PUBLIC VERSION Before the LIBRARY OF CONGRESS Copyright Royalty Board In the Matter of ADJUSTMENT OF RATES AND TERMS Docket No 2006-1 CRB DSTRA FOR PREEXISTING SUBSCRIPTION SERVICES AND SATELLITE DIGITAL AUDIO RADIO SERVICES WITNESS TESTIMONY FOR XM SATELLITE RADIO INC Seth Greenstein D.C Bar No 416733 Todd Anderson D.C Bar No 462136 Laura Fentonmiller D.C Bar No 450813 Amy Roth D.C Bar No 501483 Aymeric Dumas-Eymard New York Bar No 4243408 CONSTANTINE CANNON L.L.P 1627 Eye Street NW 10th Floor Washington DC 20006 tel 202 204-3500 fax 202 204-3501 sgreensteinconstantinecannon.com [email protected] lfentonmiller@constantinecannon corn [email protected] rdumas-eymard@constantinecannoncorn Counsel for XMSatellite Radio Inc January 17 2007 PUBLIC VERSION Before the LIBRARY OF CONGRESS Copyright Royalty Board In the Matter of Adjustment of Rates and Terms for Preexisting Subscription and Docket No 2006-1 CRB DSTRA Satellite Digital Audio Radio Services DIRECT TESTIMONY OF GARY PARSONS ON BEHALF OF XM SATELLITE RADIO INC of Directors My name is Gary Parsons am currently Chairman of the Board have held since 1997 As Chairman of XM Satellite Radio Inc XM position May of from to and share the participate directly in the development XM concept service responsibility to oversee and implement XMs business operation risks My testimony primarily will focus on XMs company history the substantial inherent in the launch and continuation of its business and its prospects for the future To summarize some of the key points broadcast -- The challenge of taking XM from an on-paper concept to an on-the-air built the satellite radio service was virtually unprecedented in the radio industry We new scratch industry and the XM business from from technological business and programming perspectives -- XM has required extraordinary infusions of capital from inception to the present stage of our development as company XM forged significant partnerships to attract the massive funding required to launch and operate the business and the automotive and retail 85768.1 PUBLIC VERSION marketing support to become successful Despite many formidable challenges XM was able to launch the service in 2001 approximately five years from the companys inception XM since has grown to serve more than seven million subscribers in less than five years since launch -- Despite XMs success we are young business that is still developing By the end of 2006 XM will have invested more than $6 billion to reach where we are today We are not yet cash flow positive Despite substantial increases in our subscriber base and revenue analysts estimate that XM will continue to lose more than $1.9 million per day To continue building our business XM requires significant ongoing investments to maintain and improve its infrastructure and to effectively market the concept of satellite radio as well as the XM service Because of the high-risk nature of the satellite radio business our investors from inception to the that In stock present expect high returns on their investments and have yet to see return fact our first in price today is 10% lower than when the company went public September 2001 indicating the investment communitys concerns over XM ability to generate profits in the next several risks ahead before becomes business that is and begins to years We face many XM profitable An increase in fees could the provide any reasonable return to our investors our royalty disrupt uncertain future returns tenuous balance between our already substantial costs and our -- The fundamental value proposition of XM is built on diversity of programming exclusive content and unique and powerful delivery platform to serve both the mobile automotive and hand-held portable and the home environment This value proposition includes offering content that appeals to both mainstream and niche audiences across broad but demographic particularly exclusive programming such as sports and talk brand-name Fox and commercial-free music limited availability content such as CNN and News XMs programming The depth of XMs programming appeals to fans of the many different kinds of 85768.1 PUBLIC VERSION content we broadcast Music fans learn from XM about new music artists and genres they had not been exposed to before and buy music and concert tickets based on the exposure these artists received on XM Personal Background and Management Experience in Communications After graduating with an engineering degree from Clemson University and an After the MBA from the University of South Carolina worked for ten years at BellSouth Corp and breakup of the Bell System in 1984 became Executive Vice President of fiber-optic MCI Communications long-distance service startup TelecomUSA joined Corporation of roles MCI from 1990 to MCI when MCI acquired TelecomUSA served in variety at Chief Executive Officer of MCIs 1996 including as Executive Vice President of MCI and as subsidiary MClmetro Inc In 1996 became Chief Executive Officer of both American Mobile Satellite data-services that provided satellite technology for truckers Corporation AMSC company American Mobile Radio the Red Cross and government institutions and Corporation nationwide audio service AMRC its subsidiary created in 1992 to study multi-channel Based belief that satellite would provided via satellite direct to subscribers on my technology services well data appeal to wider consumer market for audio radio as as services AMSC radio license whose name was decided to pursue satellite through AMRC subsequently of changed to XM Satellite Radio Following the recruitment of Hugh Panero as CEO XM Satellite Radio in 1998 have continued to serve as Executive Chairman of XM Challenges XM Faced to Launch an Unproven Technology and Business satellite-based XM had to overcome many significant challenges to create new audio entertainment business Like other satellite businesses massive investments would be 85768.1 PUBLIC VERSION required to build the business XM would have to expend years of effort and billions of dollars host before receiving our first subscriber dollar and we would face of formidable tecimological and business risks Given the nature of satellite radio XM had to overcome number of obstacles and risks not previously encountered or surmounted by other satellite-based businesses of the decisions that to the Many of these risks persist to this day and many were necessary launch of the business present ongoing challenges to XM profitability Creating New Radio Business Model the Direct Broadcast Satellite At the outset our belief was that the success of those DBS television services -- DirecTV and Echostar -- showed that people particularly in rural were to subscribe to satellite service that provided broad living environments willing also that national service variety of entertainment and information channels We recognized who lose the of favorite local stations as would appeal to professional truckers and drivers signal consolidation of terrestrial radio stations escalating they drive long distances With the commercial minutes and narrowing formats we perceived an unmet consumer need for XMs well In that nationwide concept in the urban and suburban populace as short we anticipated and limited service offering programming diversity and choice coupled with high-quality audio or no commercials on the music channels would appeal to enough different demographic sectors to create prospect of future success While the DBS example was useful our effort was unparalleled in the radio another station or and of radio industry We were not just starting acquiring managing group stations XM was to be different kind of audio service and different kind of satellite business with national reach in the home office and automobile We were creating new industry from of the ground up and had to raise immense amounts capital to support our new technology 85768.1 PUBLIC VERSION Challenges to Raising Sufficient Early Capital to Fund XM Our largest concern during the 1997 to early 2000 timeframe was raising the billions of dollars needed to launch commercial service The first hurdle requiring substantial sums of money was the acquisition of XM license In October 1997 XM paid $90 million for one of the two available satellite digital audio radio service licenses Including the contracts for building the satellites and other expenses such as salaries for the initial personnel XM paid out at this early stage The initial funding for the license came from parent company and satellite radio American Mobile Satellite Corporation AMSC WorldSpace digital network that currently broadcasts in Asia Europe and Africa which became 20% equity of international service partner In the 1990s WorldSpace was in the process developing an facing many of these same challenges In July 1999 six investors including business partners General Motors Clear the Channel Communications and DirecTV joined AMSC and AMSC bought out WorldSpace ownership interest These entities invested $250 million in the business and provided expertise in various elements of the business such as billing programming and customer service These investors entered into contracts with XM for programming or distribution and some of these contracts even provided the investor with portion of the bandwidth on the planned XM system For example XMs long-term distribution agreement with GM requires XM to make guaranteed payments of over $300 million to date to subsidize the installation of XM radios in new GM vehicles to make additional payments