Thursday, March 01, 2007

Oppenheimer Weighs In

March 1, 2007

Report excerpts:

We continue to maintain our Buy rating on both XMSR and SIRIbecause we believe there is long-term growth potential as the OEM customerbase accelerates from current levels with deeper in-car satellite radio penetration. While we may reduce our 2007 customer forecasts and our targets due to disappointing 4Q06 subscriber results, we expect valuation toprovide upside from current levels.

• Potential approval of the XM/SIRI merger took a step forward yesterday at a Congressional hearing in Washington. Although several of those who testified voiced concern over the consumer impact of a merger, we were struck by how many members of Congress seemed neutral or positive on a merger. While true, that Congress will not play as direct a role as will the FCC in deciding on the merger, its helpful to assess the overall atmosphere in Washington. Next step is a House Commerce Subcomittee hearing onMarch 7th.

Highlights from Hearing

• As expected, David Rehr, head of the NAB, the broadcaster lobbying group said the merger is anti-competitive

• However, Rep. Dick Boucher (D, Va), considered a telecommunications authority, said it should be approved with selected conditions. These conditions included: making tiered packages available, making 5% of program capacity available for educational purposes, and agreeing to freeze prices for three years

• SIRI CEO Mel Karmazin would not commit to a timeframe for price freezing but agreed to it in concept

• Many congressmen who spoke or asked questions seemed OK with the merger. Perhaps, the congressman most positive on a merger was Anthony Weiner (R, NY) who said satellite radio could not be a monopoly because the service is not a necessity and they have no monopoly power with only 3.5% share. Mr Weiner also indicated that the committee should look at Clear Channel if they were concerned with radio industry concentration

Hearing Notes Opening Statements

Mr. Rehr (CEO of NAB) The President of the NAB vehemently opposed themerger on 5 points. He claimed that a merger would effectively:

1) transformthe current national satellite duopoly into a government sanctioned monopoly

2) violate FCC precedent, anti-trust regulation, and congressional policies

3)undermine audio content (reduced competition, innovation and quality

4) Mr Rehr indicated that both XM and Sirius' pattern of non-compliance with FCC suggested that the merger would give even more incentive to digress towards anti-competitive behavior

5) He suggested that neither XM nor Sirius are "failing" and therefore should not receive a bail-out

Gigi Sohn (President & Founder of Public Knowledge) Thought that merger should be approved if consumers are better off and 3 conditions are met:

• the new company offers a-la-carte or tier pricing

• makes available 5% of air-time for non-commercial, educational/public programming etc.

• is prohibited from pricing increases for 3 years

She further acknowledged that satellite radio competitors can be defined broadly though parts ofXM/Sirius services are certainly unique. She believes XM and Sirius should provide more local content and services and they stand to "level" the playing field for both terrestrial and satellite radio

Mark Cooper (Director of Research Consumer Federation of America) Was against the mergerstating that a satellite radio merger would be "socially irresponsible" Additionally:

• thought that satellite radio service is very easily distinguished from other radio/music providers

• believes head-to-head competition is still best way to compete

• does not think pricing will stay flat or decrease and does not think a merger will benefit consumers

Charles Biggio (former Assistant Attorney General of Antitrust and Trade Regulation)He indicated that it was best to allow FCC and appropriate agencies to get all the facts straight firstbefore deciding. He had strong opinions on key factors that need to be addressed by XM/Sirius,including: pricing, content, and how it compares to offers from other providers

Mel Karmazin (CEO of Sirius)As expected, Mr Karmazin stated that a merger is not anti-competitive and would be in consumer'sbest interest as it will provide more choice and lower prices. Additionally, he indicated:

• the companies could pass through a % of synergies to subscribers in form of price decrease

• they were willing to work with restrictions/regulations to get the deal done

• he does not believe that price hikes or local content offerings make sense

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3/01/2007 12:27:00 PM

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