While the popular thought process is that the OEM channel is the story of 2007, it would be a very bad mistake to underestimate the impacts derived from the retail channel. OEM installations are indeed ramping up with partners of both Sirius as well as XM, but at the end of the day, American roadways have far more vehicles without satellite than with.
Considering recent sales slumps in the OEM channel, and it becomes more apparent that more Americans are making the decision to drive their current cars longer. If those cars are not equipped with satellite radio, the consumer has to turn to the after market. Combine this with the fact that the second half of the year is traditionally owned by retail in SDARS, and you can begin to see the importance of the retail channel as 2007 closes out.
Take it a step further, and consider the retail offerings of these companies with and without a merger. If the merger passes, the next generation of hardware will be part of the synergies spoken about by Sirius and XM. If the merger fails, these companies will have to go forward with their plans on their own and current hardware.
This year, both companies have introduced new hardware, and that hardware is designed to give consumers various functionality at various price points. However, it seems that Sirius has put a bigger offering on the consumer table. This could very well continue the trend of Sirius leading the retail arena either with or without a merger.
The noticeable absence from XM is an updated Inno. While speculation, the decision to not update this portable device could be caused by current litigation from the RIAA. That suit is still pending, and because there exists a potential liability, it somewhat ties XM’s hands for updating wearable devices. If XM were to go forward with a device that would satisfy the RIAA, they could be “admitting” that their stance on the Inno was wrong. If they continue with the Inno, they simply add to the potential liability that exists because of the current suit. This puts XM in an awkward position and limits their ability to compete in the MP3 device type arena. Interestingly Sirius indicated in their Q2 conference call that they had already achieved parity in the “wearable” category. With the Stiletto 2 being released as the only new “wearable” device in SDARS, that segment of the retail market could quickly swing above the parity level for Sirius. Readers should note that the SDARS wearable devices do not make up a large percentage of sales.
The latest NPD data (tracks retail sales) released for June, Sirius had a 61% share of the retail market. For 2007 sales to date, Sirius has 56% of the market according to NPD. This has all happened in the virtual absence of new hardware from either company (XM recently released the Xpress EZ and the Xpress R at retail). New hardware typically generates a bit of a buzz at retail, and unit upgrades become a bigger part of the picture, creating more sales in the channel. Which company has the advantage going into the Fall selling season? Readers will have to judge for themselves.
Also of note in all of this is the fact that neither Sirius, nor XM has been doing a substantial marketing push thus far in Q3. This could impact the retail numbers in a substantial manner. Already, Goldman Sachs, a more bearish analyst in the sector has estimated that XM will report negative growth in the retail channel for the third quarter. While this may seem unrealistic, XM’s net additions in the second quarter, which included Father’s Day, was about 43,000. With Q3 being traditionally weaker, the possibility is very strong that the retail channel will be lower. Investors in the sector should be prepared. For their part, Sirius added 192,000 in the retail channel for the second quarter. This number should also come in lower, but in my opinion is not in danger of approaching zero.
Maintaining a strong retail presence is an important part of the mix, and while it is great to see the OEM channel ramp up, retail needs due consideration, as it is a channel that more non-subscribers have instant access to.
Position – Long Sirius, Long XM - No Position Circuit City