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Sirius Outlines 2.0 Service

11/04/2010 11:04:40 AM Eastern
New York - Sirius XM's planned 2.0 service will increase bandwidth 25 percent, enabling the satellite-radio broadcaster to offer more programming to next-generation satellite radios without making existing radios obsolete, the company revealed.

Although the company already offers more than 130 channels, the 2.0 service will enable more music and audio channels as well as more data services to new radios, potentially including expanded programming for Hispanics as part of a separate subscription tier, CEO Mel Karmazin said in announcing his fourth consecutive quarterly net profit in the third quarter.

The 2.0 service, due to launch in the fourth quarter of 2011, will also enable new convenience and personalization features.

Because the new service will be available only on new radios, Sirius XM will make it possible to sell aftermarket satellite radios to vehicles with OEM-installed satellite radios. The 2.0 service will also potentially spur replacement purchases of transportable radios, MP3-style headphone portables offering live service, and satellite home tuners.

The first 2.0 radios will be available next fall at retail stores, said operations and sales president Jim Meyer said.

The radios and service, said Karmazin, present "huge upside opportunities for us," noting that the company offers only three Hispanic channels. With 2.0 service, he said, it "would not be difficult" to create a group of 10 to 12 channels devoted to the Hispanic market. The company "has not done a good job at all reaching out to the Hispanic-speaking market," he noted.

When asked whether the launch will turn around the company's declining retail subscriber base in 2011, Myer said, "We certainly hope so." He said he expects the aftermarket products available next fall "to be well-received in the aftermarket, though he and Karmazin noted that satellite-radio subscriptions will continue to be dominated by OEM radios because of the sheer number of OEM satellite radios on the road, including those in used vehicles.

 In addition, the window of aftermarket opportunity will not be open indefinitely, given that Karmazin previously said new 2.0 radios would roll out to new cars "as soon as they are able to incorporate this into their production schedules."

 For the three months ending September, Sirius XM lost 188,884 retail (non-OEM-radio) subscribers compared with the year-ago period and lost 637,188 retail subscribers in the first nine months of its fiscal year. The losses brought its retail subscriber base as of Sept. 30 to 7.09 million out of a total subscription base of 19.86 million. (See table for subscriber-base details.)

In other comments, Karmazin said he hasn't reached an agreement to extend Howard Stern's contract, which expires at the end of the year, and he said smartphone-delivered Internet radio in the car "does represent competition." Internet radio, however, offers no more competition to satellite radio than does terrestrial radio, he contended. Satellite radio and Internet radio will jointly take radio-revenue share from terrestrial radio, he claimed.

 In announcing the company's third-quarter financials, Karmazin contended the company is "stronger than ever." Adjusted total revenues grew 15 percent in the third quarter to $722.5 million and for the nine-month period by 13.4 percent to $2.1 billion. Net income grew for the fourth consecutive quarter to $67.6 million compared with a year-ago loss of $151.5 million. Nine-month net income hit $124.5 million compared with a year-ago loss of $363.8 million.

 Sirius XM also reported third-quarter improvements in average revenue per user (ARPU), the churn rate of self-pay subscribers, and conversions of promotional OEM radio subscriptions to paid subscriptions (see table).

The company previously announced that it expanded its subscriber base for the fifth consecutive quarter during the three-month period ending September, adding more net new subscribers than it did during the year-ago period but fewer than it did in the second quarter.
Sirius XM Subscriber Metrics    
  Three Months Ended Nine Months Ended
  September 30,   September 30,
  2010   2009   2010   2009
Beginning subscribers 19,527,448   18,413,435   18,772,758   19,003,856
Gross subscriber additions 1,952,054   1,606,446   5,693,409   4,325,532
Deactivated subscribers -1,617,327   -1,504,151   -4,603,992   -4,813,658
Net additions 334,727   102,295   1,089,417   -488,126
Ending subscribers 19,862,175   18,515,730   19,862,175   18,515,730
Retail 7,088,562   7,925,904   7,088,562   7,925,904
OEM 12,630,463   10,488,530   12,630,463   10,488,530
Rental 143,150   101,296   143,150   101,296
Ending subscribers 19,862,175   18,515,730   19,862,175   18,515,730
Self-pay 16,335,819   15,456,748   16,335,819   15,456,748
Paid promotional 3,526,356   3,058,982   3,526,356   3,058,982
Ending subscribers 19,862,175   18,515,730   19,862,175   18,515,730
Retail -188,884   -309,972   -637,188   -979,298
OEM 529,798   407,131   1,699,511   492,692
Rental -6,187   5,136   27,094   -1,520
Net additions 334,727   102,295   1,089,417   -488,126
Self-pay 258,105   35,405   631,887   -92,838
Paid promotional 76,622   66,890   457,530   -395,288
Net additions 334,727   102,295   1,089,417   -488,126
Daily weighted average number of subscribers 19,610,837   18,393,678   19,181,040   18,514,041
Average self-pay monthly churn (1) 1.90%   2.00%   1.90%   2.10%
Conversion rate (2) 48.10%   46.20%   46.60%   45.00%
1)      Average self-pay monthly churn represents the monthly average  of self-pay deactivations for the quarter divided by the average number  of self-pay sunscribers for the quarter.
2)      Measures the percentage of vehicle owners and lessees that receive service via OEM satellite radios in vehicle and convert  to become self-paying subscribers after the initial promotion period.
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