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On XM Satellite Radio Holding's (XMSR) Q2 conference call, executives discussed the cause of rising churn rates:

Hugh Panero - CEO

... we were essentially flat from year to year in attracting new subscribers, but with our higher churn on a substantially larger base in 2006 compared to 2005, we only added about 400,000 net new subscribers versus the 647,000 a year ago.

Note that any comparison between XM and its competitor in terms of net subscriber additions are also skewed by each company's different subscriber base. Our competitor’s substantially lower base resulted in fewer disconnects, even when churn rates are the same.

Joseph J. Euteneuer - Executive Vice President and Chief Financial Officer

The churn rate on self-paying subscribers for the second quarter of 2006 was 1.83%, up from the 1.64% in the first quarter of 2006...

A number of issues came to the forefront in the second quarter which influenced our churn rate.

First of all, we ended our relationship with our previous customer care vendor and began the transition to a new customer care provider, negatively impacting churn. The second quarter was also the anniversary of our 2005 rate increase. Consequently, annual customers showed a slight rise in churn.

While we previously stated we expected churn to increase somewhat in 2006 relative to 2005, this second quarter was higher than anticipated. We do expect churn to improve by the end of 2006, as our customer service and business processes improve.

Most encouragingly, our subscribers continue to tell us they are extremely satisfied with our programming content....

Craig Moffett - Sanford C. Bernstein & Company, Inc.

I want to drill-down on churn a little bit...

On the self-paid churn, can you give us any additional information about churn by cohort group? Are you seeing different churn patterns, either in different demographic pools, in different aging or seasoning pools, if you will, for subscribers acquired one year ago, two years ago and what have you?

Hugh Panero

I think our analysis of it is that the churn right now is more operationally-based, as was affected by our change-over to a new customer service vendor, where there are operational procedures that you would do on a very regular basis as it relates to both voluntary and non-pays.

Because we were winding down one particular vendor and starting up another one, we fell flat in that area, which was part of that conversion.

We have not seen any specific cohort base analysis. I think that our general problems right now are operational rather than seeing some sort of a softness that relates to some particular kind of promotion that we were out there, or a particular demographic group.

Craig Moffett - Sanford C. Bernstein & Company, Inc.

Just to drill down on that for a second, Hugh -- you mentioned in the call the strength of your customer satisfaction numbers. Have you seen any erosion in customer satisfaction?

Hugh Panero

No, I think that our voluntary disconnects has remained relatively constant. Where you really get affected by operational issues is on the non-pays, where if you are not effectively contacting them in a regular way, what we find is there are a lot of people who have moved into a non-paid status because we did not effectively communicate with them in the process that we have prior to them being turned off.

Craig Moffett

That would sound like you have pretty high confidence in being able to lower the churn rate going forward?

Hugh Panero

Yes, and I think one of the things we want to do with our revised management structure and marketing structure is to focus a lot more attention. We now have a dedicated group that we put in place over the last two months or so dedicated just to focus on these areas...

Jonathan Jacoby - Banc of America Securities

First question, this is focusing on churn again, but it looks like, just back-of-the-envelope, that retail is running at a much higher churn than OEM. I want to see if our numbers fit with yours...

Hugh Panero

On your churn, it is just slightly higher in the after-market, but really no substantial difference…self-paying subs, the churn, whether you are a self-paying converted auto customer or a retail after-market customer, it is basically the same -- not dramatically different.

Source: XM Satellite Radio Comments On Higher Churn Rates