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Industry: XM, Sirius Must Help Avoid Market Confusion

2/21/2007 12:23:00 PM Eastern

New York — The proposed XM and Sirius merger received a generally favorable reception by industry members, under the proviso that steps are taken to prevent market confusion in the near term.

Several retailers and suppliers, while encouraged by the benefits of a united satellite radio company, said consumer confusion could hamper sales of current satellite radio receivers.

“One of the key things that needs to happen immediately is there needs to be a clear statement to the public that should they choose a technology, either XM and Sirius, the consumer will be taken care of — where they don’t have to buy something new or additional to receive service,” said Dan Jeancola, merchandising senior VP for Car Toys, Seattle.

Kenwood consumer electronics senior VP Keith Lehmann added, “Yes, there is concern about that [consumer confusion]. The satellite radio companies need to be aware that customers may be fearful and they should promote heavily.”

Most industry members looked favorably upon a satellite radio merger. Steve Giblin, merchandise manager for J&R Music World, N.Y., said, “I would guess it will be good for the business. Sports fans will have access to NFL and baseball, rather than splitting it. On the sports front, it could be a good experience.”

Kenwood is hoping the merger will allow advancement in real-time traffic and other technologies that might be offered by suppliers.

The 44-store chain Audio Express said a combined company “would simplify things. We don’t have to waste time qualifying customers for one service vs. the other,” said purchasing manager Paul Gosswiller. He also acknowledged that there may be a “certain amount of confusion up front because we don’t know how long the merger will take … and the longer it takes, the worse that confusion gets.”

At a news conference on Feb. 20, XM and Sirius said that once the merger is complete, development of dual-platform receivers capable of receiving both services would be placed on the fast track. But owners of current equipment could see more immediate programming benefits without the need for new receivers. An XM program might become available to Sirius listeners and vice versa, said Sirius CEO Mel Karmazin, who would be come CEO of the merged company.

“Let’s say we had a conversation with a content partner who is exclusive, and the merger occurred, and we want to expose that to a wider audience, then we could change that deal from exclusive to shared content so someone driving in either Ford or GM vehicles could access the content, and we can do this in advance of a dual chipset.” Currently Ford radios receive only Sirius, and GM radios receive only XM.

Karmazin offered no specific target date for dual-chip radios, but said, “We think one of the big drivers of demand for satellite radio at retail will be interoperable radios and once we get the approval, we would look to bringing that quickly to market.”

The greatest hurdle to the merger remains approval by Federal regulatory agencies. Published reports yesterday gave the merged company about a 50/50 chance of passing the regulatory process. The NPD Group industry analysis director Ross Rubin believes the chances of clearing that hurdle are better now than they would have been a few years ago.

“Both companies have shown it is very difficult to sustain their operations in the current environment. They are both spending large sums of their operational budget on satellite maintenance as well as content licensing deals.”

Karmazin and XM chairman Gary Parsons said, “We remain confident that regulatory approval will be received and we can close the transaction in a timely manner.”

Karmazin said a definitive merger agreement will be filed “in the coming days,” and documents will be filed in 20 days that will trigger “investigative activity” into the merger by the Justice Department. Within 25 days an application will be submitted to the Federal Communications Commission and the five commissioners will eventually vote “on whether this merger is in the public interest. Will the consumer get more choice and better pricing?”

Karmazin and Parsons affirmed repeatedly that since satellite radio is competing with iPods and music-ready cellphones, HD radio and future technologies such as Wimax and MediaFlo, the competitive climate is vastly changed from that of 1997 when the original satellite radio licenses were granted. The executives stated that the merger would give consumers a wider choice in programming and that pricing for the service would be kept in check because of that competition, and the merged company’s goal of winning new subscribers.

Karmazin said shareholder approval could be completed in four to six months and reasserted his estimate that regulatory approval would be complete by the end of 2007.

Industry members note that many questions have yet to be answered such as the status of current distributors. Directed is now the exclusive distributor for Sirius and Audiovox, the same for XM.

“Nobody is talking about those kinds of details at this early date … for now and quite a while, the hardware will remain pretty much as is and we anticipate doing business ‘as usual,’” said Directed president and CEO Jim Minarik.

The fate of XM and Sirius’ midlevel managers are also yet to be determined. The companies duplicate staff in their product specialists, trainers and manufacturers liaisons that suppliers and retailers deal with on day-to-day business. For now, Karmazin said only that the most talented members of each company will be retained.

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