XM Satellite Radio’s stock surged last week following two major events: the successful launch of the company’s third satellite by a Sea Launch rocket and the first ever increase in its monthly subscription fee.
Washington-based XM announced a subscription price increase Feb. 28 shortly before launching a replacement satellite the same day that also marked Sea Launch’s return to flight.
XM’s stock price reached it highest point in more than four years Dec. 22 when it closed at $40.22. But the price had declined steadily since, dropping to $28.73 by Feb. 25, the last day of trading in New York before the Feb. 28 launch. The excitement generated among investors by the launch and the price increase helped the price rebound, as the stock closed March 3 at $33.28.
The XM-3 satellite is based on a Boeing 702 platform that is similar to the first two XM satellites. The difference is that XM-3 is designed to correct a solar array flaw that has shortened the expected lifespan of XM-1 and XM-2.
XM-3 is expected to begin operations later this spring from an orbital slot at 85 degrees west longitude, XM spokesman Chance Patterson said. The new spacecraft will replace XM-1, which will be co-located with XM-2 at 115 degrees west, where the two ailing spacecraft will basically act as a single unit.
XM-1 and XM-2 will divide the job of broadcasting the company’s radio signals until the launch of XM-4, scheduled for sometime in 2007, Patterson said. At that time, XM-1 and XM-2 will become on-orbit backups.
The satellite moves will be transparent to XM listeners, but the customers will notice the increase in their subscription price. XM has charged users $9.99 per month since it began operations in 2001, but beginning April 2 the monthly fee will be $12.95.
As part of the increase XM will expand its basic service to include the company’s Internet broadcast of its music channels as well as some programming that customers previously had been charged extra to access.
The changes match the pricing and programming of rival Sirius Satellite Radio of New York, though Patterson denied that XM’s business decisions are influenced by its rival. “We’ve done our own research on what we offer and don’t focus on what Sirius is doing,” he said.
This is the second time since January 2004, when XM dropped commercials from its music channels, that XM has changed its business operations to mirror those of Sirius.
However, XM remains the leader in the satellite radio market, Patterson said. “We launched first, and if you look at how the lineups evolved, a lot of what Sirius has done has tracked with what we have done,” he said. “If you look at the radios, we launch products and six months to a year later, they launch something similar, but usually bigger and bulkier.”
Jimmy Schaeffler, head of the Carmel Group, a media research firm in Carmel, Calif., said XM is echoing what Sirius has done on the business side. Schaeffler was surprised that XM had not increased its monthly subscription fee sooner after dropping commercials from its music channels.
“Their having launched at $9.95 was something of an anomaly,” Schaeffler said. “They did it based on the idea that at the time they would be including advertisements in their XM-produced programming. They dropped that but never raised the price, so from a common sense standpoint they would finally say this was based on an old model.”
Subscriptions contributed $221.1 million of XM’s $244.4 million in revenue in 2004, but the price increase is not expected to create a large bump in revenue in the near term, Patterson said. The additional funds will be used for programming acquisitions and to lower the price of XM hardware, which is the biggest barrier to entry for many potential subscribers, he said.
XM, which has more than 3.2 million subscribers, does not expect the price increase to dramatically cut into its current subscriber base or its projected subscriber growth, Patterson said. The company is forecasting that it will exceed more than 20 million subscribers by 2010.
“Our research has found that as long as the service is fairly priced, we will not be effected,” Patterson said. “We believe $12.95 is fair given the amount of content you get.”
Schaeffler said XM’s subscriber base might take a hit, but in the long run, the price increase will benefit the company. “They are finding out this is not so much about getting this huge subscriber share anymore,” he said. “They are either finding out that consumers either don’t care about a $3 price difference or that it’s not that important in the business model anymore.”
The combination of the launch and the price hike helped shore up XM’s share price, as the stock climbed back above $30 after a steady slide that began in mid-December.
“Wall Street loves to see a multi-channel company raise its rates, especially if its something they can do with limited competition, and here they truly can,” Schaeffler said.
The Feb. 28 launch was demonstrated that Sea Launch had corrected any problems with the Block DM upper stage of its Zenit-3SL rocket. The company’s previous launch in June had left a communications satellite in a lower-than-expected orbit.
Paula Korn, a spokeswoman for Long Beach, Calif.-based Sea Launch, called the mission the most accurate the company had ever performed. “We did an investigation and resolved the problem in October,” she said. “We knew we were good to go and had no concerns about the Block DM.”
Sea Launch is poised to perform four or five more missions in 2005, depending on satellite deliveries, Korn said. The next mission is scheduled to take place early in the second quarter for an undisclosed customer, she said.
This was the third successful return-to-flight mission for the three companies involved in a mutual backup arrangement. The Sea Launch mission followed the Feb. 12 launch of Europe’s Ariane 5 ECA rocket, which was redesigned following a December 2002 failure; and the Feb. 26 return to flight of Japan’s H-2A vehicle, which was operating for the first time since a November 2003 failure.