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Karmazin: Content Key To Satellite Radio

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.” With content as king, he likened the competition with XM as “Coke vs. Pepsi,” not “VHS vs. Beta.”

In a nod toward the importance of com- mercial-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 terrestrial-radio listenership].”

If Stern’s jump to satellite radio doesn’t have a big impact on terrestrial-radio ratings, Karmazin nonetheless believes it will have a big impact in Sirius subscriber numbers. Stern enjoys an audience of 12 million people, and “a high percentage are hardcore fans,” he said. Many of those 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.

Karmazin expects annual ad revenues on non-music channels to quadruple this year from last year’s $1 million, and with Howard Stern’s debut in January 2006, ad revenues will “more than double again.”

In the meantime, however, Sirius has operated at a net loss, and some financial analysts have downgraded Sirius stock. Nonetheless, Karmazin contended that the analysts downgraded the stock not because of a lack of confidence in the company’s future, but because of the stock price’s rapid appreciation late last year.

“There’s a reason the company is valued this way,” he contended, 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 pointed to 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.

Sirius will profit in a market whose potential subscriber base is “at least as big as cable and satellite TV,” or around 90 million, he said. That’s with 110 million households (90 million of which have cable or satellite TV), and almost twice as many cars as households and millions of cars manufactured annually. This year, subscribership will about double to 8 million or more and reach about 15 million in 2006, he said.

Content differentiation will help satellite radio fend off competition for listeners’ ears from Internet radio and MP3 portables that plug into consumers’ car audio systems. At some point, he noted, wireless broadband will hit the car market. The potential competition has driven Sirius to adopt “It’s all about the content” as one of its key strategies. He also pointed out that Sirius streams its 120 channels over the Internet to consumers as part of their subscriptiown.

As for the relationship between satellite radio and MP3 portables, Karmazin noted that “some future generation of MP3 player will have a satellite radio in it.” Adding satellite radio to an MP3 portable, or even to a cellphone, “will enhance the experience,” he claimed, because “some people like the discovery process.” Radio has traditionally served that role, he said.

For now, however, don’t expect to see a Sirius-equipped iPod. Saying he spoke with Apple’s CEO Steve Jobs, Karmazin noted that Apple’s belief is that “they don’t need to put a satellite radio in that device.”