We downgrade our recommendation for SIRIUS XM Radio Inc. (SIRI) to Underperform following the emergence of alternative technology of commercial-free Internet radio and extremely poor financial condition of the company. According to our view, SIRIUS XM’s business model is going to face serious competition from the upcoming subscription-free Internet radio programming which will have the facility of automatically getting customized to one’s personal tastes.

Despite being a virtual monopoly in the satellite radio market, SIRIUS XM faces significant competition. Recently, Pioneer System, a leading car information system manufacturer, unveiled a new car stereo called “AVIC-X920BT” that supports Internet radio. This new product can detect Pandora Internet radio settings from Apple Inc’s (AAPL) iPhones or iPods that can be translated into convenient access to create customized music stations for individual users while driving. Pioneer will start selling this product from March 2010.

SIRIUS XM’s business depends to a large extent upon automakers. The sale and lease of vehicles with satellite radios is the most important source of subscribers for both the XM and SIRIUS satellite radio services. However, as a result of an extremely challenging economic condition, most of the auto makers have experienced a sharp decline in sales, reduced production as well as severe financial difficulties. This situation negatively impacted subscriber growth of SIRIUS XM in both 2008 and 2009.

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