SIRI, XMSR

XM Satellite Radio may be losing its grip on the one area where it still holds a formidable edge over rival Sirius Satellite Radio – subscribers.

XM reported a change to its subscriber and financial guidance for 2006, projecting that it will end 2006 with 8.5 million subscribers, resulting in subscriber revenues of $835 million and EBITDA loss of $235 million. XM reaffirmed that it remains on track to have positive cash flow from operations for the fourth quarter of 2006 and on an annual basis for 2007.

“Subscriber growth for the first quarter of 2006 was consistent with our initial guidance of nine million subscribers by the end of 2006,” Hugh Panero, president and CEO of XM, said in a statement. “Although XM has regained retail market share since the first of the year, the satellite radio category has seen an overall softness at retail during the second quarter to date, and we have been later than anticipated with broad availability of our new products.” The revised guidance of 8.5 million subscribers represents growth of more than 40 percent throughout the course of the year. The revised subscriber guidance leads to a reduction in subscriber revenues and a narrower EBITDA loss for the year. XM expects to add a total of more than 2.5 million net new subscribers in 2006. XM, however, is currently working through regulatory and legal challenges, the resolution of which could affect future product availability and operating results, and require another revised guidance.

Sirius reaffirmed its guidance of more than 6.2 million subscribers by year-end 2006, an expected 87 percent increase over the company’s subscriber base at the end of 2005. The company continues to expect to add more than 2.8 million net subscribers during the year.

“We continue to experience dramatic growth and strong demand for our service across our retail and automotive OEM channels,” Mel Karmazin, CEO of Sirius, said. “This supports our expectation that we will capture the majority of retail satellite radio net additions in 2006.”

According to the NPD Group, Sirius captured 54 percent of retail market share in April, compared to 38 percent in April 2005. For 2006 year-to-date, Sirius has grabbed 58 percent of the retail market share, compared to 40 percent through April 2005.

William Kidd, an analyst with Ladenburg Thallman & Co., also disputed XM’s claims that the satellite radio market as a whole is soft. “We don’t think there is a problem with the category…just XM,” Kidd said in a May 24 note to investors. “The same XM press release also indicated that ‘the satellite radio category has seen an overall softness at retail during the second quarter to date, and we have been later than anticipated with broad availability of our new products.’ We believe the reality is that XM set unrealistic expectations from the start.”

The pattern of bad news for XM and good new for Sirius also continued in other areas.

Separately, XM also said it will end its efforts to acquire WCS Wireless, which would have given XM wireless spectrum licenses in geographic areas throughout the United States. At the time of the acquisition agreement between XM and WCS Wireless, announced in July, the parties expected to close their transaction by this time, with the timing dependent on receipt of necessary government approvals. Those approvals still have not been granted.

Meanwhile, reports from numerous media sources indicate that Sirius star Howard Stern had settled a breach of contract suit with his former employer CBS Radio, which sued Stern in February, accusing him of promoting his move to Sirius while still employed by CBS. The company also claimed Stern did not disclose plans to sign with Sirius as required in his contract. Details of the settlement where not revealed.

Sirius shares remain down more than $2 since the beginning of the year, but the stock posted a small gain following the good news. The stock closed at $3.68 May 24, its lowest price of the year, but rebounded to close at $4.22 May 25.

After starting 2006 at more than $28 per share, XM stock took a big hit on the subscriber news. The shares began the week at $16.60 before dipping to $13.75 May 24. The stock posted a slight rebound May 25, closing at $14.35.

“We suspect low satellite radio valuations will start to motivate some to get off the sidelines,” Kidd said. “Given Tuesday’s weakness and the recent dramatic change in company valuations, we are optimistic that more investors will be compelled to revisit these equities. That said, the next few days could still be bumpy as the Street trims XM estimates, given that some analysts had estimates even in excess of XM’s prior guidance. We continue to favor Sirius over XM.”

DISH

Echostar Communications Corp. claimed victory in the latest round of its patent battle with Tivo Inc., only to have Tivo also claim a win following a ruling by the U.S. Patent and Trademark Office issued a ruling concerning a series of patents owned by Tivo covering digital video recorder technology

In February, a jury in Texas ruled that Echostar infringed on a Tivo patent for digital video recording devices and awarded Tivo more than $73 million to cover lost profits and royalties. Tivo has said it will seek a permanent injunction against Echostar over the technology, while an Echostar countersuit is scheduled to begin in February 2007.

As part of an ongoing lawsuit filed by Tivo against Echostar, the Patent Office did a formal review of 61 Tivo patents, rejecting a pair of the claims.

“We are pleased that the United States Patent and Trademark Office yesterday rejected many of Tivo’s patent claims as invalid,” Echostar said in a statement. “That reexamination ruling, together with the favorable decision from the Court of Appeals earlier this month (finding that the Texas court abused its discretion in connection with key trial evidence withheld from the jury), are steps in the right direction as we prepare our response to Tivo’s recently filed injunction motion.”

Tivo countered by pointing out that most of its patents were upheld, but the company declined to identify which patents were struck down. “The level of misleading spin that Echostar is putting out with respect to our patent case against them is quite extraordinary,” Tivo said in its statement. “We are pleased to state that the [Patent Office] issued its first Office Action in the reexamination. The [Patent Office] reexamined all 61 claims set forth in the Barton patent confirming the validity of most of the claims, including two of the claims that Echostar has been found to have willfully infringed. In the Office Action, the [Patent Office] expressly rejected the invalidity arguments put forward by Echostar. While certain of the patent claims were rejected by the patent office, this should in no way impact the jury verdict. We will now be given an opportunity with the patent office to discuss our claims which we believe should result in a reaffirmed and strengthened patent.”

Echostar’s stock price has actually gained value since the ruling was announced and has closed below $30 only twice since April 3, reaching a high of $32.25 May 10.

ORBC

Orbcomm intends to conduct an initial public offering, hoping to raise $150 million, the company said in a filing with the U.S. Securities and Exchange Commission. The satellite-based data transmission service would be listed on the Nasdaq.

Orbcomm, a former subsidiary of Orbital Sciences, declared bankruptcy in 2000 and was acquired by a group of investors in 2001. Today, the company operates a satellite-based tracking service, with customers such as General Electric, Caterpillar Inc. and Volvo Group using the service to track, monitor and control mobile and fixed assets around the world. The company lost about $9 million in 2005 on revenues of about $15.5 million.

In January, Orbcomm completed equity financings totaling more than $110 million which will be used primarily to fund its next-generation satellite program.