May 31, 2006 (12:05 PM EDT)
XM Halts Satellite Radio Shipments On FCC Orders

Read the Original Article at InformationWeek

XM Satellite Radio Holdings Inc. has suspended shipments of two digital radios and other unnamed products found to have violated transmission standards set by the Federal Communications Commission.

The Washington, D.C., digital radio service provider said Tuesday in a filing with the Securities and Exchange Commission that federal regulators had found that Delph Corp.'s XM SKYFi2 and Audiovox Corp.'s Xpress exceeded transmission emission limits. The problem, which did not pose a health hazard, was due to the FM modulator wireless transmitter in each device.

Both radios contain technology that makes it possible to play XM programming through a traditional radio. XM said that it is taking unspecified actions in regards to other radios, which the company did not name.

"We are implementing a series of actions involving various radios to bring them into compliance, including requesting our manufacturers to suspend shipments to retail of radios or accessories that may require changes to operating or installation instructions, or modifications to software or hardware, such as small attachments that reduce emissions through the antenna or cigarette lighter adapter," the SEC filing said.

The disclosure was the second problem involving the largest digital radio provider this month. XM earlier lowered its projections for subscriber growth this year, citing an unexpected drop in demand for its services and delays in shipping new products. The broadcaster, which had 6.5 million subscribers at the end of the first quarter, lowered its forecast for the end of this year to 8.5 million subscribers from its initial guidance of 9 million.

XM's closest rival Sirius Satellite Radio Inc., based in New York, expects to have 6 million subscribers by the end of the year. Sirius ended last year with 3.3 million subscribers.

XM said it was working toward limiting the interruption in supply of XM radios to retailers, and planned to have modified devices shipping in the near term. The company, however, could make no promises that the actions wouldn't have a financial impact. XM has a variety of deals with device manufacturers, including digital music players from Samsung Electronics Co. Ltd. and Pioneer Corp. They also have deals with car manufacturers to include XM-supported radios in new cars. There was no indication that any of those deals were affected.

"We can provide no assurances at this time that our actions will be deemed sufficient by the FCC, or that other remedies that may be required by the FCC will not have a material impact on our consolidated results of operations or financial position," XM told the SEC.

While the radio trouble was certainly a negative for XM, it wasn't expected to have a major impact on subscriber growth, which is pivotal to the company's strategy of becoming profitable by the fourth quarter of this year.

"People who sign on to Sirius or XM make the decision based on content, not on the type of device that's available," Stephanie Guza, analyst for market researcher In-Stat, said Wednesday. "There's still a lot of people who are going to sign on to satellite radio, whether it's XM or Sirius."

Content has certainly been the focus of the two rivals, which have spent hundreds of million of dollars on programming. XM, for example, is scheduled to launch in September "Oprah and Friends," which features popular TV talk show host Oprah Winfrey. The broadcaster currently offers Major League Baseball and signed an exclusive, 10-year agreement with the National Hockey League that begins in the 2007-8 season.

Sirius, on the other hand, launched Martha Stewart Living Radio last year, and spent several hundred million dollars to air shock jock Howard Stern's talk show, which debuted in January. Nascar coverage is scheduled to start in 2007.

The market for satellite radio is growing rapidly. Combined shipments of digital satellite and terrestrial digital radio, which is popular in the United Kingdom, is expected to reach 22 million units in 2009 from 5 million shipments in 2004, according to In-Stat. The primary drivers are expected to be content, data services, falling prices for radios and partnerships between broadcasters and new car manufacturers.