Sirius Meets Subscriber Projections, Still Pondering XM Merger

Amid continued speculation about the possibility of a satellite-radio merger, Sirius Satellite Radio said Tuesday that it finished 2006 with 82% more subscribers than in the previous year, in-line with the company's recently lowered projection.

Sirius said that it ended the year with about 6.02 million subscribers, up from 3.3 million a year earlier and within the company's Dec. 4 forecast of 5.9 million to 6.1 million subscribers.

The forecast was lowered from the company's previous projection of more than 6.2 million subscribers due to slower-than-expected sales after Thanksgiving. Sirius also said Tuesday that it expects to report its first quarter of positive free cash flow in the three months ended Dec. 31.

But such data is of less interest to Wall Street than the broader question of whether Sirius might ever merge with its larger rival XM Satellite Radio. The New York Times recapped on Monday the advantages of a merger for the two companies, pointing out potentially significant cost savings from increased negotiating leverage for programming and the elimination of duplicative programming and employees.

Sirius chief executive officer Mel Karmazin has freely admitted that he'd consider a merger with XM at the right price. And while regulators would likely balk at allowing the nation's satellite radio duopoly to become a monopoly, XM chairman Gary Parsons argued last month at the Credit Suisse Media and Telecom Conference that "we are clearly operating in a much larger marketplace than satellite radio…The competition that the both of us face is clearly dominantly against terrestrial radio."

A new report from technology consultancy In-Stat suggests that terrestrial radio could soon begin making inroads against satellite radio carriers thanks to the gradual rollout of digital radio broadcasts. Such broadcasters will provide far better sound than traditional FM broadcasts and enable radio broadcasters to subdivide the digital portion of a station's signal to broadcast two or more programs simultaneously and thereby offer a broader array of programming – currently satellite radio's trump card.

U.S. adoption of digital radio has greatly lagged that of satellite radio because of the reluctance of major broadcasters to buy digital transmitters until more digital receivers were available, In-Stat analyst Stephanie Ethier says.

But she observes that "terrestrial broadcasters now recognize satellite radio for the real threat it represents" to their audience and advertising revenues. She adds: "As satellite radio becomes more and more prevalent in the U.S., terrestrial broadcasters are responding in an effort to compete with satellite radio."

Digital radio receivers will continue to drop in price and become more widely available over the next several years, just as sales of satellite radio units begin to slow sharply, Ethier says.

Ethier projects satellite radio unit sales in the U.S. and Canada of 6.1 million in 2006, 8 million in 2007 and 11 million in 2010. Meanwhile, she expects digital terrestrial radio unit sales will total 225,000 in 2006, rising to 1 million in 2007 and 5.1 million in 2010.

forbes.com

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