The New Wave in Radio Will Come at a Price

Imagine driving from L.A. to New York without changing the channel on your radio. And imagine pushing a button on the dash to deliver the song you just heard straight to your door. Or choosing from more than 100 specialized channels--from around-the-clock rap to 24-7 adult contemporary.

Two companies are each placing a $1-billion bet that radioheads--from music lovers to talk fanatics--will pay for programming that’s been free for 80 years. Think of it as the audio version of satellite TV, complete with a huge variety of niche programming, high technical standards and, yes, a monthly fee.

“People will pay for more choice, quality and convenience,” said Hugh Panero, chief executive of XM Satellite Radio (https://www.xmradio.com), a Washington-based company scheduled to begin pay-radio service next summer.

Both XM and its competitor, New York-based Sirius Satellite Radio (https://www.sirius.com), plan to deliver 50 channels of music, plus an almost equal number of news and talk offerings. And each plans to charge subscribers $9.95 a month. On both satellite services, many of the channels--especially those devoted to music--will be commercial-free.

“We don’t have just a classical channel,” said Sirius CEO David Margolese. “We have three separate channels: symphonic, chamber and opera.”

And although neither Sirius nor XM will provide local news, weather or traffic, their signals will not fade in foul weather or on the open road.

“You could drive across the country and never change channels,” Panero said.

But is satellite radio different enough from traditional broadcasting to attract the large number of subscribers--about 4 million for each company, according to analyst John Coats of Salomon Smith Barney--needed to break even? Not surprisingly, the National Assn. of Broadcasters--the biggest radio station trade group--doesn’t think so.

“Why would someone pay for something they already get for free?” said NAB spokesman Dennis Wharton. In many major markets, he said, a variety of radio programming is already available.

“The ideal audience for [satellite] service is someone who loves classical music and lives in a holler in West Virginia,” Wharton said. “Will it destroy radio as we know it? Not a chance.”

Analyst P.J. McNealy of Gartner Group agrees that the cost to the consumer is a major hurdle. “The price could be prohibitive. It’s $120 bucks a year, plus the cost of the device,” he said.

In new cars, that device will be a three-band radio capable of getting AM/FM/Satellite. The satellite band, which can be controlled by each company through electronic signals, will work only if the subscription fee is paid. (The fact that the band is individually “addressable” by the company could eventually lead to a consumer being able to push a button to order the CD being played).

Ford and GM have both announced that they will be making the three-band radios available for some new models next year, but they’ve not announced how they will be priced. Discussions have ranged from making them standard equipment on some higher-end models--with perhaps even a one-year satellite subscription thrown in--to the units being an option costing about $150 to $300.

Several manufacturers are also making add-on satellite adapters for car radios, just as they did in the early days of CD players. Pricing for those also has not been announced.

Home units that can receive the satellite services are on the back burner for the most part. Car use is expected to determine whether pay-radio is successful.

Analyst Riyad Said of Friedman, Billings, Ramsey names the pricing of the equipment as just one of the unknowns in this new world of pay-radio. “I think there will be a market for it, but having good programming, good service and good reception--until the services are actually launched, we won’t know for sure.”

Still, Coats is generally optimistic that there will be enough consumers willing to pay for an alternative to broadcast radio. “We like the concept,” he said. “It’s for people that like to listen to the radio and are unhappy with the existing service.”

That perceived unhappiness among a significant group of listeners is what Sirius and XM are counting on. They are particularly going after niche listeners who want far more specific programming than is generally offered by broadcast radio.

“Some of the hottest-selling music is rap and metal, but you can’t find it on the radio in a lot of places in this country,” Panero said.

“I grew up in New York listening to Jonathan Schwartz play Sinatra. That station knocked off his format and later turned to talk. Right now, there is no station in the city where you can hear Sinatra sing, ‘New York, New York.’ ”

Pop hits will get eight channels on Sirius, including one for each decade from the 1950s through the 1990s. In addition, the service will transmit several rock-related channels.

“What if you live in a part of the country that doesn’t have reggae or rap or metal? We have a separate channel for each of them,” Margolese said.

Latin music will get eight channels, including “Merengue,” “Tex-Mex” and “Rock en Espanol.” Country will have three and jazz five.

XM, which has not announced specific music channels, said it plans to take new directions in several genres. One of its classical offerings will be called, “Fine Tuning.”

“It’s for the 40-something, NPR [National Public Radio] listener who grew up with album rock and just can’t find anything on the dial that’s challenging,” said Lee Abrams, a radio veteran who serves as XM’s programming chief.

He further described Fine Tuning as a channel for people who “went to see ‘Riverdance,’ bought the Three Tenors, saw ‘Titanic’ and loved the music.” In the meantime, XM’s more traditional classical channel will, he said, be “very sensual, heavy with female voices.”

Both companies said their music programming will be presented live by DJs 24 hours a day.

“This is not an audio service,” Abrams said. “I like to say we have a collection of 100 living, breathing stations to send up to the satellite.”

In addition to music, each company plans to offer as many as 50 channels of news, sports, talk and religion, most of which will come from outside providers, including NPR, BBC, CNBC, Hispanic Radio Network, Black Entertainment Television, ASIAONE (with one channel in Mandarin and another in Hindi), C-SPAN and USA Today. There will even be a NASCAR channel for auto racing enthusiasts and a another from One-on-One Sports for 24-hour-a-day sports talk.

But none of this programming will be strictly local--except for content of wide interest, there will be no local news, sports or weather, and certainly no traffic reports. Unlike cable television, which has regional operators that can insert local programming, the satellite broadcasters originate all their programming from central points.

“Not having local information will be a challenge for the satellite companies,” said McNealy.”If someone wants local news or weather or a traffic report, they will have to switch to AM or FM. They might not come back.”

Margolese allowed that local content is a strong draw, up to a point.

“The average commuter gets in his car in the morning and has to have an information fix--six or seven minutes of local news, weather and traffic,” Margolese said. “Then for the next 40-odd minutes, our research shows, . . . the vast majority of people listen to music. We give them so many choices of music, they can have just what they want when they want to hear it.”

Satellite radio has been on the drawing board since the early 1990s. In 1997, Sirius and XM paid about $80 million each to obtain satellite frequency licenses at a Federal Communications Commission auction.

That hefty fee was only the beginning. Each company had to commission the building of satellites and uplink stations, and build studio complexes that could broadcast at least 50 live channels of programming simultaneously, each with its own host. In addition, they had to launch the satellites, hire 24-hour-a-day personnel and put in the infrastructure that would allow the capturing of outside programming.

Sirius has launched two satellites, both from a Russian facility, and expects to put up its final bird in November. All three will travel in an elliptical orbit to keep North America in uninterrupted sight.

The signal runs into problems, however, in tunnels or when blocked by tall buildings in urban cores. So, Sirius is building about 100 repeaters in densely populated areas to cut down on dropouts.

XM plans to place two satellites, to be launched from a floating ocean rig in the South Pacific, in stationary orbits above the equator. The first is scheduled to launch in December, the second early next year. And XM plans to install about 1,500 repeaters in its attempt to keep the signal continuous from coast to coast.

Analyst McNealy is skeptical that the satellite/repeater combination will truly cover the country. “The rule of thumb is, if your cell phone doesn’t work [in an area], there is a good chance your satellite radio will not work.”

He said he believes the most successful satellite radio venture will air the least advertising. “If you are paying . . . you don’t want to listen to ads,” he said.

It’s an expensive proposition. Sirius and XM each plan to spend more than $1 billion by the time their services launch.

All the money spent on a potentially major threat to broadcast radio--which traces its origins to the first successful experiments by Guglielmo Marconi in 1895--does not daunt the NAB’s Wharton.

“From practically the days of Marconi, there has been movies, television, cable and all sorts of other entertainment media that could potentially take time away from radio listening,” he said.

“This is just another competitive thread that I predict the radio industry will survive quite nicely.”