Updated Wednesday December 13, 2006

Retail Management Expressing Concerns

Bridge Ratings' trending of Satellite Radio subscribers continues through 2006. The purpose of this on-going study is to analyze consumer preferences related to satellite service brand and satellite radio in general.

Bridge Ratings interviews consumers at retail outlets who have purchased Satellite radio. Consumers are interviewed when entering audio departments to determine their purchase intent and then again post-purchase. By matching pre-purchase interest against actual purchase, we are able to determine: a) brand potency and b) brand awareness-to-purchase effectiveness, i.e. the brand's ability to convert awareness to purchase.

This Week's Update:

Retail sales continue to pace behind 2005 for satellite radio as this week' retail traffic in satellite radio departments around the country visited by Bridge Ratings, foot traffic was improved but purchase activity continues to disappoint. In-store management at 55% of the locations expressed concern about the reduced sales activity and overall interest for satellite radio. While Sirius continues its dominance of what retail there is, XM continues to experience improved brand scores and sales perhaps due to solid advertising and marketing support.

NPD Reports that Retail sales for both XM and Sirius slumped 45% in November.

Data released at presstime on 12/13 show that 2006 comparisons with 2005's fourth quarter retail sales activity further cloud a softening satellite sector outlook. XM's numbers look worse, causing BofA analyst Jonathan Jacoby to cut his year-end subscriber estimates from 7.8 million to 7.7 million. Sirius (as monitored by NPD) was also down 45% in November - but that was less of a decline than Bank of America forecast. Jacoby says "the weak demand at retail" for receivers, relative to last year, suggests that satellite's growth is going to come from its new-car (OEM) installations. Not from after-market buys at the big-box retailers. The retail numbers quoted here represent a larger universe of retail outlets than Bridge Ratings uses. Additional retail outlets such as Radio Shack and on-line sales are included in NPD's data.

"Brand Stimulation" Part of the Problem

As part of this quarter's qualitative research Bridge Ratings is conducting with potential satellite radio consumers, a "brand stimulation" study is underway, the full results of which will be published after the first of the year. In initial results from this study, consumer interest in satellite radio has cooled considerably from earlier this year and is waning primarily due to three factors the mass radio audience considers important:

1. "What's in it for me?" - A clear and unique benefit
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 the consumer has to traditional radio.
3. The "level of demand" created by the degree of attractiveness of the brand's product line.

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 has seen a significant downtrend in brand stimulation since April 2006. At this time, it is at its lowest point of the year reflecting increasing disinterest in the product over time by the general consumer base. This slowing "brand stimulation" is at the heart of the sector's marketing challenge which we don't see improving anytime soon unless new marketing strategies are introduced.

Younger Demographics Are Interested in Other Things

In anticipation of the major shopping weeks of the year, we were expecting a better showing from the youth demographic of 18-21 year olds who heretofore had shown little interest in satellite radio. Interviewing prior to the "Black Friday" shopping weekend had indicated that this youth group was beginning to show interest in satellite radio, if only from the perspective of being on the receiving end this gift-giving season. However, this interest did not translate into specific buy behavior this past week. In our survey of shopping consumers over the past two weeks, satellite radio ranked 45th overall, but did not appear on any top 20 list of consumers 12-24 years of age.

While retail sales of satellite systems is far below the activity of a year ago, the sector's potential sales growth now lies in OEM auto installation heading in to 2007.

This Week's Consumer Top 10 Composite Wish List
Consumers were asked to select ten items from a list of electronic devices

1. Digital Camera
2. Apple Video iPod
3. Apple Nano iPod
4. SanDisk MP3 Player
5. GPS Navigation Device
6. Apple Shuffle
7. Camcorder
8. DVD Player
9. TIVO
10. Large Screen TV

XM and Sirius are now talking about “listeners” — not just number of subscribers

XM and Sirius are now talking about “listeners” — not just number of subscribers. It’s much the way newspapers and magazines talk about “pass along” readership instead of “paid subscriptions” — and both XM and Sirius talked up the concept of a wider listenership at presentations this week. First it was Sirius boss Mel Karmazin saying “we’re gonna have 30 million listeners at the end of this year.” He says that “30 million Americans is a real number, and growing rapidly.” From a research perspective this is not a real number, something that can be counted. And if Sirius hits its revised guidance they’ll have about six million total subs by New Year’s — a long way from 30 million. While XM Chairman Gary Parsons uses the same “pass along” idea but with a smaller multiple — XM and Sirius together have about 12 million subscribers “which turns into about 25 million listeners, because you have that many listeners per subscription.” Sellers of newspaper advertising often boost their circulation estimates using this type of extrapolation multiple, the dependability of which is highly questionable.

Overall Shopping Mood

Based on interviews this week actual overall shopping activity this week, there are strong signs that the health of the next phase of holiday shopping activity point to overall solid retail growth of a 4.8% to 7% improvement over the same period last year, however this growth will not include satellite radio. At this time, Bridge Ratings is projecting at 25% decline in satellite radio retail activity this quarter when compared to Q4 of 2005.

During Q4 of 2005, Sirius added 1.1 million new subscribers - XM added another 898,315 for a total sector addition of 2 million for the quarter. Based on estimates by both companies projections for Q4 2006 are now : Sirius 881,000 (-22%) and XM 500,000 (-44%) for a total of 1.3 million for Q4. Bridge Ratings is projecting sales will be off 700,000 units from last year at this time. (-35%) compared to Q4 2005.

Holiday Shopping Patterns

The most intriguing shift in holiday shopping patterns has come in the catchall retail category dubbed GAFO -- general merchandise (including department and discount stores), apparel, furniture (and home furnishings) and other (including electronics, appliances, books and music). These goods often end up under the Christmas tree, yet the share of annual GAFO sales that occurs in November and December has fallen in recent years (22.5% in 2004 vs. 24% in 1990), according to Census data.

Why is this? Higher discounting ahead of the holiday and an increase in services as gifts account for much of that share decline.

But a third reason is a boom in gift cards. Sales of gift cards this holiday season will rise 6.6% to $18.5 billion, according to a National Retail Federation survey by BIGresearch. The survey found the average consumer will spend $88.03 on the cards, 15.6% of a typical holiday gift budget. Cards lock in business for the retailer, but they distort holiday sales since retailers don't count the revenue until a card is redeemed.

Gift cards essentially extend the holiday retail season into January. That's OK for retailers -- as long as consumers aren't strictly cashing in on after-holiday discounts. Gift cards create one more obstacle to merchants' desire to record more holiday sales before Thanksgiving. But for retailers' holiday selling, better late than never.

18% of consumers to satellite radio kiosks/departments this week indicated they would be purchasing gift cards.

Bridge Ratings' 4th Quarter Estimates

Third quarter results now show the satellite radio industry at just over 12 million subscribers (4% of the U.S. population). Based on retail activity and interviews over the past three weeks, Bridge Ratings now estimates an additional 1.425 million fourth quarter subscribers.

Bridge Ratings' has adjusted its estimates for XM to be near 7.6 million year-end subscription total .

Sirius adjusted its forecast down to between 5.9 and 6.1 million users by year end. Bridge Ratings puts that number closer to 5.9 million and we now estimate the end-of-year sector total to be closer to a 13.5 million subscriber count. If accurate for the end of 2006, this number would be 1.5 million shy of industry estimates announced at the beginning of the year.

When trending consumer traffic in satellite radio retail locations* the 2006 activity levels have shown a gradual drop-off until October.

Based on November traffic, the following trend chart represents the average customer foot traffic through the retail outlets Bridge Ratings utilizes for its weekly studies. Not surprisingly, November traffic showed a marked reversal of retail activity and the first signs of life in many retail outlets with satellite radio departments since early this year. However, while the increase in foot traffic has more consumers looking at satellite equipment, actual conversion of foot traffic to purchase has not met expectations.

November foot traffic/purchase activity index: .80.

How to read: Full year average conversion of foot traffic to purchase activity is 15%, i.e. for every 100 consumers visiting the satellite radio
departments in a typical week, 15 consumers actually purchased a system. For the months of November 2006, this number is 80% of the annual
average of 15% (12%).

When viewing the conversion of retail foot traffic to actual purchase over time, the satellite radio industry's challenges are placed into perspective. The following graph represents sales as a percentage of consumer shopping visits to satellite radio departments at the 40 retail locations across the U.S. which Bridge Ratings uses as a source for our weekly tracking.

Full Year Projections - REVISED

Based on third quarter announcements by both satellite companies, current pacing results and our continuing in-store interviews, Bridge Ratings has reduced its projections and now estimates that XM total subscriber count will end the year at 7.7 million and 5.9 million for Sirius. Projections are updated quarterly. As of this date, Bridge Ratings estimates that original industry 2006 estimates of satellite subscriptions of 6 million will be closer to 4.5 million with Sirius maintaining a 60% share this year with 2.8 million new subscribers compared to 1.6 million new subscribers for XM. By year's end, satellite radio's 13.5 million subscribers will constitute 4.5% of the U.S. population up from 3.1% at the end of 2005.

Brand Awareness Tracking

Trends over the past three weeks have shown improving brand awareness and purchase share.

XM scored another strong week for satellite system purchases over performing its brand awareness:

Satellite Radio Churn Rate

Bridge Ratings also interviews satellite radio subscribers who have had subscriptions for at least three months. We wanted to learn if these subscribers' intended to re-subscribe at the conclusion of their free trial or at the end of their one year subscription. We also differentiate between in-car (OEM) installs where many of the subscriptions are free upon purchase and retail purchase. Free trials last between three and 12 months.

"Do you intend to renew your satellite radio subscription?"

The Stern Effect - Stern to Go on the Offensive

In what’s likely an effort to goose sales of Sirius Satellite Radio subscriptions following that company’s recent announcement that it was revising its subscriber forecast downward, their biggest star is hitting the TV Talk show circuit. And, with apologies to Martha Stewart and Jay Thomas, the biggest star on Sirius is Howard Stern.

Stern has announced on his radio show that he'll be on CBS’s “Late Show with David Letterman” this coming week. He’ll then appear on NBC’s “Late Night with Conan O’Brien,” and he’ll even travel west for an appearance on ABC’s “Jimmy Kimmel Live,” all during the holiday season.

Yet we don't believe this will have significant impact on the nature of sales. The root of the sector's problems is far more oriented to
a mix of consumer apathy, lack of brand stimualation and decision stress.

Bridge Ratings has been tracking the impact Sirius satellite radio's Howard Stern has been having on the company's subscription rate since the fall of 2005. Between October and December 2005, Stern influenced 52% of Sirius subscription decisions on average. This was prior to his first satellite radio show which promised fewer commercials and non-censored Stern show content. Through 2006 this number has fallen. During the week prior to the Thanksgiving shopping week Stern's effect was 14%. Last week our interviews revealed that this number was 17% of those subscribing to Sirius being motivated by Stern.

November's Internet offer by Sirius for a free sample of the Howard Stern's satellite program does not appear to have impacted retail subscriptions, but it may have increased subscription sales on the Internet. Our latest estimate which includes the month of November 2006 is that a total of 1.6 million (13%) of Stern's total terrestrial fan base has migrated with him to Sirius. Despite the full-year shortfall Sirius will experience, we still estimate that Stern is responsible for 39% of the company's 2006 subscription.

Bridge Ratings estimates that 2.5 million of Howard Stern's terrestrial audience (20%) were Stern's most loyal listeners and that Stern has converted 52% of them (1.3 million) to join him. Bridge Ratings views the unconverted 48% of Howard Stern's core fan base as the prime group to pursue as they will be less costly to acquire than the 80% of Stern's terrestrial audience who were categorized as those who "listened occasionally" or "listened frequently".

This week's Sirius subscriptions as motivated primarily by Howard Stern increased slightly.

Consumer purchase motive for each service: Sirius Preferred Programming

The following chart has proven to be an indicator of the future behavior that we see in Brand & Retail Strength chart above.

Q: "As a subscriber to ______satellite radio service, please rate your satisfaction with the following on a scale of 1 to 10 where
"1" represents "Not satisfied at all" and "10" represents "satisfied completely"

Based on this week's interviews with non-subscribers to satellite radio, but who have told us in the past they intend to subscribe at some time in the future, the following represents our revised retail estimates for the fourth quarter:

Bridge Ratings continues to release updates on our retail interviews through the fourth quarter.

*Based on interviews conducted at retail outlets between January 1 and December 11, 2006. Retail outlets vary by week but may include Best Buy, Circuit City, Sears, CompUSA, Target, Staples and Sam's Clubs stores.

Markets surveyed: Los Angeles, San Diego, Phoenix, Boston, Detroit, New York, Boston, Chicago, Dallas. 4011 listeners 18+ were surveyed during this week.