Wednesday July 11, 2007

Demand for Satellite Radio Soft but Consistent

Bridge Ratings continues to interview current and potential consumers of satellite radio. Interviews are conducted via random phone calls and in-store intercept at satellite radio kiosks and departments. With the growing influence of new car installations, this quarter we've added interviews at car dealerships.

Both satellite companies released their first quarter subscriber numbers in April with a net total of 760,000 new subscribers since the start of the year bringing the sector total to 14.5 million. This number falls short of the first quarter target of 780,000 Bridge Ratings' estimated would be needed in order for the full year subscriber count to reach 3.9 million which is shy of the satcasters projections for 2007 sign-ups. 2007 totals will need to reach 1.56 million by July 1 in order for the pacing to be on-target.

With this update and improving consumer interest in the last half of the second quarter, Bridge Ratings now projects the satellite radio industry will achieve this goal of net subscribers with a net gain of 800,000 subscribers in Q2.

While"brand stimulation" has remained soft through 2007, our weekly in-store and telephone surveying has shown improving interest between mid-April and the end of June with Sirius maintaining its significant brand lead.

This chart reflects the growing softening of consumer interest and projects the brand stimulation score for the sector into September based on the April/May/June data. The chart reveals an upturn in brand stimulation score moving 4.8-4.5-4.7-4.9 for the March-April-May-June period.

The double trend-line reflects the difference between our projections for brand interest when estimates were made in Q1 of 2007. The lower line represents the earlier projection. The upper line reflects a more optimistic outlook yet we are still projecting a soft consumer passion for satellite radio.

In September 2006 Bridge Ratings began conducting "brand stimulation" studies with potential satellite radio consumers. In initial results from this study, consumer interest in satellite radio had cooled considerably from earlier in 2006. A primary reason for softer 2006 sales can be attributed to the softening interest in the technology. From our interviews with consumers this slowing interest is due to three factors the mass radio audience considers important:

1. "What's in it for me?" - A clear and unique benefit - why do I need it?
2. How strong are the negative attributes of the current 'brand preference' - In the case of satellite radio, 'brand preference' refers to the emotional use attachment to and the comfort the consumer has with traditional radio.
3. The "level of demand" created by the degree of attractiveness of the brand's product line.

A fourth component has been added. While it was unclear what the total impact on future subscription sales the proposed merger of XM and Sirius will have, our data suggest that there while there had been some hesitancy on the part of prospective subscribers immediately following the announced merger, that has dissipated somewhat in the second quarter.

At the conclusion of our first quarter analysis Bridge Ratings data indicated that 52% of potential subscribers would wait longer than previously expected before subscribing. With this second quarter report, that number has dropped to 40%.

Half of the 52% from the first quarter intended to subscribe within 30 days surrounding the merger announcement in February 2007 and postponed or canceled their purchase until further clarification of the merger outcome.

Bridge Ratings measures each of these first two attributes which generates a "level of demand" quotient that we can track over time. For satellite radio as an industry, brand and product interest had seen a significant downtrend in brand stimulation since April 2006. After a slight upsurge in interest during the last quarter of 2006, interest in satellite radio among all consumers fell to its lowest point this spring falling below the 5.0 point for the first time ever. (see chart). A Brand Stimulation Score of 4.8 indicates that as a group, those we interviewed were just as likely not to consider subscribing to satellite radio as were.

In the latter part of Q2 however, interest has improved among consumers.

For the first half of 2006, the average Brand Stimulation Score was 7.3 on this scale. Between July and December This slowing "brand stimulation" slid to 6.0 reflecting very soft consumer interest during the middle part of 2006. First quarter 2007 average score is just over the critical 5.0 point on our scale.

And though the full second-quarter average fell below 5.0 (4.7) the graph shows a correction or flattening occurring. It is possible that consumer apathy for satellite radio has bottomed out.

For the purposes of this study, Bridge Ratings interviewed consumers at retail outlets who have purchased Satellite radio. Telephone surveys were also conducted between January 1, 2007 and June 30, 2007. Calls were placed to both current and potential subscribers to satellite radio.

I. Consumer Churn

During the first quarter of 2007 both satellite radio companies experienced a great deal of churn. XM's net subscriber growth for the quarter was 285,000 off an impressive gross gain of 868,000. That means that the company experienced cancellations or non-renewal trials of 583,000 - a 67% attrition rate.

Sirius added 556,000 net subscribers in the first quarter off a gross of 988,000 - a 43% attrition rate.

The following chart trends gross subscriber additions for both companies since 2005.

The consumer apathy with the satellite radio sector which Bridge Ratings began to see mid-Q2 of 2006 has affected XM more than Sirius. By reviewing the flip of brand dominance in the above chart, XM maintained subscriber leads through the second quarter of 2006. As consumer interest has waned, XM net subscriber count has suffered more than Sirius.

Comparing quarterly net attrition rates is a revealing exercise:

Conclusion: As each satellite radio company signs more subscribers the potential for Cumulative Churn increases as well. By the conclusion of Q2 2005, XM had 1.8 million subscribers; Sirius, having a late start, had 787,000. The longer consumers experienced XM the higher the churn or attrition became. The phenomenon is being repeating by Sirius the longer they have been turning over subscribers.

Car Lot Subscriptions

Clouding the "churn" calculation is the issue of "car lot subscribers", or those vehicles which have satellite radio installed, but have not been sold and are sitting on a car lot somewhere. Churn calculation becomes a question of whether we should back out cars that fall off after a promotional offer has ended. Sirius counts them in churn - XM does not.

XM does not count OEM subscribers until the consumer decides to keep the service after a promotional period. These subscribers are never counted in churn estimates. Since each company has difference ways of calculating such things, it is difficult to have an accurate accounting.

These numbers reflect one of the highest churn rates of any subscription service today. For comparisons, the following is a select list of churn rates:

II. Consumer Interest Index (CII) :

Since 2003, Bridge Ratings has conducted Consumer Interest surveys in order to project the potential size of the satellite radio subscriber base. Over time marketing by both satellite radio companies has heightened awareness and interest in the medium.

This chart compares actual growth through 2006 and projected subscriber growth for both XM and Sirius through 2010 with Bridge Ratings' Consumer Interest in satellite radio. Consumer Interest is determined by asking potential satellite radio subscribers at any point in time if they are "Very Likely", "Somewhat Likely", "Not Likely" to consider subscribing to satellite radio in the next sixty days.

III. Consumer Expectations - Merger Still Not in the Public Interest

Following is a follow-up to the original data received from current and potential satellite radio subscribers about a series of customer-related benefits or impacts that are likely to occur should a merger of Sirius and XM occur. Consumers rated as "Very Likely", "Somewhat Likely", or "Unlikely" the following developments. This chart shows original scores recorded right after the merger was announced in February compared to perceptions at the end of March.

The press coverage and press release clarifications from both satellite radio companies may have clarified market perceptions. While the majority of the total satellite radio consumer group still believe that increases in monthly subscription rates will occur in some form, the number is down significantly. Down as well, but not as significantly, are perceptions related to Increase in hardware cost and improved programming quality.

Areas where scores increased include perceptions that monthly subscription rates will decrease due to the merger, that there will be an increase in available channels to the average subscriber and an increase in the number of commercials on music channels.

Consumer perceptions of the merger are as follows:
(Significant change noted by arrows)

Consumer Profile Total Consumer Group	June 30, 2007	May 28, 2007	March 28 2007	Feb 28 2007
Increase in Mthly Subscription Rate	65%	69%	75%	87%
Increase in Hardware Cost	59%	60%	67%	72%
Decrease in Monthly Subscription Rate	19%	18%	15%	10%
Increase in No. of Available Channels	25%	22%	20%	18%
Decrease in No. of Available Channels	70%	75%	78%	82%
Improved Programming Quality	27%	25%	25%	35%
Reduction in Programming Quality	68%	72%	70%	65%
Fewer Commercials on Music Channels	15%	13%	10%	9%
Increased No. of Commercials on Music Channels	82%	83%	87%	86%
Able to Use Current Radio	68%	70%	65%	57%
Required to Replace Current Radio	29%	28%	33%	43%
Better audio reception	39%	43%	40%	50%
Worse audio reception	53%	50%	45%	49%

Based on this quarter's interviews, how would a merger of the two satellite radio companies impact subscriptions?

Using Bridge Ratings' projection algorithm developed at the University of California at Los Angeles, the following growth chart provides some insight.

The blue trend-line represents the growth of the sector as reflected by two separate companies competing for subscribers.

Should the merger be approved at the early part of 2008, subscription impact by the beginning of 2009 and beyond is shown by the red trend-line.

At first, we anticipate that comparatively, the merged entity will generate fewer total subscription gains for all of 2008 than would the separated companies have. This is due, in part, by response by consumers who still perceive that a combined satellite service will provide inferior consumer choice. Today, and the foreseeable future, this is a major challenge to be tackled by the satellite radio sector through marketing.

After an initial period of slower growth for the combined entity, all things being equal, the merged company should exceed projected subscriber growth for two separate companies by the end of 2012.

IV. Second Quarter 2007 Retail Growth

While churn rate is increasing for both satellite radio services (as shown above) gross retail sales have remained generally consistent. The sector total gross subscriber count grew by 6.7 million in 2005 and 7.7 million in 2006. What has changed is number of subscribers who have not renewed, or those trial subscriptions that fell off the books. A significant number of these trial subscriptions were in-car where most industry analysts agree is the future of the medium's growth.

Gross additions in Q1 2007 amounted to 1.8 million but with churn net additions came to a reported 760,000.

In light of the recently announced merger intentions of these companies and the findings in the most current Bridge Ratings study, we are inclined to reduce our pre-merger-announcement (PMA) subscriber numbers for full-year 2007. For the moment, we will hold with our estimate of 17 million total by the end of 2007 until additional consumer feedback is accumulated over the next few weeks.

Some revised industry estimates put 2007 subscription gains for the two companies at between 5.3-5.6 million more subscribers bringing the industry total by year-end to approximately 19 million. In order to reach this target, first quarter gains should have been around 1.1 million new subscribers. Bridge Ratings' estimates at the start of 2007 were closer to 17 million by year-end but we are now preparing to lower these numbers based on the first and second quarter information reported here.

The following 'thermometer graph' represents quarter-by-quarter subscriber growth estimates for the satellite radio sector. To date, subscriber growth projections have achieved 40% of our annual projection of approximately 1,560,000 additional net subscribers since January 1, 2007. In order for the sector to reach our conservative estimate of 3.9 million new 2007 subscribers, the second quarter needed to outperform the first quarter. Based on our projections, second quarter subscriptions outnumbered those of the first quarter bringing the sector up to Bridge Ratings' first-half 2007 benchmark.

In other words, the satellite radio sector is on track to reach an additional 3.9 million net subscribers by year-end. The sector is, however, not on track to reach its own projection of 19 million.

Estimates of added subscribers are based on Bridge Ratings consumer interviews and projections. This chart will be updated on a monthly basis or as data is received.

V. Brand Awareness Tracking

Bridge Ratings will continue to release updates on our retail interviews through 2007.

VI. Confidence Scores

Last fall Bridge Ratings introduced a new metric into the consumer research field to measure whether a product or service was delivering upon its perceived promise. The promise is borne primarily from marketing and word-of-mouth which creates a market perception of the product or service.

In the case of Satellite radio, each company has a very distinct market promise even though on the surface they are very similar services.

The Confidence Score is a simple tool that allows us to capture over time the market's attitude about a product or service. In other words, is the service living up to its reputation.

Confidence Scores are based on a -5 to + 5 scale. The less confidence the interested consumer has in the product or service the lower the score on the scale. This metric is based on current or former users of the product or service. Following show are the Confidence Scores for XM and Sirius:

*Based on telephone interviews and point-of-purchase interviews conducted at retail outlets between January 1 and May 26, 2007. Retail outlets vary by week but may include Best Buy, Circuit City, Sears, Target, Staples and Walmart stores.

Markets surveyed: Los Angeles, San Diego, Phoenix, Boston, Detroit, New York, Boston, Chicago, Dallas. On average 11,000 listeners 18+ have been surveyed monthly.

For questions or further information contact Dave Van Dyke at 818.291.6420 or dvd@bridgeratings.com.