Satellite Radio Has a Sirius Problem

Shares of Sirius Satellite Radio fell by 43 percent to 77 cents Wednesday after it said it may have to seek bankruptcy protection or a sale of the company if it doesn’t get $300 million in operating capital by early 2003.

Although it has just under $300 million on hand to fund operations until then, the disclosure and low subscriber numbers since launch left investors voting with their sell buttons on the start-up’s prospects.

The news about Sirius comes as no surprise to observers of the Manhattan-based company as well as its only competitor in the market, XM Satellite Radio Holdings of Washington, D.C., both of which have sunk about $1 billion into their ventures.

With the market for paid satellite radio so new, the Sirius need for additional capital early next year and another $300 million the following year raises the debate over whether two players can survive in such an unproven market. Some analysts have already predicted consolidation between the two players, but the question also remains whether regulators would object. Another problem with the consolidation idea: their technologies are not all that compatible.

Sirius’s launch this year was delayed by technical glitches with its satellites and senior management shakeups. With a half-year head start, meanwhile, XM keeps increasing its lead in the race for subscribers.

XM reports that it had more than 136,500 customers in the second quarter, exceeding forecasts. Sirius went live in February and completed its national rollout at the end of July. As of August 11, it claimed 6,510 subscribers who pay $12.95 a month (on top of a one-time activation fee) for about 100 channels of music, sports, news and entertainment programming. XM subscribers pay $9.95 a month for a similar number of channels and offerings.

Plus, Sirius is still playing catch-up in its efforts to distribute the hardware subscribers need to purchase before signing on.

“We believe the number of subscribers has been constrained by a shortage of competitive radios at retail outlets and lack of national advertising and promotional efforts. Kenwood introduced an FM-modulated Sirius radio in August 2002, and Panasonic and Audiovox are expected to introduce FM-modulated Sirius radios in the third quarter of 2002. These products are
expected to reduce any perceived competitive disadvantage that Sirius radios have experienced at retail,” the company said.

Sirius said it has retained UBS Warburg to help it raise operating capital and reduce its debt load, which may include a deal to convert some debt to equity and reduce shareholders’ interest. Current investors affiliated with Apollo Management and The Blackstone Group are also looking at a possible investment.

Meanwhile, XM may have more subscribers than Sirius, but it has lower cash reserves, about $100 million as of the end of June compared to what Sirius says is just under $300 million.

At this stage, all the companies can do is hope that subscribers and investors stay tuned.

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