SIRIUS XM SATELLITE RADIO

December 4, 2008

Introduction
 XM Satellite Radio Inc. became incorporated in 1992. XM’s business

model was to exploit satellite radio transmission technology and create a

national radio network in order to compete with the traditional AM and FM

radio stations. By 1999, XM went public with an issue of 10.2 million shares

of common stock. Preferred stock issues and secured notes were completed

in the late 1999 and early 2000 to raise $750 million in capital to finance the

following:

 Launch of two high-powered Boeing satellites

 The manufacture of satellite radio receivers and other

equipment

 Install terrestrial signal repeaters and other necessary

networking equipment

 Develop programming

 Conduct market research

 Attract subscribers

XM’s broadcasting started in November 2001. The company had

almost 350,000 subscribers with a monthly fee of $9.95 by December 2002.

XM’s subscriber base had grown to over 7 million, they offered over 170

channels and the monthly fee was $12.95 in 2007.

In July 2002, Sirius Satellite Radio Inc. distributed national service.

Sirius is a subscription based business and their main objective is to attract

customers with attractive lineup of channels. Sirius had 261,000 subscribers

by the end of 2003. Sirius subscribers had increased to over 6 million by

2006.

In 2007, Sirius’ 133 broadcasting channels with a monthly subscription

fee of $12.95 included the following:

 69 channels of 100 percent commercial-free music

 64 channels of sports, news, talk, entertainment, traffic,

and weather.

A plan to merge the two satellite broadcasters was announced on

February 19, 2007, by the executives of Sirius and XM. This merge would

put an end to the very expensive bidding wars for programming and talent

that has caused the companies decreased profit potential.

Radio Broadcasting Industry

There are estimated 11,000 commercial radio stations in the United

States that are licensed by the Federal Communications Commission, in

2006. AM stations account for 43.2 percent and FM stations account for

66.8%. In addition, there are 2,760 FM educational stations.

There has been a long-term decline in the number of radio station

owners. The stations are now coming under the ownership of a single

operator. The industry is now seeing a trend dominated by large multi-

station operators. The large multi-stations are listed below:

 Clear Channel Communications – about 1,150 stations

 Cumulus Media – 307 stations

 Citadel Communications – 223 stations

  Infinity Broadcasting – 178 stations

 Entercom Communications – 119 stations

 Cox Radio – 80 stations

The traditional radio stations use an advertising based business model.

This model provides free broadcasting paid for by commercial advertising.

Stations choose a programming format such as: music, talk, sports, religious,

news, educational, or ethnic. Radio stations in their geographic listening

area compete for listeners and advertising revenues.

The satellite business uses a subscription based business model. This

model offers broad and appealing programming offerings that attract

listeners who are willing to pay a monthly fee for mostly commercial free

programming. Signals for satellite radio are received from six satellites

which orbit around North and South America. Terrestrial repeaters are then

used in urban areas to capture signals which are obstructed by large

buildings. Along with the monthly fee, the listener must purchase a radio

receiver. Radio receiver prices range from $150 - $399. The price varies

depending on the home or car model chosen.

Internet and High Definition (HD) Radio

Internet radio providers offer listeners vast amounts of programming

that surpasses that of Sirius XM. These providers are not limited to any

geographic scope, so programming can be heard around the world. Internet

technologies have improved drastically, as faster modems and higher

bandwidths have increased the popularity of streaming radio. In 2007, over

33 million people listened to an internet radio station each week. Services

are offered through many different providers, including Clear Channel, CBS

Radio, Yahoo and AOL. Many of these servers allow customers to customize

their own channels, while earning revenues from 15 second radio

advertisements each half hour.

HD eliminates the pop, hiss, static, and fade that come with analog

radio signals. This allows AM-band broadcasts the quality of FM broadcasts

and allows FM broadcasts the quality of produced CD and DVD quality sound.

HD radio provides clearer programming than terrestrial radio at no cost to

subscribers. Stations can broadcast five different channels on one

frequency, an advantage that has led to 1500 stations broadcasting digitally,

with another 3000 preparing to convert. These services are offered to more

than 90% of the public, and have become another strong competitor for

Sirius and XM.

MP3 Players and Wireless Devices

Consumers who prefer not to listen to terrestrial radios in their car

have turned to their iPods to listen to music. More than 51 million iPods

were sold in 2007, while many other MP3 devices have been sold in addition

to Apple’s version. Users can plug their music into their car or home audio

systems. Auto manufacturers have developed docking devices preinstalled

in vehicles to accommodate iPods, creating greater competition for satellite

radio.
 Wireless phones have increased their presence in the market,

developing new technologies that can pick up radio signals and play music.

Sprint Nextel, Verizon Wireless and AT&T all have their own services that

stream audio to users’ phones, allowing them to purchase music they hear

on their handsets. VCast TV, offered by Verizon, allows users to stream

video and audio content, AT&T has rolled out a service that allows users to

watch several cable stations on their phones. As technology continues to

rapidly increase, wireless carriers will become an even stronger opponent for

Sirius XM.

Broad
Size of Program
Offerings
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Local/Region Nation Glob
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Scope of Global Coverage

Current Strategy

The two major components of Sirius XM strategy are to market the

concept of satellite radio and increase their subscriber base. Additional

components are:

 Appealing programming

 Channels dedicated to artists, such as The Grateful Dead,

AC/DC, Bruce Springsteen and Howard Stern

 Diverse channels which carry programs not found on

terrestrial radio

 Partner with motor vehicle manufacturers

 Installation of satellite radio receivers in new vehicles

 Customers are offered six-month trial subscriptions, with

the price built into the price of the vehicle

 Promote sales of receivers in retail centers

 Six satellites are currently in orbit and terrestrial repeaters are

used to pick up signals in urban areas

The strategy also included continuing to introduce thinner, lighter, and

feature-rich models. The company does not manufacture its own equipment;
manufacturers such as Delphi, Pioneer, Alpine and Audiovox develop the

branded radios that carry the company’s programming.

The Sirius XM target market includes drivers of trucks, recreational

vehicles and residential boats both in the United States and Canada. Sirius

introduced Sirius Backseat TV in 2007, where it broadcasted children’s

programming from Disney, Nickelodeon and Cartoon Network. The company

has an exclusive contract with Chrysler, which introduced the program in

selected 2008 models. In 2008, Sirius Travel Link was introduced in Ford

vehicles, which provides real-time traffic details, weather and movie listings

through Ford’s navigation units. XM provides a similar service, providing

real-time traffic information and weather details through GPS devices. Their

service is provided through many Garmin GPS devices, the leader in its

industry.

In addition, this target market includes households with home radios

and satellite televisions. Personal home units and portable units can be

connected to stereo systems, providing listeners another alternative to

terrestrial radio. Subscribers can also tune in to Sirius and XM online, a

service that is free to current subscribers. Sirius programming is offered

through DISH Satellite TV, while XM programming is found on DirecTV

Satellite services.

After the completion of the merger, Sirius and XM introduced a la carte

programming. Subscribers can purchase different packages of

programming, or can select up to 50 XM or Sirius channels to include in their

subscription. These services are available at discount prices, as low as $9.99

per month. Both Sirius and XM also provide subscribers with internet only

options and Best of Sirius or XM (depending on the current satellite provider

already being used). Several of these packages were created to fulfill the

companies’ agreement with the FCC and Justice Department.

Competitive Strength Analysis

Competitive Weig Sirius AM/F HD Internet

MP3
Strength ht XM M Radio Radio
Diverse
Programming 0.25 9 2 3 10 10
Size of Listener
Audience 0.15 3 7 5 6 8
Geographic
Scope 0.15 5 8 6 10 10
Advertising
Revenues 0.1 3 9 7 7 1
Marketing
Partnerships 0.1 8 5 5 3 3
Cost of service 0.2 3 10 8 10 8

Overall Strength 1.0 5.2 6.2 5.2 7.9 7.2

As shown by the competitive strength analysis, Sirius XM has strong

disadvantages in all categories except for its programming and marketing

partnerships. Its listener audience is small due to the geographic scope it

reaches, as well as the number of subscriptions the company has in

comparison to other substitute products. Internet radio can provide listeners

with diverse programming, as well as cover any geographic area that has

internet capabilities. Sirius XM needs to focus on its strengths, while work to

improve its audience and advertising revenues. The company cannot control
the cost of its service, due to its agreement with the Federal

Communications Commission.

Merger

The proposed merger which the companies applied in March 2007 was

expected to face careful examination from anti-trust regulators at the U.S.

Department of Justice. The U.S. Department of Justice along with consumer

rights groups felt the merger would create a satellite radio broadcasting

monopoly. The Federal Communications Commission granted the licenses to

XM and Sirius based on the terms that prohibited one company from owning

both satellite radio licenses.

The executives at XM and Sirius argued that merger was in the public’s

interest due to competition from iPod, Internet Radio, and audio services

provided by cable and satellite-television providers. The companies also

planned to argue the following:

 Greater programming and content choices will be provided

to consumers

 Develop and introduce a wider range of lower cost, easy-

to-use, and multifunctional receivers that can receive both

networks’ programming

 Use of efficiencies in chip-set, radio design, and

procurement

 The possibility of lower subscription rates

 The deal called for Sirius to acquire XM by the means of a stock

exchange. XM shareholders would receive 4.6 shares of Sirius for each

share of XM stock owned. The new company will have $1.5 billion in

revenues and 14 million subscribers.

On July 25, 2008, the Federal Communications Commission did

approve the $3.3 billion merger. The approval was finally granted based on

the companies voluntarily agreeing to pay $19.7 million in combined fines.

Five Forces Model

Strength of Suppliers

 Sirius has several channels devoted to one “programming act”

o Howard Stern, Oprah, Martha Stewart, NFL Network, NASCAR,
etc.
o Programs demand high amounts of money since material can be
played on terrestrial radio
o Pay $60 million annually to MLB, $80 million annually to Howard
Stern
o Sirius must meet demands of its listeners in order to stay
competitive; it cannot afford to lose profitable, popular programs
 Sirius pays royalties to music labels, artists and regulators to broadcast
their work
o Company must abide by contracts and regulations
o FCC has stringent contractual agreements that limit how Sirius
can offer its programming in order to prevent a potential
monopoly
 Programming and royalties account for more than $400 million in
expenses
 Programs dictate the subscriber growth of Sirius
o Sirius relies on diverse programming to draw new customers
 Revenues derived from advertisers limited to national companies
o Sirius cannot regionalize its advertisers, due to programming
which is played simultaneously around the country
o Advertisers focus expenses on other forms of media (television,
internet)
o Company involved in advertising sharing programs that limit
revenues
o Sirius relies on advertising revenues from talk shows
 Sirius relies on sales of automobiles to sell its installed radios
o Declining sales limit potential customers
o Auto manufacturers may focus their capabilities to allow
customers to use portable audio devices to play music instead of
satellite devices
 Sirius has many suppliers of its radios, using more than a dozen
manufacturers for its radios
o One supplier, Delphi, declared bankruptcy, creating a slight
increase in strength of suppliers
o Sirius does not manufacture its own equipment; it licenses its
chip sets and technology to third party electronics manufacturers
o Company licenses technology to GPS devices which provides
traffic information
 DirecTV and DISH Network broadcast satellite programming
o Satellite TV revenues depend on the health of satellite television
market

Strength of Buyers

 Consumers have many alternatives to satellite radio

o HD Radio, terrestrial radio, MP3 audio devices, internet radio,
CDs, podcasts, television
o Other alternatives have no subscription fees and offer similar
varieties of programming
 Consumers do not like listening to advertisements, providing Sirius an
opportunity to reach that market
 A la carte programming allows consumers to choose which channels it
wants to subscribe to, decreasing subscription costs

Substitute Products

 Alternatives exist which do not require subscriptions

o HD Radio, terrestrial radio, MP3 audio devices, internet radio,
CDs, podcasts
 Terrestrial radio has limited programming, based on where consumers
live
 HD radio does not limit commercials; it only provides clearer audio
 Equipment purchase not required with all alternatives
o Internet radio, terrestrial radio already installed in vehicles
 Profitability easier to achieve with terrestrial radio
 o Advertisements pay for programming
o Each station can focus on certain customers and markets based
on the programming broadcasted for advertising
o Local stations are owned by several large corporations, each
owning a significant number of stations

Threat of New Entrants

 Heavy, due to significant technology advances

o New technologies allow companies to avoid regulations, based
on new equipment
o Internet radio does not require equipment, so initial expenses
are decreased
o MP3 players rely on equipment, thus do not have to pay royalties
to artists
 Qualcomm developing new technologies for AT&T and Verizon Wireless
 Satellites launched by new entrants could increase rivalries
o Each satellite costs $500,000 to $1,000,000 to launch
o Average annual maintenance costs for each satellite is $3 - $4
million
o Costs are not extraordinary for companies with high amounts of
cash
 Alternatives to radio may decrease the need for satellite radios
 Reduced commercials on terrestrial radio may reduce subscribers to
satellite radio

Rivalry Among Competitors

 Heavy rivalry, due to extensive amounts of alternatives to radio

 Terrestrial radio dominated by six large corporations, including Clear
Channel
o These corporations own a majority of all radio stations
o Revenues have been increasing from advertising by more than
12% annually
o 30 other companies own at least 20 other stations
 Terrestrial radio tried to block the merger due to a possible monopoly
within the industry
 Market consists of more than 220 million listeners
o Sirius has more than 18 million subscribers
o Younger generations listening to MP3 players and other audio
devices instead of radios
o 11,000 commercial radio stations
 o Revenues within the industry top $27 billion in 2008
 Many geographic markets which influence how stations will format
their programming
 Companies work to broadcast popular programming which will
generate large revenues
o Competition for top programming increases expenses
 Sirius competes with all formats of terrestrial radio, offering channels
that span all genres of music, as well as talk radio and sports
 Companies competing to broadcast programming which listeners want
to hear
o Rivals must compete with music and podcasts on consumers’
MP3 players
 Equipment for satellite radio and terrestrial radio found in same retail
locations

SWOT Analysis

Strengths

 Variety of station programming

o More than a dozen music genres
o Diverse talk programming, including entertainment, news,
sports, finance, and weather
o Specialty programming, featuring artists and entertainment
personalities
 International operations in Canada
 Consumers can purchase diverse subscription packages
o A la carte stations, Best of Sirius/XM stations, Family
Programming, select Sirius and XM stations
 Equipment costs are limited to satellites, since company does not
manufacture its own radios
o Company uses terrestrial repeaters to supplement radio
coverage
 Sirius not involved in contracts that bars it from new technologies or
preventing other technologies
o Sirius music found on Sprint network
o Receivers can play MP3 audio
o Portable devices developed to play both satellite networks
 Radios found in many different models of owned cars and rental cars
o Involved with contractual agreements with Hertz Car Rental,
Alamo Car Rental and Avis Car Rental
o Found in about 120 different car models
o Radios installed in boats and recreational vehicles
 XM Radio offers NavTraffic for GPS devices, giving live traffic updates
 Sirius offers television services for some auto manufacturers (Backseat
TV)
o Traffic services offered for traffic updates
 Sirius offers free internet radio for 70 -80 of its channels to subscribers
o Sirius audio offered through DISH Network
o XM audio offered through DirecTV
Weaknesses

 Excessive amounts of long-term debt due between 2009 and 2013

o Financial obligations prevent company from being profitable
o Company’s lack of available cash could bankrupt operations
 Programming duplicated on XM and Sirius networks
o Music, entertainment and traffic and weather updates duplicated
o Recently, significant duplicate programming; subscribers have
lost some of the uniqueness of lost stations
 Sirius does not produce its own equipment, preventing standardization
of features
 Equipment not compatible with both Sirius and XM
 Advertising produces minimal revenues
o Advertising limited to national and private companies
o Advertising only found on talk, sports and news stations
 Sirius XM strategies limited by FCC due to merger agreement
o Sirius and XM cannot become a single network
Opportunities

 Technology advances allow Sirius to take advantage of new equipment

o MP3 capabilities, satellite/cable TV, internet radio, GPS devices
o New radios and additional features on new and existing units
o Add services to more mobile phone units
 International expansion into Puerto Rico and Latin America
o Expand Canadian operations
 Expand and develop current services
o Backseat TV, NavTraffic, marine weather services
o Offer additional subscription packages
o Expand commercial services and airplane services
o Expand automobile services with additional vehicles
 Develop equipment that is compatible with both XM and Sirius
o Manufacture its own equipment to standardize feature
 Revenues from online radio advertising
Threats

 Anti-trust and legal issues from Federal Communications Commission ,

record labels, and artists
 o Government regulations in regards to interfering signals and
satellite licensing
 Competition increasing from terrestrial radio, HD radio and other radio
alternatives
o Wireless carriers developing own audio services
o Wireless spectrum being purchased by other media alternatives
o Cable television and satellite television develop its own music
alternatives
 Automobile sales continue to decline, hurting sales of units and
potential subscribers
 Sales from boats and recreational vehicles decline
 Economic recession delays consumers from spending money on
subscription services
o Sirius unable to secure new financing or refinance its current
debt
 Satellites malfunction or become damaged
 Sirius is purchased from existing media companies
 Sirius cannot renew its programming contracts with its current
entertainers or sports leagues
 Company loses contracts with equipment providers or equipment
providers go out of business

Financial Analysis

Since 2005, both Sirius and XM have seen rapid increases in revenues.

Before the merger, Sirius had over $1.1 billion in revenues in 2007, while XM

had amassed over $900 million. Though revenues were increasing,

operational costs were also increasing. Both companies had negative

operating profit margins, with a margin of -0.28 after the combination of

assets of the two companies. Neither company has ever turned a profit;

Sirius had losses of $682 million, while XM had losses of $565 million. These

losses are narrowing, along with narrowing net profit margins. Significant

amounts of the companies’ expenses come from programming costs. Sirius

saw programming losses significantly decline $300 million from 2006 to

2007. As a function of programming expenses versus revenues, both Sirius

and XM saw declines in the percentage of revenue attributed to

programming expenses. The combined financials of the companies showed

declining expenses, as the margin decreased from 26% to 21%.

As the number of subscribers has increased, so has the amount of

revenue per subscriber. In 2006, the average monthly subscription revenues

for each company were just over $10 per customer. Including advertising,

this ratio trended over $11 per customer. Though both companies have

offered rebates to customers, most of those costs have been recovered from

activation and equipment fees.

Return on assets and earnings per share have remained negative for

both companies since 2005, since Sirius and XM have net losses. The

amount of debt is significant, with debt-to-assets over 1.5. Both companies

have relied heavily on long-term debt to finance their operations, mainly

through convertible bonds. Long-term debt has topped more than $2 billion

after the merger, with long-term debt-to-equity at -2.6 due to negative

equity within the company. The only positive aspect of Sirius XM’s financials

is that the company has working capital of over $200 million midway through

2008. This capital originated mainly from the sale of securities, which has

also been used heavily to fund operations. Though there is capital to utilize,

the amount is decreasing as Sirius XM prepares to pay off long-term debt.

The current ratio for both companies has been below one since 2005.

The current ratio in 2008 has increased to 1.62 for the merged company.
This is a positive to the financial community that the company is improving

on its ability to meet their current obligations. Sirius and XM continue to

have negative working capital since 2005. In years 2007 and 2008, Sirius

XM was able to turn working capital into a positive number. This positive

number is important to the company because it shows their ability to meet

their current obligations on timely basis without having to borrow or raise

more equity capital.

Most of Sirius’s debt is in the form of convertible bonds, which allows

the holder to turn the debt into shares of stock at a set price. These

convertible bonds have caused the company to endure negative equity for

several years, which should continue for the next several years. Though the

company is now facing negative equity, it has still managed to borrow

money at lower fixed rates. However, the company has $300,000 in

convertible notes due in 2009 and $230,000 due in 2011, with other long-

term debt as high as $500,000 due in 2013. Unless Sirius can cut expenses

in other areas, it may be as long as 2013 until the company becomes

profitable. The company is also obligated to follow all covenants of its loan

agreement for loans due in 2013.

Programming Analysis

Programming at Sirius XM was recently consolidated, which eliminated

more than two dozen channels between the two networks. The eliminated

channels were replaced by channels with equivalent programming from both

Sirius and XM. Subscribers were not made aware of the new lineups of either
network prior to the change; little information has been released about the

new lineups, other than the merger has given the companies an opportunity

to listen to new programs without eliminating genres. Though the stations

that had equivalents from either Sirius or XM, not all of the stations with the

highest listener ratings were kept on the new lineup.

Flight 26, an XM channel, was replaced by Sirius’ The Pulse, which was the

25th most listened to station between the two networks. Sirius XM did keep

most of its more profitable channels and programs, though still has many

channels which have low audiences. Though the company was able to save
hundreds of billions of dollars in programming expenses, by merging

channels, Sirius XM has eliminated much of the uniqueness in programming

between the two networks.

Issues

Though there are some positive aspects of Sirius’ business strategy,

the company is currently facing many pressing issues. Until recently, Sirius

and XM had channels which had duplicate programming playing.

Programming costs represented more than 16% and 25% of revenues in

2007 for XM and Sirius, respectively. During 2006, 80% of revenues were

represented by programming for Sirius, mainly due to the costs of new

programming and the high costs for programs, including Howard Stern. The

two companies offer the same genres of programming, and in order to cut

programming costs, more than two dozen stations were eliminated from XM

Radio. During this recent switch, which occurred November 12th, XM

replaced many of its duplicate programming stations with channels from

Sirius. The company expects the elimination of many channels to save

$400,000 annually. Once these channels were eliminated, the networks

have few differences, other than specific specialty programs, which can be

received by subscribing to the Best of Sirius or the Best of XM.

Sirius is facing another issue, where the company faces the possibility

of being delisted from the NASDAQ. The company’s stock price has been

under $1 since September 19th, and must meet all of the NASDAQ’s
compliance requirements within 180 days, or will be face delisting. Sirius XM

needs a stronger share price in order to refinance much of its debt due in

2009. With the share price well below the $4 needed to refinance its debt,

Sirius is facing significant financial problems. The company plans a reverse

stock split by the end of next year in order to raise the share price.

Currently, Sirius XM is under extreme pressure to fulfill long-term debt

obligations, many of which are restricting the company from turning a profit.

As of the first six months of 2008, the company’s debt-to-equity ratio is at

-2.6, due to the negative equity held by the company. After the merger of

the two companies, long-term debt-to-equity dropped from an average of

-1.5 to -1.0. Under these conditions, it will be very difficult for the company

to create more debt financing, especially when the debt is tied to equity.

Sirius cannot incur additional debt or debt, make certain transactions with

affiliates, pay dividends, or sell or lease all of its assets. This limits many

investments the company can make, because if Sirius violates their

obligations on the 9.6% notes, all of its debt will be immediately payable.
 Much of Sirius XM’s success depends on the health of the auto

industry. As Ford and General Motors struggle to remain competitive within

the auto industry, sales of satellite radios are in jeopardy of declining. Sales

of both Sirius and XM radios are directly related to the health of the

automobile industry, so if either Ford or General Motors were to go out of

business, sales of new radios and new subscribers would decrease

significantly. Sirius generates more than 95% of its revenues from radios

installed in new vehicles.

Overall retail sales of Ford vehicles are down 30% since last year, with

sales to rental agencies declining almost 40%. Sirius and XM rely on the

sales to car rental agencies, which gives both companies the opportunity for

customers to test the satellite radios in the cars. The companies use this as

a way to draw more customers, exposing more consumers to their

programming without any risk to the consumer. Sirius XM has contracts with

dealerships which allow the companies to have prepaid subscriptions

installed with new vehicles, so as new vehicles are purchased, the company

receives the activation fees from new subscribers. Subscriptions with

consumers tend to last 3.5 years until services are cancelled. Though other

manufacturers will fulfill potential subscriptions, the demise of Ford, General

Motors and Chrysler will hurt the number of new subscriptions. Overall sales

of motor vehicles from 2007 are down 33%. Since there is a direct

correlation of sales of subscriptions to sales of new vehicles, it is very

difficult for Sirius to control its own financial future.

 Sirius XM is struggling to maintain competitive with other forms of

media. Though Sirius and XM are increasing the numbers of subscribers, the

strong competition from other outlets is providing listeners a cheaper

alternative to satellite radio. Listeners can tune in to free terrestrial radio or

HD radio, which now provides clearer audio. As the economy continues to

fall into a deep recession, potential subscribers will have less incentive to

pay for radio. According to Arbitron research, the number of radio listeners

has progressively decreased since 1998. As the market thins, competition

from other internet radio providers has intensified. Internet radio provides a

greater range of programming, while allowing listeners to customize their

own stations. Sirius and XM provide listeners with only half of their

programming online, preventing listeners from experiencing all that satellite

radio has to offer. Online radio has provided opportunities for other

companies to take advantage of advertising, as well as allow listeners to

tune in at work and at home.

The satellite radio networks must also deal with rapidly increasing

sales of iPods and MP3 players. Consumers can listen to their own playlists

of music in their vehicles, and are having more products available to them

that promote greater usage of iPods in the car. Sirius XM’s portable devices

can record and store music, yet relies on the ability of the device to receive

satellite signals. As competition between substitute products increases,

Sirius XM must differentiate itself and find new mediums in order to produce

more subscribers and advertising revenues.

 Sirius XM currently relies on revenue streams from subscription and

activation fees, with few revenues coming from advertising. Advertising

revenues have been flat for both Sirius and XM before the merger, with net

advertising sales only accounting for 3 – 4% of revenues between 2005 and

2007. Revenues from advertising are limited, since the companies generate

revenues primarily from commercial breaks during talk shows, news and

sports. Sirius XM is dedicated to commercial-free channels, yet has not

taken advantage of its website or online radio to promote other companies.

Internet radio providers typically use their online players for advertising

purposes, while interjecting infrequent commercial breaks in between songs.

Total advertising revenue generated by internet radio providers topped $100

million in 2007, a 77% increase from 2006. Jouralism.org expects revenues

to grow at a compound rate of 25% during the next five years, presenting

satellite radio with another major opportunity that it has not fully taken

advantage of. Sirius XM has only managed to cut costs by consolidating

programming and channels, yet has not found a way to offset increasing

music costs. As advertising revenues remain miniscule, Sirius XM may not

be able to fully exploit its success, thus leading to the company folding.

Recommendations

Sirius XM desperately needs to increase its share price, which has been

below $1 since mid-September. As of November 28th, Sirius is being traded

at 20 cents per share. In order to prevent the company from being delisted

from the NASDAQ, Sirius executives need to approve a reverse stock split to
increase the share price. With the company regaining more control of the

company, executives can alleviate some of the current pressures from

shareholders. Simultaneously, the strong demand for the shares by Sirius

will cause the price to increase. Though current CEO Mel Karmazan stated in

October that Sirius is meeting all NASDAQ standards, the company still must

find a way to raise its share price. The company has considered a 50-1

reverse stock split in order to move to the price over 50 cents per share.

The reverse split will help the long-term status of the company by increasing

earnings per share, which in turn will make Sirius appear to be a healthier

company for investors.

As competition has increased significantly within the radio industry

with a flow of diverse products, Sirius must find a way to diversify itself to

remain competitive. Sirius XM has several opportunities to increase its

audience and subscription levels by marketing the use of its networks

through global positioning systems (GPS) and its current internet radio

systems. Sirius XM currently has a collaborative partnership with Garmin to

use Sirius’s satellites that provide real-time traffic updates to GPS devices.

Garmin is currently the market leader in GPS devices, owning a significant

47% share of the market. During 2007, more than 33 million GPS devices

were sold, three times the amount sold in 2006. Sirius can take advantage

of this growing market by offering its chip sets to Garmin to use in their GPS

units. Since Sirius XM does not manufacture its own devices, this approach

would not change the company’s current business strategy. Users will not
have to purchase additional Sirius devices, allowing consumers to utilize the

GPS units currently in their cars. Sirius would still be able to acquire the

subscription and activation fees, increasing revenues for the company in the

future. Since 10% of Americans have a GPS unit in their vehicles already,

Sirius can increase its subscriber base. The price of GPS units has been

declining as well, making the units more affordable for potential customers.

Sirius XM and Garmin also have products that are utilized for marine

purposes, making an extended partnership more formidable for both

companies.

The expansion of internet radio has given Sirius XM an opportunity to

further its own services. The company currently offers most of its

programming online, with XM providing users with a discount for having a

subscription to only online content. Since the breadth of programming is so

important for both Sirius and XM to remain competitive, both networks

should provide subscribers with all of its programming, instead of only 80

channels. This would make both networks more competitive with AOL Radio,

CBS Radio and Yahoo Radio. Subscribers would not have a limited selection

of channels when listening online. Since Sirius XM cannot change its prices

for its current lineups due to agreements with the FCC, the company can

extend its a la carte programming to online listeners. Users could listen to

both Sirius and XM programming of their choice without having to purchase

an entire subscription. Simultaneously, this provides customers some

customization to their listening content, keeping Sirius competitive with

other internet radio stations.

Sirius XM needs to extend its marketing efforts in order to increase

awareness of satellite radio and increase the number of subscribers.

Currently, the company collaborates with auto dealers and retailers to install

satellite radios in vehicles and sell devices in stores. Sirius XM should work

with auto manufacturers to extend marketing agreements by advertising

satellite radios while advertising new car models. Auto dealers can advertise

satellite radio as a feature of their vehicles they sell, promoting both the

vehicle and Sirius XM. The satellite company needs to expand its marketing

through additional mediums, utilizing advertising on media sites online and

through terrestrial radio stations. Sirius XM should set up a social

networking site that links subscribers to each other. As companies such as

Facebook and MySpace develop revenues from their sites, Sirius XM could

develop a site that promotes its products, while attracting potential

advertisers. Retail operations could affect the rise in sales of satellite radios

by advertising the radios within its own commercials.

Another alternative is to upgrade cars sent to rental companies and

used vehicles. Sirius XM can work with its current partners to have radios

installed in used vehicles, offering its partners additional royalties for this

service. This would allow the company the opportunity to take advantage of

consumers looking for cheaper vehicles who may not be able to afford new
vehicles during the current economic conditions. Sirius XM would also be

able to offset lost potential customers from the decline in new vehicle sales.

Advertising revenues have been miniscule for Sirius XM. In order to

create more revenues from advertising, Sirius XM should begin offering

advertisements on its website and online pop-up player. The company could

cycle through advertisements on its players, providing more opportunities for

more companies to advertise. To generate additional revenues, Sirius XM

should work with larger corporations that depend more on advertising, such

as Pepsi, Target and restaurants. Contracts with companies such as these

would create more long-term advertising relationships and provide

opportunities to sell business radios to some of these companies for

corporate and service purposes. Should Sirius XM generate a social

networking site, as mentioned before, the company could create additional

advertising without compromising its ability to provide “100% Commercial

Free” channels. A final opportunity for the satellite company is to sell

advertisements that show up on the screens of its devices sold. While

listeners use the radios in their car, advertisements could scroll along the

bottom of the screen. Additional advertising revenues are needed in order to

decrease the company’s reliance on subscription and activation fees.

Due to the company’s long-term debt position, it is very difficult to

decrease expenses. Sirius XM can only decrease significant costs by

decreasing programming expenses. The company needs to phase out some

of its channels that have very low audiences. Though the company wishes to
cater to all audiences, there are channels which have few listeners. By

consolidating some of these channels, programming expenses may

decrease, helping the company become profitable.

Conclusion

Sirius XM has many challenges that it is facing to remain a competitive

force in the radio industry. High amounts of debt and limited control over its

suppliers and customers hinders the company from becoming profitable from

its sales. Many opportunities are available to the company in order to

change its fate, yet the company is limited to its expansion due to its

agreement with the FCC. By increasing its subscriber base and advertising

revenues, Sirius can offset its long-term debt, while preparing for the future.

If the company continues to create solutions which only temporarily ease the

pressures being faced, Sirius XM may have to declare bankruptcy. A long-

term strategy is needed to remain competitive within this highly competitive

industry in order become profitable in the future and remain a formidable

opponent for substitute products.

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