Partnerships

I wanted to expand a bit on the problems that people see with the slowdown in OEM sales. Tyler covered part of it in his weekly radio show (which I got home just in time to hear the last 45 seconds of). He also wrote a piece about the concerns of the OEM side of the Satellite Radio Industry. In his recent article, Tyler points out that HD will likely have a hard time getting into the dashboard of vehicles because of the lack of subsidy. The lack of vehicle sales is of great concern to the Satellite Radio sector, I agree, but I also see the struggles of the OEMs as a positive. How you may ask?

Im glad you asked.

1. OEMs are looking to cut costs at every turn. This is obvious. But don’t you think they would also be looking to MAKE money at every turn? I sure would be. OEMs like GM and Ford make a pretty decent amount of money off of the revenue sharing and subsidies. Obviously, they make more money off of it than they put into it, or it would never have been a smart business move. Because of this, they may ramp up installation rates faster than expected to milk out the extra income when they need it most.
2. I just purchased a 2008 Chevy Tahoe. The sticker price on that vehicle was 49,000. I negotiated a deal with the dealership for 39,000 and 0% financing. Sure, large vehicles may not be selling well right now because of gas prices, but by getting the Tahoe, I was able to save a significant amount of money, and actually improve my gas mileage over the Chevy Silverado I had previously. A win/win for me. These large vehicles are selling VERY cheap right now, making them more attractive. The large vehicles are the ones that have the best (read: Lowest) churn rates amongst any other.
3. While vehicle sales are slipping (plunging?), install rates are still ramping up. Those radios are going to be going somewhere. People that are buying new vehicles now either do not care about the slowdown in economy or are downgrading to save money, either on the car payment itself, or on gas prices. With that savings in money, comes a bit more freedom. With that freedom, perhaps they can spare an extra $12.95 a month for Satellite Radio? The New York Times seems to agree.
4. Many of the vehicles that are getting traded in right now are the large gas guzzlers (like my Chevy Silverado). These are the ones that the OEMs first started installing Sirius and XM in. These Satellite Radio equipped vehicles are now hitting the used car lots, and can possibly provide an additional source of subsidy-free income to the SatRad industry. Sure, revshare still has to be paid, but no more subsidy.
5. As Tyler mentioned on the radio show, less installs means less radios, means less subsidies. So at least they would still be saving some money.

In conclusion, the OEM meltdown slowdown is definitely something to keep an eye on, but I do not think that it is the doom and gloom some analysts have made it out to be.

GM announced that they are taking measures to cut costs. GM is not alone. Cash strapped OEM’s are suffering from slower vehicle sales, and many are caught with a large supply of gas hungry models that consumers are hesitant to buy with current gas prices. GM is making “Bold Moves” by making cuts such as:

• More than 20 percent reduction in salaried employment cash costs
• Dividend on common stock suspended
• Asset sales and capital market activities to raise $4-7 billion of additional liquidity

For satellite radio watchers, the health of the OEM industry is an important factor to consider. Satellite radio is installed into millions of automobiles each year, and if those cars are not selling, the subscriber rolls do not grow as expected. Yes, eventually the cars sell, and eventually the subs will come, but the subsidy costs for installation and chip sets in many cases have already been paid. A prolonged sales process means that the cash flow of the OEM deals is also stretching.

With auto makers looking to improve their own cash flow, do not look for them to absorb new costs. This is perhaps one reason HD Radio is having trouble getting into the dashboards of cars. Unlike satellite, which absorbs some costs associated with installations, Ibiquity is selling the concept that consumer will demand HD, rather than offering an installation subsidy or revenue share. The Ibiquity plan costs OEM’s money. Thus, with OEM’s cutting costs in every possible way, there is only one natural conclusion. OEM’s will not install HD.

For this reason, the Ibiquity proposal that their chip sets be included in all SDARS receivers is more important than ever to Ibiquity. Such a rule would circumvent the need to negotiate with the auto manufacturers, and ensure that HD radios get installed into dash boards. Auto makers like GM and Toyota have balked at the Ibiquity proposal, but the lobbying efforts are strong. In my opinion SDARS is not locking HD out of the dashboard, it is the economy in general, and the lack of a subsidy on the part of Ibiquity.

Slow OEM sales are a concern for many. Keep an eye on the sector.

Position: Long Sirius, XM. No position GM.

Auto sales are down. This has been the month after month news item for most auto manufacturers. With the exception of a few bright spots, the entire auto industry is in a slump. With high gas prices, many companies are offering clearance price on what are now considered gas guzzling trucks and SUV’s. Four cylinder cars are now the hot commodity, and even many of these simply are not selling at the needed pace.

For satellite radio sector watchers, the slumping sales in the OEM channel is an undertone that, coupled with the lack of a merger decision, makes many investors have pause in the sector. In an environment where good news seems to always be followed with a pause and then bad news, it is hard for the satellite radio equities to see any momentum.

The chart below outlines auto sales, SDARS partners and estimated installation rates. We caution readers that this is merely a guide, and not representative of actual installations. Readers who seek more detail can refer to previous months and/or years sales here at Sirius Buzz to draw better comparisons.

Many analysts started off 2008 seeing the OEM channel as a driver for satellite radio subscriptions. Most used some base assumptions projecting subscriber numbers based on a certain level of car sales happening combined with a bigger ramp-up in the rate at which SDARS receivers are installed. Now with half of 2008 gone, and car sales still slumping, there could well be some adjustments in the models that analysts use.

Historically, the take rate for SDARS on OEM installations has hovered in the 50% range. This metric has remained virtually unchanged during the sales slump of cars. For SDARS, that represents a small silver lining, but at the end of the day, installations need to happen, and cars need to sell.

I project that upon a merger decision, additional guidance will be given by Sirius and XM. Until that time, we need to rely on the assumptions of analysts, or our own research into the sector to determine what the subscriber picture will look like at the end of the year.

Position - Long Sirius, XM. No Position OEM’s.

Automobili Lamborghini S.p.A. announced last week that they will offer Sirius as its exclusive satellite radio provider in Lamborghini vehicles. The first Lamborghini to include Sirius as standard factory installed equipment will be the Murcielago (above) beginning with the 2009 model year in the U.S.

“SIRIUS was the natural choice for Automobili Lamborghini’s exclusive supercars,” stated Stephan Winkelmann, President and CEO of Automobili Lamborghini S.p.A. “Satellite radio gives our customers easy access to endless music options, therefore enhancing their ability to enjoy their vehicle on the road or track.”

This is pretty exciting news considering that 2007 was a big year for Lamborghini, as they sold 2,406 cars worldwide, a 15 percent increase over the 2,087 cars delivered in 2006! Can you sense my sarcasm on this one?

For everyone who is about to comment that this is old news, I am sorry if you couldn’t wait and went with the Ferrari over the weekend instead.

Mazda Motor of America, is providing a new way for its dealers to promote the Sirius Satellite Radio they already offer in many of their vehicle models, as well as a method for getting the message out about new Mazda models and other dealership news.

With the help of Applied Media Technologies Corporation (AMTC), the national provider of Sirius to businesses, all U.S. Mazda dealerships are able to reach out to their customers with music and customized marketing messages both in the showroom and during telephone “on-hold” time.

“When we opened our new Mazda Retail Revolution dealership in Temecula, Cal., the only things missing were quality in-store music and a telephone on-hold messaging solution. To our surprise, both services could be found from one source, AMTC,” Temecula Mazda Vice President Bill Brumbaugh said. “With AMTC’s help, we installed Sirius Satellite Radio and TelAdvantage messaging, engaging customers both in the dealership and over the phone. Sirius provides crystal-clear digital sound with 67 channels to choose from, and TelAdvantage allows us to customize our on-hold messages to our liking.  Often, our guests comment on the quality and selection content while visiting and calling our dealership. We explain to our customers that when you purchase a Mazda from us, you can have this same SIRIUS Satellite Radio experience in your vehicle every day. I can’t tell you how many guests turn into customers for life.”

Retail studies have shown that music greatly influences customers’ purchasing patterns and decision-making processes, helping to establish the mood, motivate the subconscious, and create a lasting impression on existing and potential customers. However, in order for a business to reap these benefits, performance royalties must be paid per song, and stiff fines await those who neglect the payment of these fees. Businesses also face the challenge of finding suitable music to play in their establishments. CDs are repetitive, and terrestrial radio comes fraught with aggravating commercials, and worse, advertising for competitors.

Position - Long Sirius

Directed Electronics released their Q1 2008 financial results today, and reported that net revenue from satellite radio sales are up 14% on a pro-forma basis. Now, readers should be cautioned that this reporting method does not mean that sales of satellite radios are up. It simply means that on a net basis, the company is seeing more dollars.

For Directed, Net sales of Sirius radios represented $17,676,000 for Q1 2008 vs. $15,491,000 for the same period in 2007.

“We believe the change to net reporting of our satellite radio sales coupled with providing our security and entertainment and satellite radio product category margins will ultimately provide increased transparency into the fundamental drivers of our profitability,” commented Kevin Duffy, Directed’s EVP and CFO. “In the first quarter of 2008, our security and entertainment business comprised approximately 75% of our total pro forma sales but over 90% of our gross profit due to the combination of our strong brands and innovative products which help both our retailers and Directed to earn solid margins.”

Position - Long Sirius, XM. No Position Directed.

Satellite radio garners a lot of subscriptions from the automobile (OEM) channel. In fact, for the past several months, the weaker retail channel has had SDARS sector watchers relying quite heavily on cars equipped with satellite radio as a saving grace for subscriber numbers. Headlines that GM is cutting back production on trucks and SUV’s may send some people following Sirius and XM into worry mode.

Two years ago, what is happening at GM would have been very bad news. It was at that point that it was the GM truck and SUV line that made up the bulk of satellite radio installations for XM Satellite Radio. Today, while the news is not good, the impact can be better absorbed. The reason is that GM is now installing XM receivers across more vehicle lines than they were in 2006. The overall penetration is also deeper.

The GM news states that the layoff’s and production cuts will mean 88,000 fewer pick-ups and 50,000 fewer SUV’s. This means a total of 138,000 less vehicles. If we assume a 75% penetration in the pick-up/SUV segment, then 103,500 fewer XM equipped vehicles will roll off the lines this year. Of that 103,500 about 55,000 were destined to become self paying subscribers. The deeper penetration across more model lines will easilly absorb these types of numbers.

Yes, it does slow down growth. However, it does not represent doom and gloom. Car sales have been down for most auto makers this year. Production cuts are happening. Penetration is also getting deeper though, so the impact will not be felt to the extent that some may anticipate. Specific to the XM, with regard to the GM issue, this is a Q4 and Q3 impact.

Another thing to consider is that the chipsets are still available for GM to install. This means that they may well utilize these radios anyway. XM is a revenue generation deal for GM, and if the chipsets are already there, they might as well conduct the installations. With the types of numbers and the time frame we are talking about, the overall installation number may not change.

It is often easy to assume that bad news such as GM’s translates through to the related SDARS partner. Investors need to remember that the chipset orders run well ahead of production, and GM is still installing radios into the vehicles that will continue to be produced. The point to remember is that the OEM channel is still growing, and partners such as GM that share in the revenue gain nothing by letting SDARS receivers sit.

In my opinion, the OEM woes have potential to spill into SDARS if the sales lull is prolonged, but the ramp up that is happening is helping to soften the blows. Cars will still come SDARS equipped, and consumers will still become self paying subscribers. Watch the OEM channel, but measure the news carefully.

Position - Long Sirius, Long XM, No Position GM

USTelematics has announced a deal that will integrate Sirius’ music programming and offer Sirius subscriptions to users of the Voyager infotainment unit.

Voyager provides live and downloaded wireless mobile internet protocol TV (IPTV) and audio programming for rear-seat passenger vehicle infotainment, and integrates a broad suite of features and functions, including the creation of a mobile Wi-Fi internet hotspot to enable online computer usage in the car and on the road, as well as DVD, movies, TV, Xbox and other computer games, and more.

The jack of all trades flip down unit runs all WinXP software, retails for around $999, and installs in place of the domelight in most vehicles. It should also be noted that Apple solidified a deal with USTelematics back in December of 07 to bring iTunes to the Voyager unit.

The Mini brand has seen tremendous and consistent growth in the United States. While the sales numbers have been growing, the car itself has not….until now. Beginning February 16th, the all new Mini Clubman will be hitting dealer lots. Mini fans can now enjoy a roomier ride whale maintaining the distinctive style of Mini.

Audio fans can also rejoice in that Sirius Satellite Radio as well as HD radio are available on the Mini Clubman. Pre-wiring for Sirius as well as HD Radio comes standard. For $1,000 you can add Sirius with a lifetime subscription, of for $500 you can add HD radio. As with all Mini’s, your options and combinations of features are nearly limitless.

Position - Long Sirius

Sirius announced an agreement today that extends Sirius’ exclusive relationship with Chrysler through September 2017. This agreement spans all of Chrysler’s brands including Chrysler, Jeep and Dodge vehicles.

It’s hard to look that far down the road but, 9 years and a greater than 70% penetration rate of factory-installed radios is certainly great news with or without the merger.

“SIRIUS is proud to extend our exclusive relationship with Chrysler, Jeep and Dodge,” said Mel Karmazin, CEO of SIRIUS. “Chrysler will be selling millions of vehicles with SIRIUS and we look forward to a very significant number of Chrysler customers becoming part of our already very satisfied SIRIUS family of more than 8.3 million subscribers.”