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XM Outlines Strategy to Boost Retail Subs

7/27/2006 02:11:00 PM Eastern

Washington — Admitting that XM Satellite Radio faces a number of regulatory and operational issues, CEO Hugh Panero told Wall Street analysts today the company will prevail.

Panero said XM will “navigate through these problems with the focus and determination that enabled us to launch the satellite radio industry.”

Looking at the retail market share, XM’s net new subscriber additions in the second quarter were down 50 percent, compared with the same quarter last year, or 168,487 compared with 315,888. (For additional financial and subscriber data please see XM Posts Q2 Sales Gain, But Increased Loss).

The company blamed the softness on overall weakening in satellite radio retail growth, delays in the release of XM/MP3 players and shortages caused by the Federal Communications Commission (FCC) investigation into products as well as operational issues.

“Our competitor captured share … We find this unacceptable, and we plan to gain share,” said Panero, adding he hopes XM will be at parity with Sirius’s retail share in the fourth quarter.

Panero pointed to low pricing on Sirius products in the second quarter including receivers at $24 at RadioShack and a rebate on Sirius’ headset portable, the S50. Panero said, “We don’t want to play that game, but we’ll respond with an intelligent strategy that doesn’t just sell radios but gets subscriptions.”

Further, the entire satellite radio market softened in May and June with The NPD Group reporting only single-digit retail growth for the category in those months, compared with 120 percent growth for the whole category in January, Panero said.

Heading into the second half, XM said it hopes to resolve FCC issues before the fourth quarter to alleviate product shortages. Chairman Gary Parsons said, “There has been an issue with a broad range of wireless FM modulator products. XM plug-and-play products fall into that category, and we are working our way through the resulting shortages and of particular products … A technical team is working to complete the designs and conduct additional testing and address uncertainties regarding emissions variability with testing results.”

XM said it is in contact with the FCC daily, and it would air-ship products in the fourth quarter to help fill the pipeline if necessary. It also said Sirius will likely report some FCC issues in its next earnings call.

XM spent $5 million to help resolve the FCC issue in the second quarter, adding about $4 to the cost of each new subscriber, it reported.

XM also said it has joined with Sirius in certain efforts to fight recent legislation in Congress that would force both XM and Sirius to limit consumers’ ability to record satellite radio programming and raise the royalties that the companies pay to copyright holders. Parsons said, “Sirius is being extremely helpful on this front.” He said that efforts to create a broader coalition to fight the legislation along with the Consumer Electronics Association (CEA) and even the National Association of Broadcasters (NAB) are going well.

In programming, XM said that Bob Dylan’s new show generated more than 500,000 listeners for its initial broadcast, increasing to 1.7 million currently, “making it one of the most successful shows launched in XM’s history,” said Panero. Also 2 million subscribers listened to World Cup Soccer broadcasts on XM. The Oprah & Friends channel will debut on XM on Sept. 25 and will be “a centerpiece for marketing efforts in the coming months,” he said.

It should be noted that XM, for the first time, reported gross subscriber addition for the quarter, as well as net subscriber additions because of what has been termed an “optical illusion” in subscriber performance by analysts. Since Sirius has a lower subscriber base, at a similar churn rate, XM would lose more subscribers each quarter because of its larger subscriber base.

“Our competitor’s lower subscriber base results in fewer disconnects, even when gross subscriber additions are the same,” Panero said.

In retail sales for the quarter, XM’s gross subscriber additions were nearly flat with last year’s gross retail subscriber additions at 408,000 this year, compared with 421,000 for the quarter last year. Overall gross subscriber additions (including OEM) totaled 926,000 for the quarter, compared with 945,000 for the quarter last year, said XM.

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