Morgan Stanley on SDARS and NPD

April 25, 2007

Mar NPD Results: 30% YoY Declines In-Line with forecast

· Quick Comment: NPD satellite radio point-of-sales data released today shows retail category sales declined just below 30% YoY in March, implying 35% YoY category declines for 1Q07 (see Exhibit 1). The 35% declines reported for 1Q07 compares to our forecast of retail gross additions declining 30% in 1Q07 and 9% YoY in FY07E. XMSR also gained over 300 bps of market share over SIRI in March, while experiencing less severe YoY declines in the month and 1Q07. For the quarter, XMSR retail sales declined roughly 30% YoY compared to 40% for SIRI. We note YoY category sales trends could be better than shown by NPD as NPD excludes point-of-sales data from major wholesale retailers (i.e. Wal-Mart and Costco) and direct sales where both satellite radio operators have aggressively ramped their presence. As noted in previous research, we believe FY07 category sales will strongly rely on both operators’ ability to address potential consumer confusion stemming from the pending XMSR-SIRI merger.

· Implications: The 1Q07 NPD retail results are in line with our existing 1Q07 retail gross additions forecast. We expect total net adds for XMSR and SIRI to be 270K and 550K for 1Q07. As we head into 2Q07, we will begin to exit the YoY “Howard Stern” comps and we expect YoY declines to continue to moderate. We point out that January NPD sales were down 45%, February down 33%, and March just under 30%. For the full year, we expect category retail gross additions to be down approximately 10% - which implies a modest recovery in sales in 2H07 and in particular 4Q07.

While not necessarily indicative of long-term trends, XM had its best market share month (47%) since August ‘05. XM likely benefited from the lead into the Major League Baseball season, which began in early April.

4/25/2007 06:15:00 PM

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