Analyst Patrick Cormack sees the deal between Sprint and Padora as a huge positive for the Sirius/XM merger. Such a deal clearly illustrates the speed at which technology is moving forward, but also outlines the new ways and methods consumers are using to access audio content.

When looking at the competitive landscape, the DOJ goes beyond current trends and looks into the future (typically about 2 years). New forms of consumer access to content are being developed at a greater rate of speed now, and widespread acceptance of a cell phone as a platform seems to be gaining support from consumers. already, companies such as Verizon are incorporating vast arrays of content into cellular devices, and consumers seem to be flocking to cell phones that carry a wider range of services. Simply stated, a cell phone is no longer simply a device to make a phone call.

Analyst report excerpts after the jump…



Date: May 30, 2007

Analyst: Patrick J. Comack

1) Sprint.s streaming Internet radio deal with Pandora is not just a positive for Sprint, but is a huge positive for investors hoping for approval of the Sirius/XM merger.

2) Sprint has done a huge favor for investors who want the SIRI/XM deal to be approved. SIRI/XM needs another competitor in addition to terrestrial radio in order to get their merger approved, in our opinion. We don’t consider a device like the iPOD a competitor. The iPOD doesn’t broadcast live music to the car.

3) However, Pandora will stream music to cars via a Sprint handset and Bluetooth. Sprint is charging only a $3/month premium for this service.

4) The FCC’s rule of thumb is that there needs to be at least three competitors in each market. The FCC doesn’t seem to care about market share (line concentration) as seen in the AT&T deals.

5) Hence, Sirius and XM can point specifically at the Sprint/Pandora deal as concrete evidence that their combined company will be battling terrestrial radio companies and wireless companies for the ears of drivers.

6) We would take advantage of any negative impact from Senator Kohl. Senator Kohl was quoted as saying: “Our concern is the marketplace today. Consumers should not suffer the price increases likely to result from a merger to monopoly because of a vague hope that new technologies may deliver (a) new competitive alternative sometime in “the future.”

7) Hence, we actually think Senator Kohl.s statement is great for the deal, because the future is now and there is proof. Senator Kohl can subscribe to this disruptively low-priced $3/month service, and utilize his Bluetooth enabled car to have a third choice for radio. The Sprint/Pandora Internet radio will be broadcasted by a Sprint cell phone into his car speakers. Eventually users will replace the phone with an embedded modem in the car, in order to listen to the Sprint/Pandora broadcast.

8) Also Verizon and AT&T will not stand still after the Sprint/Pandora announcement, as we now expect AT&T Mobility to cut a deal with Yahoo’s Launchcast service to combat the Sprint/Pandora combination. Yahoo Launchcast is already played via the AT&T/DISH Homezone box.

9) There are obviously investors who doubt that the SIRI/XM deal will be approved based on the deal risk discount of 14% between XM’s current price and XM’s equilibrium price based on the SIRI merger ratio. The spread was 18% before the XM outage. The bad news for XM was actually great news for the merger. The Sprint/Pandora deal should further tighten up this spread.

10) We believe the SIRI/XM deal will now be approved, and should close by year end. In addition to the Sprint/Pandora deal, Sirius and XM are now strongly backed by minority groups, including the Black Caucus and the Latino Coalition. It is obvious that the minority groups believe a SIRI/XM merger will create a future-proof platform for minority-driven channels, which not only includes Afro-American and Hispanic channels, but also channels for women.

11) In terms of stocks under coverage, we have no Buy ratings. We have Neutral ratings on Verizon, SunCom, ALLTEL and SkyTerra. We recommend investors sell Motient, Dobson, AT&T, Sprint Nextel and Qwest
T.S. Position – Long Sirius, Long XM, No Position Sprint/Nextel, AT&T, Verizon, SunCom, ALLTEL, SkyTerra, Motient, Dobson, Qwest.