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.
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
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?”
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.