Gartner Says Automotive Manufacturers to Embrace Digital Satellite Radio for New Revenue Opportunity.

Business Editors/High-Tech Entertainment Writers

SAN JOSE, Calif.--(BUSINESS WIRE)--Nov. 27, 2000

Digital satellite radio is scheduled to be available in 48 states in the United States in 2001, and most of the growth prospects will be in the automotive sector, according to Gartner Group Inc. (NYSE:IT and ITB). Gartner's research shows that consumers primarily listen to the radio in their vehicles, and more than two-thirds of the consumers listen to the radio five to seven days per week in their vehicle. Gartner analysts said automotive manufacturers are eager to offer digital satellite radio in their vehicles.

"Decreasing profit margins on new vehicle sales, accompanied by a low market capitalization and disappointing shareholder returns, as well as increasing global competition, are forcing automakers to explore innovative ways to generate new revenue streams," said Thilo Koslowski, senior analyst in Gartner's e-Business Services group with responsibility for the automotive vertical market. "Vehicle manufacturers will be able to participate in generating revenue in two forms: through outfitting vehicles with necessary satellite radio receivers, plus sharing activation fees, and in subscription fees with the service providers."

Sirius Satellite Radio and XM Radio hold the only two satellite digital audio radio service (SDARS) licenses, which were issued by the Federal Communications Commission (FCC) in 1997. The new generation of satellite radio promises to be more like cable- and satellite-based television services than the currently available analog AM and FM radio stations or current satellite radio services. Consumers could subscribe to the radio programming they are most interested in such as all rock, jazz, oldies, and so on.

"Radio broadcasters are worried about the effect XM and Sirius will have on their listenership. Digital satellite radio certainly offers a new form of entertainment. Subscribers will receive up to 100 channels of music and news/talk, with ultra-clear signals, as well as ubiquitous nationwide coverage from each of the services, but subscribers have to pay to receive these services. It remains to be seen if consumers will pay for radio channels, especially when digital terrestrial technology is implemented, bringing digital signals to local stations in the next few years," said Robert White, industry analyst in Gartner Dataquest's Digital Media group.

A problem with digital satellite radio services is it does not provide targeted local content such as news, weather, sports and traffic reports to individual geographic areas. "The lack of traffic reports represents a challenge because Sirius and XM are relying heavily on sales in the automotive consumer market," said Mr. Koslowski. "Motorists need traffic updates, especially during their primary drive times, which are vital to radio ratings. Consumers would need to switch from satellite radio to traditional AM and FM radio stations. Having to switch back and forth, some consumers may question the value of a subscription-based radio service."

Digital satellite radio will also be targeted for the home market, although Gartner analysts do not see strong demand in this segment. Consumers who pay for digital cable and satellite services already receive digital music channels. There is also the potential challenge to satellite radio in the home from home networking.

"As music in digital formats such as MP3 files are more easily networked around the house, more of the consumers' demand for music will be met. If a consumer is easily able to construct a play list of MP3 files on their PC, and then listen to that music anywhere in their house, the need for a satellite radio receiver or traditional radio could decrease," said P.J. McNealy, senior analyst in Gartner's e-Business Services group. "Even though the potential market opportunity for satellite radio is significant, we believe that moving consumers to accept a subscription-based radio service remains a challenge."

Gartner provides additional analysis on this market in the report "Digital Satellite Radio: Broadcasting Clearly From the Stars." This document describes the new services, examines its targeted segments and analyzes overall market opportunity for satellite radio providers, the automakers and consumer electronics manufacturers.

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