Tuesday, May 16, 2006

What The Record Industry Suit Means to XM and Sirius

May 16, 2006

Satellite Standard Group is offering our opinion on what this latest suit means to XM and Sirius. We are not attorneys, but have followed the satellite radio sector for quite some time.

XM Satellite Radio made a decision to go forward with the sale of the Pioneer Inno, the Samsung Nexus, and the Samsung Nexus line without having reached agreement with the record industry. About 6 months ago, Sirius satellite radio made a similar decision. The difference here lies with the fact that Sirius actively sought to, and ultimately did come to agreeable terms with the record companies over the devices, and thus Sirius is not facing a law suit in the manner that XM is.

XM satellite radio has stated quite clearly that they will defend the issue on behalf of consumers. One major question though is where this leaves shareholders of XMSR. SSG will break our opinions down by category.


Consumers of XM Satellite Radio (subscribers) can feel very good knowing that they have a product that has very good recording capabilities. Devices such as these XM units, as well as the Sirius S50 make "downloading" (saving songs) very easy, and an instantaneous decision. Songs can be saved to these devices free of any additional charges to consumers.

Subscribers to both Sirius as well as XM will benefit by XM taking the stance that they are taking. Consumers can still buy the devices, and can be saving songs at will while the parties to the litigation slug away in court, or at the negotiating table.


Unfortunately for shareholders, this could be yet another cloud that hangs over XM Satellite Radio. As an investor, I find this issue very frustrating. XM is likely very correct when they state that the record industry is using this suit as a bargaining chip. It is already known that the record industry will negotiate terms. They have already done so for Sirius in the case of the S50.

By taking this course of action, XM is virtually stating that this could be a long and drawn out process involving attorneys and negotiations between the parties. Time and patience is something XM investors are already running out of. Class action suits have already been filed against XM Satellite Radio, and to date 12 law firms have joined in on the action relating to shareholders who bought the equity last year, and the suit alleges were mis-informed about the performance of the company while executives were selling off their own shares. A second Class Action suit was filed last year alleging that XM misinformed consumers about their music being "Commercial Free". This litigation simply comes at a bad time for XM and shareholders of XMSR.

XM Satellite Radio seems to have decided to "shoulder the load" for the "Free Use" issue. Yes, should they prevail, XM would benefit, but so would Sirius Satellite Radio, and Sirius will not have to lift a finger to benefit from XM's work. Having not yet turned a profit, can XM afford to take on this action? Will shareholders be patient enough to wait to see results? Will institutions be that patient?

There are simply a lot of clouds and questions that already exist without having to add this one to the mix. It was appearing that many issues that had been surrounding XM of late were starting to see a light at the end of the tunnel, and now this law suit gets thrown into the mix.

It would appear that there are already serious questions surrounding XM's management. Board Member Roberts stepped down, and shares have fallen substantially for the past 5 months prompting the Class Action Suit. Can XM's management instill confidence in the investors to ride out this "storm"?

Personally I feel that XM should make a statement regarding what the course of action is and why. Investors are seeking a "comfort zone", and bullet point statements such as "We will defend this vigorously on behalf of consumers" is not enough. Investors need to know WHY XM is taking the stance they have decided to take. Investors need to know WHAT it is exactly that the record companies disagree with. Investors need to be INFORMED.


Shareholders of Sirius satellite Radio, while comforted by knowing Sirius has already worked out these issues, can not rest easy. Satellite radio is a sector comprised of two companies, and the trading patterns of these companies remains remarkably similar. Bad news for XM can also hamper the entire sector, and thus Sirius. Is this issue exclusive enough to XM that it can become the wedge that separates the trading similarities between these companies? That is the question many people are asking themselves as they digest this news.

This one suit in and of itself is not likely to do the trick, but there is a potential that this suit in combination with the other events may contribute to Sirius gaining its own momentum. Consider the institutional holdings in Sirius as compared to XM. Institutional ownership in Sirius was at about 30% at the end of Q1. Compare that to over 90% for XM. If institutions were to consider "switching horses" at this point, things could become very interesting for the Sirius equity. There was some substantial institutional interest in Sirius in Q1 (SSG will be writing that story next). Could an event such as this bring more interest? Only time will tell.

One thing is certain at this point. The satellite radio sector has not been "hot" of late. SSG has stated that we feel this sector is transitioning from subscriber numbers and hype as a catalyst to CFBE metrics. Should Sirius be able to demonstrate that they can hit CFBE in Q4 of 2006, and should institutions and investors be convinced that this is the case, we could see good activity with the Sirius equity.

On May 23, Sirius is conducting their Annual Meeting. This forum presents an opportunity for Sirius to present their case to investors. It also offers a forum for Sirius to formerly outline what they see happening with their own "live wearable" device slated to hit shelves this summer. In the opinion of SSG, Sirius should address their own live wearable device as quickly as possible. Investors in Sirius need the confidence to know that the law suit XM satellite radio is facing is unique to XM.

5/16/2006 09:39:00 PM

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