Wedbush issued a note today after the sirius Volkswagen announcement, noting that the OEM channel is playing a bigger role in SDARS.
• Automakers continue to strengthen their commitment to satellite radio: Volkswagen to offer Sirius as standard equipment on a number of key models. Volkswagen committed to making Sirius standard on all Touareg2, New Beetle, New Beetle Convertible, GTI, and GLI models beginning with the 2008 model year. Other major models, such as the Jetta, Rabbit, and Passat, will remain factory-installed options. In March 2006, Volkswagen committed to Sirius exclusively through 2012 and to equip approx. 80% of its vehicles (starting withthe 2007 model year) with satellite radio. Per Auto News, Volkswagen delivered 329k vehicles in 2006.
• To reach a mass-market audience, satellite radio requires this type of automaker support. Although this announcement does not seem to change the magnitude (in units) of Volkswagen’s satellite radio commitment much, it does show that satellite radio is increasingly being seen as important enough to consumers to be afactory-installed standard, as opposed to a dealer option or factory-installed option. We think this type of automaker support is paramount to satellite radio reaching a wider audience.
• The good news is that it’s not long before the OEM market will make soft retail sales a lesser emphasis. Sluggish retail sales, though better than Q1, seemed to have continued in Q2. We believe an uptick in OEM demand should start to noticeably counter the retail sales trends in Q3.
• Separately, our merger stance is unchanged; we continue to think that the merger is not likely to be approved. Although there is no denying that satellite radio competes with a host of entertainment services and devices, including traditional radio and iPods, we are skeptical that such indirect competitors can be proven to begood substitutes for satellite radio. Despite the presence of such indirect competition, we do not see any of the company’s indirect competitors as having sufficient market power, capable of constraining a monopoly’s pricing power. We think this is the key decision that regulators will ponder when considering the antitrust implications of the proposed Sirius-XM merger. Since satellite radio is really the first real example of a successful pay radio service that consumers pay monthly for, it’s hard to see how it has much in common with over-the-air radio, whichis free, and an iPod which is not a service, but a piece of hardware. The economic model differences are stark with the company’s supposed competitors. The similarity is clearly the end application. However, if market definitions were that simple and did not more carefully highlight the economic differences, it would be analogous to saying that YouTube and Blockbuster are direct competitors with Comcast, a point that most of us wouldquickly realize is false.
• Reiterate BUY. Our $4 price target is based on a DCF analysis and does not incorporate any merger premium/benefit, consistent with our view that the transaction has less than a 50% likelihood of approval andthus, will likely be denied within 12 months.
• Risks to attainment of our share price target include shortfalls in subscriber growth; increased competition whether from XM; AM/FM radio, HD Radio, or streaming-media services; new/increased government regulation; a prolonged and/or failed merger attempt; an inability to renew key content and OEM contracts; satellite anomalies;and an unfavorable outcome in the ongoing arbitration process with record labels over royalty rates.
Tyler Savery Position - Long sirius, Long XM