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Sirius’ Karmazin Says Content Is Key

New York — Diverse content will be the key driver of satellite-radio growth, and Sirius has built a solid foundation to profitably deliver content that consumers can’t get on terrestrial radio, Sirius’ CEO Mel Karmazin told a crowd of analysts and press at a conference, here.

Investors can “assume we are very aggressive” about getting big-name talent like Howard Stern to jump into Sirius’ talent pool, Karmazin said, “because it will always be about the content.”

In a nod toward the importance of commercial-free music, however, Karmazin stressed that the company’s 65 commercial-free music channels “will stay commercial-free.”

Karmazin’s comments contradicted a J.P. Morgan study that concluded commercial-free programming is the biggest driver of satellite-radio demand. “The absence of commercials on satellite radio still reigns as the No. 1 driver of demand,” the report said. “Unique content, on the other hand, appears to be the least important factor, which implies that the loss of Howard Stern and other programming should not have too negative an impact [on the number of terrestrial-radio listeners].”

If Stern’s jump to satellite radio doesn’t have a big impact on the number of terrestrial-radio listeners, Karmazin nonetheless believes it will have a big impact on the number of Sirius subscribers. Stern enjoys an audience of 12 million people, and “a high percentage are hard-core fans,” he said. Many of the hardcore fans will follow Stern to satellite radio, and Stern will attract many people who have heard of him but couldn’t hear him because they live outside Stern’s current 46 radio markets, Karmazin explained. If Sirius gains 1 million subscribers because of Stern, he said, “he paid for it [his contract].” And that’s not including additional advertising revenues that he’ll attract, he noted.

In the meantime, Sirius has operated at a net loss, and some financial analysts have downgraded Sirius stock. Nonetheless, Karmazin maintained that that the analysts downgraded the stock not because of a lack of confidence in the company’s future but because the stock price rose rapidly in recent months, “There’s a reason the company is valued this way,” he said, pointing out that Sirius is a growth company in a media industry whose other key players — in terrestrial radio and TV, for example – are growing slightly if at all. “People value growth,” he said.

Despite continuing net losses, Karmazin outlined several leading indicators of future Sirius profitability, including no debt, $800 million in cash on the balance sheet, a sufficient amount of cash “to get us to profitability,” and an analysts’ consensus that revenues will hit more than $200 million in 2005 and hit $500 million in 2006. He also cited declining acquisition costs, which dipped to less than $200 in the past fiscal year and is expected to fall to $145 this year.

Karmazin conceded that rival XM is a year ahead of Sirius in many facets of the business, from lower acquisition costs of $60 per subscriber, to less expensive next-generation chipsets, and to the appearance last year of a wearable headphone portable. “They started a little over a year ahead of us, and we’ll get to where they are,” he said, noting that Sirius’ first wearable headphone portable will hit the market this year.