Satellite Radio Firms Issue Warning Thu Aug 15, 4:03 PM ET

By SIMON AVERY, AP Business Writer

The nation’s two satellite radio companies are racing to line up new financing before they run out of cash next year — just a short time after launching nationwide services offering scores of digital channels to motorists.

Shares of Sirius Satellite Radio plummeted nearly 44 percent Wednesday, to 76 cents, after the New York-based firm said it was not signing up subscribers as fast as predicted.

Shares of Washington-based rival XM Satellite Radio Holdings fell more than 4 percent to $2.89.

Both companies warned investors about low cash positions in filings with the Securities and Exchange Commission ( news – web sites) this week.

On Wednesday, XM Satellite said it would run out of cash in the first quarter of next year and would have to discontinue operations if it did not raise additional funds.

Chance Patterson, XM Satellite’s vice president of corporate affairs, declined to say how much the company needed to raise by early next year, but said the company expected to break even by late 2004 or early 2005.

Unlike Sirius, XM Satellite has exceeded early subscription forecasts. Since launching nationally in November, the company said it had signed up 136,000 customers at the end of June — compared to an anticipated 130,000.

XM Satellite remains on track to report 200,000 subscribers at the end of the current quarter and 350,000 subscribers by the end of the year, Patterson said.

On Tuesday, Sirius reported that it needed to raise another $300 million by mid-2003 and warned it might have to file for bankruptcy protection without the cash injection.

“The issue is can we get the money,” said Sirius spokesman Jim Collins. “The concern is that the environment is so negative that analysts have concerns that the industry cannot raise that money.”

But Collins insisted that Sirius’ business plans are on track, even though subscriber growth failed to meet expectations in the last quarter.

This week Sirius cut its year-end target to 75,000 customers, down from an earlier forecast of between 100,000 and 150,000.

Making matters worse, some analysts said Sirius is burning through its remaining $300 million faster than expected.

“Cash burn is running somewhat higher than we have been expecting,” John Stone, an analyst with Ladenburg Thalmann wrote in a report. “This higher cash burn highlights the importance of securing funding for the company.”

Among the financing options Sirius is considering is a debt-for-equity swap, or an additional equity investment by Blackstone Group and Apollo Management or other major equity holders.

In a report entitled “Listen Up — Get Out While You Can,” Merrill Lynch analyst Marc Nabi said all paths will “lead to significant dilution to current equity holders should funding ultimately become available.”

Collins said Sirius’ growth has been hampered by supply constraints that occurred after the company pushed its nationwide launch ahead one month to July 1. Consumers will find the satellite radio kits easier to buy as Panasonic and Audiovox introduce receivers later this year, on top of three existing independent brands, he said.

“We feel it’s a product awareness issue,” Collins said.

Sirius spent $1.9 billion on its network of three satellites and 92 land bases that transmit some 60 channels of commercial-free music and some 40 channels of talk and children’s programming.

The company charges $13 a month for its service, which requires an upfront consumer investment of at least $250 for a receiver, antenna and radio. On Tuesday, Sirius reported a second quarter loss of $124.6 million, or $1.62 per share, on revenue of $70,000.

XM satellite spent about $1 billion on its satellite and ground station network. The company charges a monthly fee of $10 for access to more than 100 channels, although the service is not commercial-free.

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MARCH 21, 2002

NEWS ANALYSIS By Stephen H. Wildstrom

The Techno-Culture Clash in Telecom

On display at the industry’s big trade show: Tensions between wireless carriers and their hardware and software partners

Software companies run on Internet time. Speed is everything, and if the product that is shipped doesn’t quite work, it can always be fixed in the next release. The handheld-computer industry works on PC time. It’s more important to get the product right out of the box, because hardware is difficult to fix. Time-to-market considerations still dominate the process.

Then there’s the wireless-carrier industry, which works on telephone time. The goal from the get-go is 99.999% reliability, so the rule for both hardware and software is test and test some more, to make sure that products work properly and don’t interfere with the operation of the network. Telephone time is the toughest standard of all.

But a new, carrier-dominated world was very much on display Mar. 18-20 at the Cellular Telecommunications & Internet Assn.’s Wireless 2002 show in Orlando, Fla. Computer-oriented companies such as Hewlett-Packard, Compaq, and Handspring are rolling out devices with built-in support for the new data networks being offered all over the world. At the same time, large-scale wireless-data deployments by corporate customers are taking the voice-oriented carriers into territory they don’t understand very well.

“THOSE FIVE NINES.”  “In the dot-com days, you could talk to an Internet company and have a service up and running in a couple of days,” says Gregg Armstrong, chief operating officer of Starfish Software, a Motorola unit that makes software to synchronize data across multiple devices. “The quality was often not very satisfactory. Now, before the carriers will deploy anything, they want to do extensive testing because they need those five nines of reliability.”

As PC and Internet players move into the world of carriers, they’re being forced to change the way they do business. A device can be used on networks using CDMA technology, such as Sprint and Verizon Wireless, only if it has been “provisioned” by the carrier, so carriers must approve all devices.

Customers of GSM networks, offered by VoiceStream and all European carriers, can, in effect, provision their own devices by moving a little card called a subscriber-information module from one device to another. But a retail model in which carriers are expected to subsidize the cost of phones and handhelds means the network operators are in control of what gets sold.

Hardware makers, who once got products to market as quickly as humanly possible, now face months of negotiation followed by months of testing. Furthermore, says Joe Sipher, vice-president for product marketing at handheld maker Handspring, “carriers want everything on their networks to look as much alike as possible, while hardware makers want to differentiate their products as much as possible.”

BRANDED HANDSETS.  The tension between carriers and their hardware and software partners has as much to do with business models as with technology. It has been the carrier who acquired the customer and the carrier who billed the customer — even for services provided, usually invisibly, by third parties. Some carriers, notably Sprint, have only recently begun to allow hardware makers to put their own brands on handsets.

“At least for the next couple of years, the carriers will continue to own the customers,” says Bruce Chatterly, CEO of Seattle-based ViAir, whose applications help carriers give customers access to Internet and corporate e-mail accounts. But companies with strong brands of their own, like Compaq and Microsoft, want a bigger piece of the action.

One product unveiled at the CTIA show is a good example of the complexity engendered by all the new requirements. Called the Thera by Audiovox, it’s co-branded by Audiovox Communications and Sprint PCS, which will provide both the data network and the sales and marketing force. The connection to the network is provided by a Sierra Wireless radio modem. Yet the Thera itself was designed and manufactured by Toshiba to use Microsoft’s Pocket PC 2002 software platform.

WARY OF REDMOND.  Microsoft probably faces the greatest challenge in this new world. For one thing, carriers have not traditionally been its big customers. They mostly favor Sun Microsystems gear in their data centers, regarding Windows servers as neither secure nor reliable enough to make the cut as “carrier grade.” More important, Microsoft’s reputation as a company that manages to walk away with the lion’s share of the profit in any relationship makes carriers extremely wary of partnering with Redmond.

Microsoft has been making some inroads, mainly with wireless Pocket PC 2002 models. European carrier mmO2 (formerly BT Cellnet) will brand and sell a Pocket PC for use on its GSM network (the hardware comes from HTC in Taiwan). But Microsoft has had a tougher slog getting carriers to embrace its Smart Phone, a smaller unit based on a stripped-down version of Windows CE and intended primarily for voice use. The software marker has finally gotten some carrier deals for the Smart Phone, but it has had to work with a third-tier handset maker, Britain’s Sendo.

The carriers, too, face challenges adapting to the changing market. The more they succeed in being the customers’ single point of contact, the more responsibility they take for customer satisfaction with hardware and software provided by others. But if they don’t supervise the whole package, they may be pushed out to serve as only commodity suppliers of bandwidth. “They run the risk of being reduced to dumb pipes,” says Richard Siber, a partner in Accenture, whose Mobile Service Bureau is a software and services product designed to help carriers manage wireless deployments for enterprise customers.

In the end, the carrier, hardware makers, and software companies will all have to find a way to work as a team. They all need each other now. And, with luck, the wireless-data business will have enough growth so that all can prosper. But look for some interesting clashes in culture along the way.