Radio Flyer

Two satellite startups bet billions they can grab a piece of the AM-FM pie

The nation’s two satellite-radio operators promise that their services will be music to the ears of their subscribers–and their investors.

But while the payoff could be rich, the stakes are high. Sirius Satellite Radio Inc. expects to spend $1.2 billion and its competitor, XM Satellite Radio Inc., $1.1 billion to deliver digital-quality music, news, sports and information to subscribers in their cars starting early next year.

If the services do take hold, satellite radio would be the biggest change to hit the industry since FM grabbed the stage in the 1970s, advocates say.

But questions abound. Does the technology work? Are consumers interested in a national radio service? Will they pay for programming when they can already get something similar–for free–on terrestrial radio stations?

Although their technology differs, the competing satellite-radio companies have the same basic offer: up to 100 channels of CD-quality sound for $9.95 per month. Sirius plans to keep its 50 channels of music commercial-free but sell spots on the remaining news, sports and information channels. XM plans 15 to 20 commercial-free channels but will limit spots to just seven minutes per hour on the others.

Ten years ago, when satellite radio was first addressed by the FCC, the National Association of Broadcasters protested that it would threaten the “viability of the U.S. radio industry.” Now that the services are close to reality, the association is downplaying the risk.

“There will probably be a small niche audience for satellite radio,” NAB spokesman Dennis Wharton allows. But “I’m not convinced we should be writing the obituary for local radio because of it.”

Unlike AM and FM stations, Sirius and XM will not offer local programming, traditionally radio’s strength, Wharton says. And, he asks, “will people pay for service that they’ve always gotten for free?”

Others are also asking that question as Sirius makes final preparation to launch its first satellite-radio bird between June 28 and July 3 (the bird arrived at its Proton rocket launch site in Kazakhstan last Thursday). “Everybody [at Sirius and XM] just blithely assumes that people are going to line up to pay $10 a month,” says Haig Hovaness, director of KPMG Consulting’s Digital Media Institute.

The companies are also wrong in assuming that CD-quality sound is worth $10 a month, Hovaness says. Car owners report that road noises negate the sound of their sound systems, he says.

If, indeed, satellite radio sounds at all. “This is all ‘release one’ hardware. Who knows if there are going to be a lot of bugs and glitches?” Hovaness asks.

Old science

When the technology is challenged, the satellite-radio operators point to World-Space Corp., which has a satellite-radio system up and running in South Africa. However, WorldSpace serves stationary radios, not moving ones as Sirius and XM expect to. (WorldSpace had a 20% interest in XM and had planned to take control until last June, when it transferred its stake to American Mobile Satellite Corp. [now Motient Corp.])

After the first launch later this month, Sirius plans to send up two more satellites in September and October. XM plans to send up two satellites, the first in late November and the second next January or February. Sirius’ satellites are being built by Space Systems/Loral; XM’s by investor Hughes Space & Communications Inc.

“There’s nothing new sciencewise here,” says Sirius CEO David Margolese. “It’s a pretty straightforward integration” of proven technology. Besides, he adds, “we’re 10 years old now, so we’ve had a lot of time to work through things.”

One of things the companies have had to work through is how to provide truly seamless, coast-to-coast service. To address that worry, Sirius and XM are building systems of “terrestrial repeaters.” Perched atop skyscrapers and at tunnels, these repeaters will fill in whenever the line of sight with a satellite is lost. XM says it will need up to 1,700 repeaters in about 70 cities, while Sirius plans on 105 in 46 cities. The FCC has yet to approve the repeater systems, but the companies are confident that it will. (The FCC also is considering whether to impose public-service programming obligations on satellite radio, as it has on satellite TV.)

There is already a successful model for pay radio: Cable TV, XM and Sirius executives agree. Like cable, Margolese says, satelliteradio will offer more programming choices and a clearer signal. And just as consumers were willing to pay for those features for TV, they will pay for radio, he says.

The rapid acceptance of satellite TV is also spurring investor confidence in satellite radio, Sirius President Hugh Panero says. In fact, investors are “enthralled with the business model based on their experience with the direct broadcast satellite business,” he says. After just six years, the number of new DBS subscribers is expected to more than double the number of new cable subs this year, according to a study by Allied Business Intelligence.

Consumers are likewise sure to flock to satellite radio, Panero says. In field tests, they say they are “enthralled by the coast-to-coast coverage, the large channel coverage [or number of formats] and the digital-quality sound.”

Filling the void

In making their business case, Sirius and XM cite studies that conclude that people are dissatisfied with the current state of radioand are willing to pay for higher-quality sound in their cars. (Car radios are key to the industry because about 42% of the average daily time spent listening to radio–three hours and 18 minutes–is in the car, according to the Radio Advertising Bureau.)

Besides poor signal quality in general and fade-out when leaving a terres-trial-radio market, the studies say that consumers are unhappy with excessive advertising on AM and FM and the limited ethnic and musical offerings.

XM and Sirius aim to exploit that unhappiness. Programming choice is one of satellite radio’s biggest strengths, particularly “given the limited programming coverage that terrestrial radio currently offers,” says a February report by Bear, Stearns & Co. Inc., which has invested in XM and underwrote several of its stock offerings.

The satellite-radio companies say that nearly half the nation’s 10,000 or so commercial radio stations offer just three formats: country, adult contemporary and news/talk. Another 30% offer just three others: oldies, adult standards and rock. If you want to listen to reggae in New York or to classical music in Detroit, you’re out of luck, Margolese says.

Meanwhile, niche music categories including rap, soundtracks, classical and New Age accounted for up to 21% of recorded-music sales in 1998, XM and Sirius say. XM plans to fill the void with the help of such well-known terrestrial radio broadcasters as Clear Channel Communications Inc., Radio One Inc., Hispanic Broadcasting Corp. and Salem Communications Corp. For other programming, XM has turned to USA Today, CNNfn, Bloomberg News Radio, Nascar and the Weather Channel. Sirius plans to go it alone, building what it says is equivalent to 50 radio stations.

“The driving force here–no pun intended–is being able to hear what you can’t otherwise get over conventional radio,” Margolese says.

Cars are expected to drive satellite radio. Initially, the services will target the nation’s 112 million commuters and 1.1 million long-distance truck drivers. Between them, XM and Sirius have made deals with automakers including General Motors Corp., Ford Motor Co. and DaimlerChrysler AG to provide satellite-radio receivers in the equivalent of 72% of the 17 million new cars sold in the U.S. each year. After agreeing that they no longer will make exclusive deals, Sirius and XM recently signed on Honda. The price of the radios is expected to be embedded into the sale price of the car, with subscribers signing up for the services at the time of purchase.

The companies have also lined up manufacturers of “after-market” car receivers and signed retail arrangements with the Best Buy and Circuit City chains. The receivers are expected to go for about $150 each.

At first, home-based satellite radios are not expected to be a major part of the equation, although Sirius says it also will target the 22 million people who live in areas served by five or fewer FM stations.

As required by the FCC, the companies also are jointly developing a standard receiver that can tune in both services. That won’t be available before 2004, however.

Going separate ways

Despite their extensive cooperation, don’t look for a XM/Sirius merger, company executives say. “They’re our competitors,” Margolese says of XM. “They don’t need us, and we don’t need them.”

XM spokeswoman Vicki Steam, while agreeing that a merger is not likely, soft-pedals the competition. “The first goal of what we’re [both] doing is building a new industry. Cutthroat competition wouldn’t be advantageous to anybody.”

With no revenue to date, neither Sirius nor XM expects to start generating earnings before 2005 and 2006, respectively, according to Bear Stearns. But with “the large potential market of more than 200 million registered vehicles in the United States,” satelliteradio could attain 21 million subscribers, about 12.1% of the U.S. population, by 2006. That’s 11% penetration of the car market.

Whether that represents substantial competition to terrestrial broadcasters, at least one executive is reluctant to say. The potential “is there” for the same scenario that led to declines in broadcast-TV viewing after cable was introduced, Margolese says. However, he declines to comment further. “I’ll just leave it at that.”

XM’s Panero maintains that his service will complement traditional radio. It will simply add “another layer of options” for consumers to choose from.

Nor will advertising decline, he says. In fact, “we will contribute to the growth of national radio advertising” with commercials that currently don’t exist on radio.

But he also says that satellite radio provides an opportunity to “reinvent radio, to revolutionize it and make it sing again. We can do that with the help of technology and creative programming.”

The nation’s biggest radio group, Clear Channel Communications Inc., is hedging its bets. Last June, Clear Channel invested $75 million in XM and controls a board seat.

In the meantime, terrestrial radio is preparing to compete by readying a digital standard that will allow it, too, to broadcast in digital-quality sound. Like satellite radio, in-band on-channel, or IBOC, technology has been delayed for a decade as it has run the government, competitive and technological gauntlets. The process currently is entering the independent-testing phase that essentially will result in a standard. No deadline for finishing the process has been set, but one of the two companies involved hopes to get the go-ahead from the FCC by year-end.

With or without terrestrial-radio listeners, by the time satellite radio is delivered to consumers, it may be too late.

The services face their own high-tech competitors. The biggest threat is “IP radio,” according to Hovaness, referring to the Internetradio and its eventual wireless distribution. Ultimately, an IP-radio user is expected to be able to listen to music or ask for coupons for a store he or she is about to visit. “No way satellite [radio] can do that,” he says.

He points to the $20 billion failure of another satellite company, Iridium LLC. The Motorola Inc.-backed company attracted just 28,500 mobile-telephone and paging subscribers and went bankrupt in 1999 after 11 years in development and less than 10 months in service.

“This is what happens to technologies that take five to 10 years to get into the hands of consumers,” KPMG’s Hovaness says. “They become obsolete.”

                      AM[ldots]FM[ldots]XM? Siriusly?
                  After 10 years and billions of dollars,
                 satellite radio enters the home stretch,
                with the first satellite set to go up this
                month and service to begin early next year.
                              Sirius
Headquarters                  1221 Avenue of the Americas
                              New York, NY 10020
                              (212) 584-5100
                               siriusradio.com
Top executive                 CEO David Margolese
Facilities                    20 studios, two live-
                              performance studios
Targeted customers            Commuters, truck drivers,
                              RV owners, Hispanics
First available in cars       1Q 2001 (Ford)
Price of after-mkt. receivers $100 more than AM/FM
                              receivers
Monthly subscription rate     $9.95
No. of channels               Up to 100
Programming                   50 channels of music; 50
                              channels of news, talk and
                              sports (with commercials)
Unusual formats               Chamber music; 'Broadway's
                              Best'; 'Singers & Songs'; news,
                              talk and entertainment for the
                              disabled
Exclusive program providers   CNBC, NPR, USA Networks/
                              Sci-Fi Channel, Sting, Grand
                              Master Flash
Automobile partners [*]       Ford (exclusive; includes
                              Mazda, Honda), Daimler-
                              Chrysler (exclusive;
                              "preferred" status for heavy
                              trucks), BMW (exclusive),
                              Freightliner (trucks)
Receiver partners [**]        Alpine Electronics, Audiovox,
                              Clarion, Delphi-Delco
                              Electronics Systems
                              Kenwood, Matsushita
                              (Panasonic), Recoton,
                              Sanyo Electric, Visteon
                              Automotive Systems (Ford)
Receiver technology providers Lucent Technologies
Principal Investors           DaimlerChrysler, Ford, Prime
                              66 Partners, Apollo
                              Investors, Blackstone Group
                              XM
Headquarters                  1250 23rd Street NW
                              Washington, D.C. 20037
                              (202) 969-7100
                              xmradio.com
Top executive                 President Hugh Panero
Facilities                    About 80 studios, one
                              live-performance studio
Targeted customers            Young adults (16-34 years
                              old), new-car buyers,
                              ethnic and special-interest
                              groups, truck drivers
First available in cars       2Q 2001 (GM)
Price of after-mkt. receivers $150-$399
Monthly subscription rate     $9.85
No. of channels               Up to 100
Programming                   Up to 100 channels of
                              music (15-20 channels with
                              limited commercials)
Unusual formats               Soap operas, audio books,
                              home and garden, classifieds
                              (including ISO ads)
Exclusive program providers   BET, Clear Channel, CNN
                              Sports Ilustrated, CNNfn,
                              C-Span, DirecTV, Nascar,
                              Radio One (urban music),
                              Salem Communications
                              (religious music), Weather
                              Channel, USA Today
Automobile partners [*]       General Motors Corp.
                              (exclusive), Freightliner
                              (trucks), Honda, Avis Rent
                              A Car
Receiver partners [**]        Alpine, Audiovox, Clarion,
                              Delphi-Delco, Mitsubishi
                              Electronic Automotive
                              America, Motorola,
                              Pioneer Electronics, Sharp
                              Sony Electronics (for home
                              and portable use; also in
                              marketing agreement)
Receiver technology providers STMicroelectronics, Lucent
                              Digital Radio
Principal Investors           General Motors Corp. and its
                              DirecTV, SpaceSystems/Loral,
                              Clear Channel, Motient Corp.,
                              Liberty Satellite
(*.)New deals will be non-exclusive.
(**.)Though required by the FCC, receivers that accept both Sirius' and
XM's signals will not be available until 2004, the companies say.
Source: Companies and their Securities & Exchange Commission filings

David Margolese

CEO

Sirius Satellite Radio

David Margolese, who founded Sirius in 1990, puts his money where his mouth is: He owns 17.4% of the would-be satellite-radioprovider.

Margolese, 42, is a born entrepreneur–and a successful one at that. He started Sirius after founding a paging company that grew into Canada’s national cellular telephone service, Rogers Cantel Mobile Communications Inc. (Rogers is now principally owned by AT&T Corp. and British Telecommunicafions PLC; Margolese divested the last of his holdings in 1989.)

He also started small in the United States, investing $1 million of his own money into what was then called CD Radio Inc. In 1990, CD Radio became the first applicant at the FCC for the nation’s two satellite-radio licenses. It changed its name to Sirius SatelliteRadio last November.

Though basically unknown to consumers now, satellite radio has the same potential that cell phones did, Margolese says. And cell phones, he notes, are “virtually everywhere now.”

Commuters particularly will be drawn to his national service, Margolese says. After getting the latest local news, weather and traffic from a local AM or FM station, they will settle in to listen to CD-quality music via satellite for the remainder of the trip, he predicts. “What [else] would you do with the other 45 minutes?”

Hugh Panero

President and CEO XM Satellite Radio

As one of the pioneers of pay-per-view TV, Hugh Panero learned that “people will pay for their passions.” In fact, he says, “with great content, people are going to pay for anything.”

He’s now using that lesson to build XM Satellite Radio into what he hopes will be one of two subscription services that will “reinvent [and] revolutionize [radio] and make it sing again.”

XM’s programming plan is to take popular terrestrial formats and “blow them out,” says Panero. Rather than one oldies station, he says, XM might offer an oldies channel for each of the past few decades.

Panero, 44, was hired to lead the Washington, D.C.-based XM (then called American Mobile Radio Corp.) in June 1998. He had held the same post at PPV network Request Television, which he joined in early 1993.

While at Request, Panero turned down at least one offering that inspired a great deal of passion: a PPV special featuring the recently acquitted O.J. Simpson.

Beginning in 1982, Panero held several positions at Time Warner Cable, including vice president of marketing and PPV. He was responsible for Time Warner Home Theatre, a three-channel PPV service, and the company’s Quantum upgrade of its Brooklyn/Queens system. Quantum, revolutionary at the time, in the early ’90s offered a 150-channel capacity and 15 PPV movies a week.

Talk Radio

A pair of filmmakers use the Internet to broadcast their media calling card

The latest wrinkle in talk radio cannot be found on the car stereo, or even (for that matter) on any kind of radio. In fact, the Next World Entertainment Zone — orbiting through cyberspace at www.nwez.net — radically alters the notion of what we have come to know as “drive time.” In this case, the drive is the one outfitted inside one’s computer.

But this minor detail hasn’t stopped a couple of gifted fellows named Andy Cowan and Scott Kapoian from growing into something of a cult sensation as the crown jewels of the fledgling NWEZ Web site.

For two hours each Friday night beginning at 8, Cowan and Kapoian transform themselves into “The Up & Down Guys.” As described by Kapoian, the pair blend “an interactive therapy session coupled with an entertainment talk show.”

“If we had a TV show, it would be so easy to tell people how to find us,” notes Cowan, launching into one of his patented pessimistic diatribes. “We could just say we were on Channel 5 or whatever. With this show, I have to ask, ‘Uh, do you have Real Player? How fist is your modem?’ In this age of short attention spans, we’re lucky if they even hear all of the instructions.”

Cowan taps into his down-beatedness quite naturally: as a veteran of the television scriptwriting wars. He has penned acclaimed episodes of “Cheers” and “Seinfeld” and earned a CableACE Award for a comedy short, though, tellingly, he couldn’t even get to first base with his date on the night he won.

CableACE-Award

Conversely, Kapoian fairly bubbles with an inborn optimism as an actual licensed Santa Monica psychologist, in private practice since 1986. He revels in his function as straight man to Cowan’s incessant cynicism and gloom.

“I feel like we’re going to help change entertainment by bringing back wit with accessibility,” Kapoian says.

During the course of their more than 20 live shows to date, the format finds an opening hour devoted to some aspect of Cowan’s ongoing (and hopeless) therapy.

Then in hour two, the real fun begins. Cowan starts off by conducting “interviews” with such Hollywood luminaries as Julia and Eric Roberts and Katharine Hepburn or even Fed Chairman Alan Greenspan. Except that we can only hear Cowan’s side of the phone conversation. Hmmm …

Other show staples include “Virtual Date,” in which Cowan moves close to the Web camera and engages in a (one-way) conversation with an imagined woman; “Movie Non-Reviews,” in which Cowan tries to convince Kapoian that he saw a movie he actually did not; and “Unemployment Tonight,” an like glitzy update on the 90% of Hollywood that’s out of work.

In a rare moment of virtual hopefulness, Cowan notes that “Up & Down Guys” is being considered for both TV series and radiotalk-show opportunities beyond the cyber realm. His buoyancy is nearly palpable.

“The terrific thing about the Internet is that it’s really the great equalizer,” Cowan admits. “We have a Web show — and so does Sam Donaldson.”

Radio Bits

Radio has changed very little since AM broadcasts began around the turn of the 20th century. FM was introduced in the ’30s, and stereo FM broadcasts began in ’61. But both types of transmission are analog in nature and are thus prone to problems such as noise, multipath interference (intermittent cancellation caused by reflected radio waves arriving at the receiver at different times), and crosstalk with signals in adjacent frequency bands.

fm-radio-broadcast

On October 10, 2002, the Federal Communications Commission (FCC) announced its approval of the largest overhaul of terrestrial radio broadcasting ever to occur. The underlying technology, developed by a company called iBiquity Digital (www.ibiquity.com), is called In-Band On-Channel (IBOC), which piggybacks digital data on top of conventional analog AM and FM transmissions. As a result, radio stations can send digital and analog signals simultaneously without changing their broadcast frequency, providing full backward compatibility with existing receivers while adding significant capabilities for new digital radios.

Both AM and FM broadcasts include sideband frequencies above and below the primary transmission frequency, and IBOC uses these sidebands to send digital data. In fact, the data is redundantly transmitted in the upper and lower sidebands to help ensure that it arrives at the receiver intact. Another safety measure in the FM domain is iBiquity’s First Adjacent Canceller (FAC) technology, which cancels out strong adjacent FM channels that can wipe out the digital sidebands.

fm-vs-am

IBOC overcomes noise and multipath interference with a proprietary encoding scheme that is applied to the sidebands and used in conjunction with custom error-correction algorithms. The power in each redundant sideband is then combined within the receiver to maximize signal gain. Digital bandwidth is conserved by using a perceptual audio coder (PAC) to remove certain elements of the audio data based on psychoacoustic models, much like other audio coders, such as MP3.

All digital-transmission systems face a trade-off between signal robustness and the time it takes for a receiver to acquire the signal. This trade-off is determined by a portion of the control software called an interleaver, which scrambles the timing of the encoded data, redistributing transmission errors to increase the fault tolerance of the system. Short interleavers use small data packets and allow rapid acquisition, but the signal is prone to dropouts. Conversely, long interleavers use large data packets to provide more robust signals, but they take longer to acquire the signal.

IBOC solves this dilemma by first tuning in the analog signal and then crossfading to the digital signal once it has been acquired by a long interleaver, which ensures robust reception. At the boundary of the station’s coverage area, the receiver crossfades back to analog as needed to prevent abrupt digital dropouts.

The new capabilities offered by IBOC include the Main Program Service (MPS), which preserves the primary programming in analog and digital forms and adds other data related to the program, such as artist name and song title. Other new elements include Personal Data Service (PDS), which lets users specify the types of on-demand data they wish to receive; Station Identification Service (SIS); and Auxiliary Application Service (AAS), which allows virtually any type of application to be added in the future. Text information is displayed on the radio’s front panel.

Under the commercial name HD Radio, IBOC will soon be available in car radios from Kenwood, Delphi, and others, using chipsets from Texas Instruments that can be retrofitted into existing radio architectures. This technology could change forever the way that your music is broadcast to millions of fans, so watch for its introduction in 2003.

Facts About Radio

Free radio resource pushes teen ad market

How many hours did the typical teenager listen to radio during the past seven days? What weekly activity occupies teenagers more than any other? Do teens spend more time watching TV than listening to radio?

The answers to those questions and dozens more are available through a free radio industry-funded service known as New Generation Radio (NGR) and based in New York. Its goal is straightforward: to educate advertisers about the teen and young-adult audience and the strategic importance of radio.

Not widely known within the advertising community, NGR calls itself the best-kept secret for ad agencies setting their sights on teens and young adults. Its director, Deborah Esayian, is a former brand manager at Procter & Gamble; its marketing director is Rick Berger, a former brand manager at L’Oreal and an agency accounts supervisor.

  • NGR points to Simmons and other research that shows the MTV generation still listens to 3-4 hours of radio a day, regardless of their TV habits. Yet using radio as an advertising medium-‘long forgotten in the wake of MTV”-is almost unheard of at many ad agencies when it comes to media buys and creative development, NGR says.
  • NGR wants to change the perception of radio’s effectiveness by working directly with agencies on everything from answering simple questions to handling entire national buys and promotional tie-ins-for which NGR receives no commissions. The service takes credit for helping bring some heavy-hitters to radio in recent years-including Reebok, Pringles, Clairol Herbal Essences and Starburst,

One user of NGR resources, April Zeig of Grey Advertising in New York, says that the nature of radio can be made to work for advertisers: “We found radio to be an important component of our media plan because it allowed us to connect with our teen target via their favorite music, celebrity DJs and teen-focused events where we could sample product.” Zeig says Grey Advertising was pleased enough with “such a successful first year using radio” that her company will expand its market list in a second year.

As a resource for advertisers, broadcasters and media, NGR seems to have many of the answers, culled from research groups. As far as that trio of inquiries at the top of this article, the answers are: The typical teenager listened to 10 hours of radio during the past seven days; 39% of teenagers’ time is devoted to media of all kinds, more than any other activity; and, yes, teens spend more time watching TV than listening to radio, but barely. Teens and young adults surveyed watched 11 hours of television during the previous seven days, compared with 10 hours for radio.

However, NGR also is armed with data that show that while TV reaches 86% of teens and young adults daily, 93% listen to someradio every day–despite the heavy competition from compact discs. And here’s a statistic that might make some advertisers sit up and take notice: 55% of teens and young adults say that radio is the “most effective and best way” to reach them, versus cable (50%) and magazines (39%).