XM AND SIRIUS FACE MAJOR HURDLES

News of Margolese’s resignation didn’t come as total surprise, officials said. Company had been hinting at changes in direction for weeks. Wilsterman echoed wording of resignation statement when he said Margolese, whom he praised as “visionary,” had been expected by company insiders to “pass the baton” to others when Sirius was ready to make transition to operational from developmental firm. Announcement said Margolese would remain nonexecutive board chmn., with his duties assumed by CFO John Scelfo and Gen. Counsel Patrick Donnelly until permanent replacement was found.

As for Dec. commercial rollout of limited base of receivers, Wilsterman said it had been scrapped for variety of reasons, including economic factors such as decline in consumer confidence. He said Sirius also wanted to wait to evaluate results of its in-vehicle testing program, which company said would be expanded to 6 additional markets by end of Oct. -- Columbia, S.C., Houston, Indianapolis, Miami, N.Y.C., Seattle. Sirius said expanded vehicle testing program represented final phase of tests, with company determining new commercial launch date only after completion. Wilsterman declined to discuss specifics, but company said it would update investors on status during Nov. 14 conference call.

Revelations came only week after Sirius said it would vigorously defend class-action suit that alleged it had violated SEC rules by failing to disclose it wouldn’t be able to roll out service by end of 2000 or early 2001 (CD Oct 10 p10). It called claims “frivolous and without merit” and “entertaining piece of fiction.”

Margolese recently has had rocky relations with investor community over many delays and Sirius’s failure to land comprehensive receiver agreements with major automakers. Problems came to head in April when Margolese said fewer than 20,000 Sirius receivers would reach retail shelves this year, and only very late in 4th quarter. That revelation came in company’s 2nd conference call in as many weeks to “clarify” comments in earlier call in which Margolese and others counseled investors to act conservatively in buying Sirius shares because possible receiver delays would inhibit growth in consumer subscriptions for calendar 2001. Targeted Dec. launch date for limited quantities of Sirius receivers stood until company’s announcement Tues.

XM, which began service Sept. 25 (CD Sept 26 p7), also has problems. Some analysts fear 2 U.S. satellite radio companies won’t attract enough subscribers to become profitable. With money tight for companies and economy, many consumers haven’t had opportunity to evaluate product, analyst said. “There are still a lot of people in the marketplace who haven’t heard of either company. If people don’t know, they can’t buy,” and XM and Sirius have “lots of work to do.” XM won’t disclose number of subscribers paying for service. Stocks of both companies have steadily declined in recent weeks. Shares of Sirius, up slightly from $3.44 to $3.50 at close Tues. have dropped 89% this year. XM was trading at $8.68, up from $7.01.

Meanwhile XM appeared to be “penny-pinching” in effort to save money, industry observer said. “Just like other companies in this economy, we're looking at all of our costs,” XM spokesman said. Company has pulled back $100 million advertising campaign that focused on branding in favor of less expensive consumer-based campaign with specific information about services. “You'll see more pricing information, you'll see more about the variety of XM radios that are available to retailers,” spokesman said.

CEO Hugh Panero said Oct. 9 XM had “great product and bad economy.” He also said cost reductions and several financing deals would keep project moving in right direction. Panero said XM would be able to stretch available cash until mid-2002. XM spokesman said most on Wall St. still were bullish on future and reports of possible layoffs weren’t true. However, he said: “It’s premature to talk about subscribers. We just launched 2 weeks ago,, but we're on target.” He pointed to 100,000 units at retailers as proof of demand for service.

Prudent approach by XM drew praise from Bear, Stearns analyst Bob Peck: “I think it’s a wise choice they are making, spending economically, targeting the most highly likely subscribers right away and if the market rallies a little bit, raising a little more money at that point.” He called it “efficient use” of resources and “a better targeted program.” However, Peck cut 2001 price target for Sirius to $20 from $54 and XM to $19 from $49.

Earlier, Merrill Lynch had cut ratings of XM and Sirius. Its analyst Mark Nabi projected that at current pace of marketing activities, XM had enough cash to last only until Jan. or Feb. He said there was concern that new funding rounds might dilute earnings for current shareholders. Nabi said: “Investor concerns, regarding liquidity, dilution and potential postponed demand should unfortunately offset any positive news flow from service launch.” He also forecast Sirius had cash to last until 3rd quarter 2002.

Meanwhile, FCC granted XM and Sirius special temporary authority (STA) to use terrestrial repeaters in 2332.5-2345 MHz frequency band in concert with satellite system. XM had received temporary STA on Sept. 17 (CD Sept 8 p8). Commission also dismissed as moot petition for reconsideration and emergency motion for stay filed by Wireless Communications Assn. STA order requires XM and Sirius to coordinate operations with WCS licensees and provide certain information to WCS, Multipoint Distribution Services and Instructional TV Fixed Service licensees upon request.