Tyler Savery submits: Some analysts, and even XM Satellite Radio (XMSR) itself, point out that subscriber growth in the first half of 2007 will not be particularly strong. Those statements left alone without further understanding can be a bit dangerous. This is particularly true given a change in the methodology XM will be using counting some subscribers.

With a change in methodology come an unbalance, and until the current methodology can absorb that change, the balance is disturbed. That is exactly what will be happening for XM in the first half of 2007.

The “weaker” first half numbers are not at all indicative of "nothing happening", or a "weakness in the sector". Quite to the contrary, XM will be building a "backlog" of subscribers during that time with Hyundai, Nissan and Toyota (TM). This happens because, going forward, subscribers from Hyundai, Nissan (NSANY), and Toyota are not counted in subscriber rolls when the consumers promotional period starts. Instead, the installations will be counted after the promotional period ends and when a consumer decides to keep the service. The method is derived from the structure of the deal. Absent any revenue from Hyundai, Nissan, and Toyota, these installs are a pure "promotional period", and because there is no revenue, they are not counted as subscribers at the inception of the promotional period.

Thus, during the first half of the year, this new method will be taking shape for XM. After a three month trial, those that keep the service will become a part of the subscriber count. This is where a "backlog" of subscribers is created.

For example, if we were to assume 50,000 installs from these automakers in January of 2007, in addition to assuming a 50% take rate, XM would have a sudden swell of 25,000 subscribers in April. The February crop would hit in May, the March crop in June and so on. As the year progresses, and installation rates increase, the crop will get bigger. With a deeper penetration rate anticipated for model year 2008 cars, we should expect bigger monthly numbers beginning in July or August of 2007.

It stands to reason that this type of change in the counting methodology will take around 6 months to become absorbed into the overall system. Given these changes, and the investment XM is making into these installations, we hope to see some sort of breakdown or statement from XM on how things are progressing.

These changes require that investors shift from what they have been conditioned to accept. With all of the other OEM deals, the subscriber crop has been counted as soon as the "seeds" were planted. With Hyundai, Nissan and Toyota, it is the "harvest" that determines the subscriber count.

Investors should think of OEM installations as "seeds" and "harvest" of a crop. The "seeds" are planted and take three months to come to fruition. With GM (GM) and Honda (HMC), the "seeds" are added to the subscriber number. With Hyundai, Nissan and Toyota the "harvest" determines what is added to the subscriber number.