02.04.09

Will TerreStar’s future be tied to satellite radio?

Posted in Financials, ICO/DBSD, Spectrum, TerreStar at 10:50 pm by timfarrar

Its now been reported that Echostar has acquired a substantial portion of Sirius XM’s maturing debt as part of a possible attempt to take control of the company through a forced bankruptcy filing. This doesn’t come as a great surprise given Echostar’s other investments in satellite-delivered mobile TV (in Korea and China), in 700MHz spectrum that would likely be used for mobile TV in the US, and in TerreStar’s MSS-ATC system (where it has stated an interest in using the satellites for mobile video, most recently at the SATCON conference in New York last October). Indeed, a primary reason for the spin-off of Echostar from DISH was to enable Echostar to exploit new business models in mobile entertainment, while the slow growth DISH business would ultimately be sold to a telco or merged with DirecTV.

In our view, satellite radio has always had a far more viable business model than mobile TV, despite the recent downturn in new car sales making it difficult if not impossible for Sirius XM to achieve subscriber growth this year. We believe that satellite radio will remain an attractive feature for car manufacturers in the medium to long term both because the satellite infrastructure is ideally suited to providing a near ubiquitous car-based service with only a limited number of terrestrial repeaters and because the technology is not going to change dramatically over the next decade, avoiding the risk of existing OEM installations being left with no service (as happened to many OnStar subscribers when analog cellular networks were switched off). Compare this to cellular-based navigation and entertainment systems, where technology is advancing very rapidly and an aftermarket solution (or a flexible OEM solution such as Sync) is the most viable option for car manufacturers and end users alike. However, we also view a bankruptcy filing by Sirius XM as highly likely, because it will enable the company to renegotiate its biggest (controllable) expense – that of content rights. While some providers such as talk radio hosts may feel that there is a better deal on offer from terrestrial free-to-air networks, for most sports programming there is no viable alternative to satellite radio as a distribution mechanism, because no other broadcast (audio) medium can offer sufficient capacity and reach to deliver multiple simultaneous games to a widely distributed national audience. Some may argue that internet streaming is an alternative, but 3G and 4G wireless networks are (and will remain) ill-suited to providing continuous in-car coverage (not to mention the difficulty of extracting any revenue stream for content providers other than advertising from such users).

So if Echostar does now move to take control of Sirius XM, how will this fit with its other investments? Most obviously it seems plausible that TerreStar’s satellites could be used to provide a two-way communications channel for future generations of Sirius XM receivers, while Sirius XM’s repeater network could form part (although not all) of the necessary Ancillary Terrestrial Component (ATC) to ensure signal reception for TerreStar in urban areas. This would enable low cost integration of other services into cars, whether desired by the manufacturer (such as over-the-air fault monitoring) or paid for by the consumer (such as an OnStar alternative). Indeed, with the exception of mobile video (which we do not believe is likely to gain traction in cars, for the simple reason that the vast majority of satellite radio use is by solo commuters, who obviously couldn’t watch a video) this sounds surprisingly similar to ICO’s proposed Mobile Interactive Multimedia (MIM) service, and given Sirius XM’s strong relationships with most of the major auto manufacturers, this prospect could make it even more difficult for ICO to move forward with a commercial launch of MIM. Perhaps it might even provide an incentive for ICO to contemplate merging with TerreStar (as has often been rumored in the past)? Certainly Echostar’s interest in satellite radio is likely to shake up the MSS sector as well.

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