Tuesday, May 23, 2006

XM and WCS Split

May 23, 2006

XM satellite Radio and WCS have announced that their relationship is now over. XM satellite radio will not be acquiring the WCS spectrum.

In the opinion of satellite standard Group this is a positive move for XM satellite radio as well as the sector. It has been our opinion that the WCS spectrum issue has been a cloud overhanging XM. With this announcement that cloud is now gone.

The reasons we felt that WCS was a cloud was because of all of the uncertainty surrounding the issue. XM had not disclosed their business plans for the bandwidth, nor any anticipated build-out costs. Those questions had been hanging over XM since the deal was announced in July of 2005. At the time of the announcement, XM was at about $36.00 per share, and the price has fallen ever since.


In terms of the stock price, this should have a positive impact. All of the questions about the business plan and costs are now moot. There was little doubt that the costs would have been substantial, and that it would have a drain on cash before it would have been viable. Whether or not the street will realize this right away is yet to be seen. Capital expenditures by XM should now be able to be trimmed substantially, and the prospects of being free cash flow positive are now better than they were 24 hours ago.


This announcement takes some pressure off of Sirius Satellite Radio as well. Sirius had previously announced that they are working on rolling out hierarchical modulation that would effectively increase Sirius' capacity by about 25%. The potential existed that Sirius would have to move early on this process in order to match whatever services that XM had planned for the WCS bandwidth. Today, that pressure has had some relief.


The potential exists that this announcement could have a very positive impact on the sector. There is a perception that Sirius and XM are having to out-do each other, and that they do so at a great cost. With WCS out of the picture, the perception could well shift to the cost saving aspects of the deal. This announcement has the potential to illustrate that these companies do realize that smart growth is better than expensive growth. Is this enough to change the downtrend? We will see in the coming days.

5/23/2006 12:09:00 AM

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