| SIRIUS SATELLITE RADIO INC Item 1A Risk Factors In addition to the other information in this Annual Report on Form 10-K, the following risk factors should be considered carefully in evaluating us and our business |
| This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws |
| Actual results and the timing of events could differ materially from those projected in forward-looking statements due to a number of factors, including those set forth below and elsewhere in this Annual Report on Form 10-K See “Special Note Regarding Forward-Looking Statements |
| ” Failure of our satellites would significantly damage our business |
| Our three satellites were launched in 2000 |
| We do not maintain in-orbit insurance policies covering our satellites |
| Our operating results would be materially adversely affected if the useful life of our satellites is significantly shorter than we expect, whether as a result of a satellite failure or technical obsolescence, and we fail to launch replacement satellites in a timely manner |
| The useful lives of our satellites will vary and depend on a number of factors, including: • degradation and durability of solar panels; • quality of construction; • random failure of satellite components, which could result in significant damage to or loss of a satellite; • amount of fuel our satellites consume; and • damage or destruction by electrostatic storms or collisions with other objects in space, which occur only in rare cases |
| Our satellites have experienced circuit failures on their solar arrays |
| The circuit failures our satellites have experienced to date do not limit the power of our broadcast signal or otherwise affect our current operations |
| Additional circuit failures could reduce the useful life of our existing in-orbit satellites |
| In the ordinary course of operation, satellites experience failures of component parts and operational and performance anomalies |
| Components on our in-orbit satellites have failed, and from time to time we have experienced anomalies in the operation and performance of our satellites |
| These failures and anomalies are expected to continue in the ordinary course, and it is impossible to predict if any of these future events will have a material adverse effect on our operations or the useful life of our existing in-orbit satellites |
| If one of our three satellites fails in orbit, our service would be impaired until such time as we successfully launch and commission our spare satellite, which would take six months or more |
| If two or more of our satellites fail in orbit in close proximity in time, our service could be suspended for at least 24 months |
| In such event, our business would be materially impacted and we could default on our commitments |
| We may from time to time modify our business plan, and these changes could adversely affect us and our financial condition |
| We regularly evaluate our plans and strategy |
| These evaluations often result in changes to our plans and strategy, some of which may be material and significantly change our cash requirements or cause us to achieve cash flow breakeven at a later date |
| These changes in our plans or strategy may include: the acquisition of unique or compelling programming; the introduction of new features or services; significant new or enhanced distribution arrangements; investments in infrastructure, such as satellites, equipment or radio spectrum; and acquisitions of third parties that own programming, distribution, infrastructure, assets, or any combination of the foregoing |
| 17 _________________________________________________________________ To fund incremental cash requirements, or as market opportunities arise, we may choose to raise additional funds through the sale of additional debt securities, equity securities or a combination of debt and equity securities |
| The incurrence of indebtedness would result in increased fiscal obligations and could contain additional restrictive covenants |
| The sale of additional equity or convertible debt securities would result in dilution to our stockholders |
| These additional sources of funds may not be available or, if available, may not be available on terms favorable to us |
| Our business might never become profitable |
| As of December 31, 2005, we had an accumulated deficit of approximately dlra2dtta7 billion |
| We expect our cumulative net losses to grow as we make payments under various contracts, incur marketing and subscriber acquisition costs and make interest payments on our debt |
| If we are unable ultimately to generate sufficient revenues to become profitable, we could default on our commitments and may have to discontinue operations or seek a purchaser for our business or assets |
| Programming is an important part of our service, and the costs to renew our programming arrangements may be more than anticipated |
| Third-party content is an important part of our service, and we compete with many parties, including XM Radio, for content |
| We have entered into a number of important content arrangements, including agreements with the NFL, Howard Stern and NASCAR, which require us to pay substantial sums |
| Our agreement with the NFL expires at the end of the 2010-2011 NFL season; our agreement with Howard Stern expires in December 2010; and our agreement with NASCAR expires in 2011 |
| As these agreements expire, we may not be able to negotiate renewals of one or more of these agreements, or renew such agreements at costs we believe are attractive |
| Our financial obligations under our agreement with Howard Stern consist of both fixed and incentive payments in cash and common stock, and are substantial |
| In October 2004 we disclosed that the aggregate fixed obligations under our agreement with Stern would be approximately dlra100 million per year commencing in 2006 |
| The 34cmam375cmam000 shares issued in January 2006 for the benefit of Howard Stern and Don Buchwald, his agent, were valued in October 2004 at approximately dlra110 million and were included as part of the aggregate fixed obligations under the agreement |
| At issuance, these shares were valued at approximately dlra225 million, which will be recorded to equity granted to third parties and employees expense in the first quarter of 2006 |
| In addition, we may not be able to obtain additional third-party content within the costs contemplated by our business plan |
| We also must negotiate and enter into final music programming royalty arrangements with BMI and our existing arrangements with the ASCAP, SESAC and SoundExchange will expire at the end of 2006 |
| Such royalty arrangements may be more costly than anticipated |
| Certain copyright holders have stated concerns regarding features in SIRIUS radios that allow subscribers to listen to SIRIUS programming after the initial broadcast |
| We believe these devices comply with applicable copyright law |
| We cannot assure that our royalty fees will remain at current levels or that arbitration or litigation will not arise in connection with royalty arrangements or SIRIUS radios that include certain recording capabilities and we cannot predict what the costs to us of a proceeding or a settlement of such a dispute or disputes might be |
| Higher than expected costs of attracting new subscribers could adversely affect our financial performance and operating results |
| We are spending substantial funds on advertising and marketing and in transactions with automakers, radio manufacturers, retailers and others to obtain and attract subscribers |
| If the costs of attracting subscribers are greater than expected or if our competitor, XM Radio, substantially increases equipment subsidies or reduces hardware prices, our financial performance and operating results could be adversely affected |
| 18 _________________________________________________________________ Higher subscriber turnover could adversely affect our financial performance and operating results |
| We are experiencing, and expect to continue to experience in the future, some subscriber turnover, or churn |
| We cannot predict the amount of churn we will experience |
| High subscriber turnover, or our inability to attract customers to our service, would adversely affect our financial performance and operating results |
| Competition from XM Radio and traditional and emerging audio entertainment providers could adversely affect our ability to generate revenues |
| We compete with many entertainment providers for both listeners and advertising revenues, including XM Radio, the other satellite radio provider in North America; traditional AM/FM and digital radio; Internet-based audio providers; direct broadcast satellite television audio services; and cable systems that carry audio services |
| In addition, other technologies in the mobile audio environment, such as Apple iPod® and MP3 devices, wireless broadband services and next generation cellular telephones, have emerged to compete with our service |
| If consumers or other third parties perceive that XM Radio offers more attractive service, enhanced features or superior equipment alternatives, or has stronger marketing or distribution channels, it may gain a long-term competitive advantage over us |
| As of December 31, 2005, we had 3cmam316cmam560 subscribers, while XM Radio reported 5cmam932cmam957 subscribers as of the same date |
| In July 2005, XM Radio announced an agreement to acquire WCS Wireless, the principal assets of which are wireless spectrum licenses in geographic areas covering a significant portion of the continental United States |
| While XM Radio has not announced a plan for the use of this spectrum, XM Radioapstas acquisition of this spectrum, other radio spectrum or technologies not available to us, may enable it to offer more services, produce entertainment products of greater interest to consumers or operate at a more competitive cost |
| We compete vigorously with XM Radio for subscribers and in all other aspects of our business, including the pricing of our service and our radios, retail and automotive distribution arrangements, programming acquisitions and technology |
| Competition with XM Radio may increase our operating expenses as we seek arrangements with third parties, such as programming providers, and may cause us to reach cash flow breakeven with more subscribers or later than we estimate |
| Unlike satellite radio, traditional AM/FM radio has a well established and dominant market presence for its services and offers free broadcasts supported by commercial advertising rather than by a subscription fee |
| Many radio stations also offer consumers well known on-air personalities and information programming of a local nature, which we do not offer as broadly as local radio |
| To the extent that consumers place a high value on these features of traditional AM/FM radio, we are at a competitive disadvantage |
| Some radio stations have begun reducing the number of commercials per hour, expanding the range of music played on the air and experimenting with new formats in order to compete more directly with our service |
| Several major radio companies recently banded together to launch an advertising campaign designed to assert that traditional AM/FM radio, like satellite radio, is innovative and features new artists |
| Digital radio broadcast services have been expanding, and an increasing number of radio stations in the US have begun digital broadcasting or are in the process of converting to digital broadcasting |
| The technology permits broadcasters to transmit as many as five stations per frequency |
| To the extent that traditional AM/FM radio stations adopt digital transmission technology and to the extent such technology allows signal quality that rivals our own, any competitive advantage that we enjoy over traditional radio because of our digital signal would be lessened |
| Internet radio broadcasts have no geographic limitations and can provide listeners with radio programming from around the world |
| According to an Arbitron study, approximately 20 million Americans listened to Internet radio each week in January 2005 |
| We expect that improvements from higher bandwidths, faster modems and wider programming selection will make Internet radio increasingly competitive |
| 19 _________________________________________________________________ The Apple iPod®, a portable digital music player that stores up to 15cmam000 songs, allows users to download and purchase music through Apple’s iTunes® Music Store, which offers for sale over two million songs |
| The iPod® is also compatible with certain car stereos and various home speaker systems |
| Our SIRIUS S50 portable satellite radio player competes with the iPod® and other portable music devices |
| A number of wireless telephone providers now offer, or have announced plans to offer, music services |
| These music services may provide a variety of live music channels as well as the ability to download selected songs |
| Although many of these services have just been launched, are dependent upon the adoption of next generation cell phone technology and are not yet widely accepted in the market, music services from wireless telephone providers could become increasingly competitive with our service |
| Weaker than expected market and advertiser acceptance of our service could adversely affect our advertising revenue and results of operations |
| Our ability to generate advertising revenues will be directly affected by the number of subscribers to our service and the amount of time subscribers spend listening to our talk and entertainment channels or our traffic and weather service |
| Our ability to generate advertising revenues will also depend on several factors, including the level and type of market penetration of our service, competition for advertising dollars from other media, and changes in the advertising industry and economy generally |
| We directly compete for audiences and advertising revenues with XM Radio and traditional AM/FM radio stations, some of which maintain longstanding relationships with advertisers and possess greater resources than we do |
| We attract a substantial number of our new subscribers during the fourth quarter and our inability to deliver competitive products during the fourth quarter could have a material adverse affect on our operations |
| We attract a disproportionate share of our new subscribers each year during the fourth quarter because of the holiday season |
| For example, in 2005 we attracted approximately 53prca of our new subscribers during the fourth quarter |
| As a result, our failure to properly manage radio inventory, respond to changing technology and competitive pressures or deliver a competitive product during the fourth quarter could significantly reduce our number of new subscribers and have an adverse affect on our operations |
| We also depend on third parties to manufacture, distribute, market and sell SIRIUS radios, and their failure to perform during the fourth quarter could have an adverse affect on our operations |
| Failure of third parties to perform could adversely affect our business |
| Our business depends in part on the efforts of third parties, especially the efforts of: • automakers that manufacture, market and sell vehicles capable of receiving our service, but in many cases have no obligations to do so; • consumer electronics manufacturers that manufacture and distribute SIRIUS radios; • companies that manufacture and sell integrated circuits for SIRIUS radios; • programming providers and on-air talent, including Howard Stern; • retailers that market and sell SIRIUS radios and promote subscriptions to our service; and • third party vendors that have designed, built, support or operate important elements of our system, such as our customer service facilities |
| If one or more of these third parties does not perform in a sufficient or timely manner, our business will be adversely affected and we could be placed at a long-term disadvantage |
| The sale of vehicles with SIRIUS radios is an important source of subscribers for us |
| To the extent sales of vehicles by our distribution partners slow, our subscriber growth could be adversely impacted |
| In addition, we do not manufacture satellite radios or accessories, and we depend on 20 _________________________________________________________________ manufacturers and others for the production of SIRIUS radios and their component parts |
| If one or more manufacturers does not produce radios in a sufficient quantity to meet demand, or if such radios were not to perform as advertised or were to be defective, sales of our service and our reputation could be adversely affected |
| Failure to comply with FCC requirements could damage our business |
| As the holder of one of two FCC licenses to operate a satellite radio service in the United States, we are subject to FCC rules and regulations |
| The terms of our license require us to meet certain conditions, including designing a receiver that will permit end users to access XM Radioapstas system; coordination of our satellite radio service with radio systems operating in the same range of frequencies in neighboring countries; and coordination of our communications links to our satellites with other systems that operate in the same frequency band |
| Non-compliance by us with these conditions could result in fines, additional license conditions, license revocation or other detrimental FCC actions |
| We may also be subject to interference from adjacent radio frequency users if the FCC does not adequately protect us against such interference in its rulemaking process, including interference that could result from XM Radio’s use of the spectrum it is seeking to acquire from WCS Wireless |
| The FCC has not yet issued final rules permitting us to operate and deploy terrestrial repeaters to fill gaps in our satellite coverage |
| We are operating our terrestrial repeaters on a “non-interference” basis pursuant to a grant of special temporary authority from the FCC The FCCapstas final terrestrial repeater rules may require us to reduce the power of our terrestrial repeaters and limit our ability to deploy additional repeaters |
| If the FCC requires us to reduce significantly the power of our terrestrial repeaters, this would have an adverse effect on the quality of our service in certain markets and/or cause us to alter our terrestrial repeater infrastructure at a substantial cost |
| If the FCC limits our ability to deploy additional terrestrial repeaters, our ability to improve any deficiencies in our service quality that may be identified in the future would be adversely affected |
| Rapid technological and industry changes could make our service obsolete |
| The satellite industry and the audio entertainment industry are both characterized by rapid technological change, frequent new product innovations, changes in customer requirements and expectations, and evolving industry standards |
| If we are unable to keep pace with these changes, our business may be unsuccessful |
| Products using new technologies, or emerging industry standards, could make our technologies obsolete or less competitive in the marketplace |
| Our substantial indebtedness could adversely affect our financial health |
| As of December 31, 2005, we had approximately dlra1dtta1 billion of indebtedness |
| We may incur more debt if we believe we can raise money on favorable terms |
| A significant portion of our indebtedness contains restrictive covenants |
| Our indebtedness could: • limit our flexibility in planning for, or reacting to, changes in our business and industry; • limit our ability to borrow additional funds; • increase our vulnerability to general adverse economic and industry conditions; • require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, possibly reducing the availability of our cash flow to fund working capital, capital expenditures, and other general corporate purposes; and • place us at a competitive disadvantage compared to competitors that have less debt |
| Failure to comply with the covenants contained in the indentures governing our debt could result in an event of default, which, if not cured or waived, could cause us to discontinue operations or seek a purchaser for our business or assets |
| 21 _________________________________________________________________ Our national broadcast studio, terrestrial repeater network, satellite uplink facility or other ground facilities could be damaged by natural catastrophes or terrorist activities |
| An earthquake, tornado, flood, terrorist attack or other catastrophic event could damage our national broadcast studio, terrestrial repeater network or satellite uplink facility, interrupt our service and harm our business |
| We do not have replacement or redundant facilities that can be used to assume the functions of our terrestrial repeater network, national broadcast studio or satellite uplink facility in the event of a catastrophic event |
| Any damage to the satellite that transmits to our terrestrial repeater network would likely result in degradation of our service for some subscribers and could result in complete loss of service in certain areas |
| Damage to our satellite uplink facility could result in a complete loss of service until we could identify a suitable replacement facility and transfer our operations to that site |
| Consumers could pirate our service |
| Individuals who engage in piracy may be able to obtain or rebroadcast our satellite radio service without paying the subscription fee |
| Although we use encryption technology to mitigate the risk of signal theft, such technology may not be adequate to prevent theft of our signal |
| If signal theft becomes widespread, it could harm our business |