same period XMs subscriber acquisitions cost declined from $79/subscriber to $57/subscriber. Subscriber acquisition costs include subsidies paid to radio manufacturers, automakers, retailers and chip set manufacturers and commissions paid to retailers and automakers as incentives to purchase, install and activate satellite radios (Sirius Satellite Radio Inc. Quarterly report ending Sept. 30, 2004. ). Subscriber acquisition costs do not include advertising.
The higher subscription activation rates paid by Sirius reflects the higher dependence Sirius has on retail outlets like Radio Shack and Best Buy to sell its products. XM keeps its subscription activation rates low through a unique deal it has with Honda and General Motors. The radios are activated when the automobiles are manufactured and most Honda and General Motors cars come with a free three-month trial subscription. Therefore XM is less dependent upon third party retailers. However, it is likely that as Sirius subscriber rates continue to grow, Sirius will have more bargaining power with retailers and therefore can reduce subscriber acquisition rates further
The main driver for subscriber growth is the relationship the two satellite radio companies can establish with the automobile makers. The automobile is the place that most people will listen to satellite radio. This is an area where XM is rewarded heavily for being first to market. According to David Kestenbaum, an analyst at Independent Research Group, the deals that XM established with Honda and General Motors (GM) came sooner then the deals that Sirius made with Diamler Chrysler and Ford (TSAO, 2004). Honda and GM are making a strong marketing push to promote the XM satellite radios that are installed in many of their models. While neither Ford nor Daimler Chrysler have made satellite radio a priority and unfortunately Ford and Daimler Chrysler are amongst the weakest players in the auto industry (Tsao, 2004). However, Sirius is working to strengthen its relationship with Daimler Chrysler who will install Sirius radios in over 500,000 units or about 12% of Daimler Chryslers production (Tsao, 2004). The key to gaining market share will depend heavily on the relationships with the car companies and it seems that XM has gained considerable ground in this area.

Sirius and XM diverge significantly in their respective strategies to gain market share. Sirius seems to be focusing its resources on programming while XM is focusing on the technology side satellite radio.

Sirius has made some bold moves that have gotten the company significant free publicity. Sirius signed Howard Stern to a $500 million dollar deal. Sirius is counting on at least 30% of Howard Sterns 12 million terrestrial radio listeners to sign up for its satellite radio subscription. That is a lot of subscriptions and could easily move Sirius ahead of XM. The Howard Stern deal has also given Sirius some significant publicity that has catapulted Sirius brand name recognition. A month after making headlines with the Howard Stern deal, Sirius made headlines again with the recruiting of Viacoms president Mel Karmazin to be the new CEO. Presumably Sirius brought Karmazin aboard because of his ability to attract talent and drive programming. Again Sirius, received a large amount of publicity and sent a signal that Sirius is focusing its strategy on recruiting on-air talent and signing contracts for popular programming. Sirius signed a seven-year $220 million dollar deal with the NFL to broadcast every NFL football game on Sirius satellite radio.
This is in contrast to XMs strategy which seems to be focusing on technology. XMs CEO and President Hugh Panero is focusing XMs resources on developing its technology to put satellite radio wherever people will listen. XM was named product of the year by Fortune, invention of the year by Time, and the best of whats new by Popular Science in 2001. In addition, XM has raised the technology bar again in October 2004 when it announced that it was launching the first hand held portable satellite radio, the XM MiFi. Hugh Panero announced to Reuters News Wire that XM will set its sites on merging satellite radio and mobile phone service (Levine 2004). Panero is targeting 5 years to merge the two technologies.
Financially XM seems to be in a better position compared to Sirius. Both XM and Sirius are spending vast amounts of money as it struggles to make a profit. XM states that it will break even sometime in 2005 (Tsao, 2004) and is already generating a positive cash flow as seen in table 1. Sirius believes that the break-even point for them will be somewhere around 2 million subscribers and are still not generating a positive cash flow. In the third quarter of this year, XM reported a $118 million dollar loss on $65 million in revenue giving it a return on sales of 1.8. Sirius reported a third quarter loss of $169 million on $19 million in revenue giving it a return on sales of 8.86. In addition XMs profit margin is 6.7% while Sirius actually looses money on it sales. However XM is in a weaker debt position as reflected in XMs and Sirius debt ratio of 0.76 and 0.36 respectively. A comparison of the current ratio shown in Table 1 also indicates that Sirius is more liquid then XM. This is most likely due to the $321 million Sirius recently raised in a common stock offering. Table 1. also shows a staggering 286% annual revenue growth for Sirius compared with 95% for XM. However, Sirius is operating from a much smaller financial base and the 285% only represents $14 million dollars compared with XMs revenue growth of $32 million dollars for the same period.
One area that neither the literature nor analyst addressed was the vulnerability the companies have with their satellites. Sirius is obviously more vulnerable since it requires three satellites to broadcast its signal compared to the two required by XM. Obviously three satellites require more maintenance costs the then two that XM utilizes. However, both companies have fairly new satellites so this may not be a differentiating factor yet.

Table 1. A Comparison of Financial Ratios and other financial indicators between Sirius and XM. All financial parameters were calculated using September 30, 2004 quarterly reports (Sirius Satellite Radio Inc quarterly report ending Sept 30, 2004) and (XM Satellite Radio Holdings Inc. quarterly report ending Sept 30, 2004).
Financial ParameterSiriusXM
Change in Cash as of September 30, 2004(116,392)51,041
Current Ratio3.451.63
Debt0.360.72
Return on Sales(8.86)(1.8)
Return on Assets(0.1)(0.07)
Return on Equity(0.16)(0.286)
Profit Margin*(1.09)0.067
% Increase in Revenue over the last four quarters286%95%
Cost to Acquire a Subscriber**22957
* The profit margin reflects and average of the last two quarters, September 30,2004 and June 30, 2004
**XM Satellite Radio Holdings Inc. Quarterly report ending Sept. 30, 2004., Sirius Satellite Radio Inc. Quarterly report ending Sept. 30, 2004.
XM certainly shows a significant financial advantage over Sirius in that it has a positive cash flow and will achieve the break-even point much sooner then Sirius. This will likely give XM an advantage with Wall Street as it raises cash to fund its growth. Sirius is betting big on programming while XM is betting on its technology. It is difficult to discern at this point which company has the right strategy, but better programming seems like a better strategy compared with developing technology. Any third party can develop the technology if the revenue is exists. Additionally XM has established good relationships with automakers Honda and GM who have significant market share in the auto industry and are committed to promoting XMs satellite radio as a means of boosting its auto sales. It is not clear whether there is enough market share for two satellite radio companies. However, it seems like there is little to significantly differentiate the two companies and therefore it is likely a market consolidation will take place. Neither company use a similar technology platform making it difficult for third party innovators to improve and further the technology similar to how software innovation drives personal computer technology. Both XM and Sirius have sound strategies that seem to have a good chance of working. However as the Fortune article pointed out, the biggest threat to Sirius may not be XM but rather other technologies like the high speed internets streaming radio and Apples iPod.
RECOMMENDATIONS
The United States has many choices for the consumer to dial into when choosing what to listen to. The one advantage satellite technology has over land based technology like the internet or terrestrial radio is that no infrastructure is needed. To have satellite radio you dont need miles of cable or radio stations in close proximity. Therefore, we recommend that Sirius should focus on developing countries like China or South America where a standard infrastructure does not exist. Even parts of Europe have remote population that would welcome satellite radio.
XMs strategy of putting satellite radio wherever someone might listen is a very sound one. Sirius should also adopt this philosophy. Once it has significant on air talent it will need to expand into new markets like cell phone or even Dish TV where a signal for radio can be beamed into a high definition TV. On Demand seems to be a very big market for the cable industry. This may be an area where Sirius could really gain listenership. The idea would be people could use satellite radio similar to a CD player by choosing to listen to an artist at the time of their choosing.




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