Satellite Radio Rivals Picking Up Static

In a once-abandoned printing factory that used to churn out National Geographic magazines, 82 immaculate, gleaming radio studios stand at near-silent attention, waiting for a master switch to be thrown in late summer.

XM Satellite Radio Holdings Inc. is gearing up to go on the air in a big way: 100 channels of digital music and talk radio beamed to your car, broadcasting everything from rock, pop and country to news, comedy and evangelical programming.

Once the laggard in a two-horse race because of launch delays, XM is poised to be the first to broadcast radio via satellite, the first innovation in radio technology since the FM band started showing up in car audio systems about 30 years ago.

But XM and its New York City-based rival, Sirius Satellite Radio Inc., which was considered the leader as recently as April, face hurdles that have hammered their stock prices and caused Wall Street to scale back subscription and revenue projections.

XM was delayed in launching its two satellites--the last one went up last month--whereas Sirius has had three in orbit doing test broadcasting since Jan. 4.

Sirius is facing a shortage from its supplier of the microchips that receive the satellite broadcasts, delaying its start of service until the end of the year. Last month, it abruptly raised its monthly subscription fee from $9.95--the same as XM Radio--to $12.95.

Auto makers also are slow to adapt and are not expected to build satellite-compatible radios into their cars in significant numbers until next year.

The stock prices of Sirius and XM have taken a beating and are 60% to 70% below their 52-week highs.

This is not exactly music to the ears of consumers, investors and the two companies.

The idea behind satellite radio is to offer an unprecedented choice of channels with digital-clear sound broadcast coast-to-coast so motorists can listen to the same blues or ‘50s channel from Miami to Seattle. For big-rig truckers or those who are on the road a lot, it will mean a steady stream of their entertainment of choice on long-haul trips. For others, it will mean being able to listen to a favorite genre in a market that lacks it. For instance, there is no classical music station in Detroit or reggae station in New York.

“Every channel is a living, breathing radio station,” said Dave Logan, XM’s ebullient vice president for programming operations. The channels range from Muzak to something called XM Weirdness, which may play anything from obscure Frank Zappa cuts to William Shatner singing “Lucy in the Sky With Diamonds.”

Eric Clapton, for instance, has recorded 346 songs, but only 31 ever get played on U.S. radio stations. You’ll hear many of the others on XM, Logan said.

Doug Wilsterman, Sirius’ vice president for marketing and distribution, said one of every three compact disks is of a genre that’s never heard on the radio because it won’t be supported by advertisers. But he promises there will be a place for them on Sirius.

Three orbiting satellites for Sirius and two geostationary birds for XM will transmit to the continental U.S., using a series of ground repeaters to reach consumers in large cities with tall buildings that may block the signal.

Until the radios are built into cars, subscribers will have to buy a new dashboard radio unit with a third band added to AM and FM to receive the satellite broadcasts. The radios start at $200 and an antenna and a separate module installed in the trunk that contains the crucial chip sell for about $300.

Alternatively, the rear module plus a small FM tuner/transmitter will relay the signal to standard car radios, though the broadcast then becomes analog instead of the higher-quality digital, for a starting price of $300.

The fundamental risk is whether people will pay for something long taken for granted: listening to the radio in cars. XM and Sirius are banking that they will, as they invest more than a billion dollars each into what they think is the next big thing on wheels.

“We want to create a very special audio presence, like HBO is special to the cable industry,” said XM Chief Executive Hugh Panero. “We want to create fans, not listeners.”

Sirius plays up its 50 commercial-free music stations. XM will have as much as six minutes of ads per hour, compared with the average of 22 minutes for commercial stations.

“They [XM] have to target demographics; we just have to provide great music,” said Tom Versen, Sirius’ director of production and creative services.

Sirius and XM say their research shows customers readily will pay the subscription fee, especially if it is rolled into their car payments.

Wall Street estimates that by the end of the year, Sirius will have 10,000 subscribers and XM 50,000. But the two are projected to be neck and neck by 2003 with about 2 million subscribers each. By the end of 2004, that number is expected to climb to 4 million, roughly their break-even point, according to Salomon Smith Barney.

The companies will approach the 15 million mark in 2007, each chalking up revenue of slightly more than $2 billion.

Because of the slow roll-out, investors in April drove down XM’s stock to $3.87 and Sirius’ to $6.12. Now that both are essentially up and running, their stocks have recovered, with XM closing Friday at $15.50 and Sirius at $13.50, both on Nasdaq, though both are still far below their 52-week highs of $46.94 and $60 respectively.

“Like most tech companies, we’ve mirrored the decline in Nasdaq,” said Steve Cook, XM’s vice president for marketing. “But all we’ve done is de-risk: We’re shipping radios, pursuing more auto makers, getting more broadcast partners.”

Both XM and Sirius initially will be driven by the $11-million-a-year car-radio aftermarket, those car radios sold in retail electronics stores. That market, plus Sirius’ rate hike and auto partners heavily invested in the broadcasters’ success, make Robert Peck, senior analyst for satellite communications at Bear Stearns, keen on both stocks, with a per-share target price of $54 for XM and $57 for Sirius by the end of this year.

“Sirius’ raising the subscription price at this time shows they’re reassured it won’t affect subscribers,” Peck said. “They realized they were leaving a few dollars on the table.” XM could well follow suit, he said.

Armand Musey, satellite technology and services analyst at Salomon Smith Barney, is more cautious. Though both companies’ share prices should benefit from the successful launch of XM’s second satellite, he said, the shares have traded like yo-yos. He has a 12-month target price of $15 for XM and $25 for Sirius.

“Shares of Sirius offer the potential for significant upside if the company meets its targets, but we expect them to be highly volatile until market demand proves itself,” Musey said.

That demand will be led for at least a year by three-band aftermarket radios sold at electronics stores until General Motors Corp. and Ford Motor Co., which own chunks of XM and Sirius respectively, install satellite-capable radios in their cars.

Not only are the radio stations gambling on this new business, but also the auto makers. GM, one of XM’s largest shareholders, will begin installing XM-compatible radios in Cadillac DeVilles and Sevilles this year.

Honda Motor Co. also has invested in XM but is holding off on putting in radios until it can get units that are capable of receiving both XM and Sirius broadcasts. (Within five years, satellite radio units compatible with both systems will be available, avoiding another Betamax-versus-VHS format logjam.)

“We’re basically on track with roll-out volumes that have been in place for about a year,” said Rick Lee, GM’s executive director for satellite radio services. GM is testing the new technology to make sure bugs are worked out before it goes on sale. “Most [manufacturers] would not take a big part of their portfolio and put it at risk of the technology not panning out,” Lee said.

Satellite radios could be in half of all GM vehicles in five years or so, he said.

Ford and DaimlerChrysler have equity stakes in Sirius and Bayerische Motoren Werke also has signed on as a partner.

Ford is taking its time, considering how best to mount the hockey puck-size radio antennas and making sure the system can deliver seamless broadcasts. “As in any new system there are still wrinkles,” a Ford spokesman said. “You want to make sure it works if you’re going to ask people to pay for it.”

So what exactly will listeners get as they inch down the freeway in rush hour or zoom cross-country on vacation?

Both will carry news programming from CNN, Bloomberg Radio, the Weather Channel and British Broadcasting Corp. Both will have rock, pop, heavy metal, ‘50s/’60s/’70s/’80s music, alternative rock, country and western, classical, jazz and gospel. There’ll be talk, C-SPAN, sports, comedy, evangelists, kid shows and programming aimed at African Americans, Latinos and Asian Americans.

Then what’s the difference? For fans of “The NewsHour With Jim Lehrer” or 24-hour NASCAR radio or L.A. Theatre Works, it must be XM. For those who must have National Public Radio, Sirius is the way to go.

If you want to take your satellite radio out of the car, for now only XM has portable Sony Corp. “plug and play” units, which can be used in the home. Sirius will have portability later, probably next year, and both companies are eyeing the leisure boat market.

Wilsterman, Sirius’ vice president for marketing and distribution, has recreational vehicles and long-haul truckers in mind as big targets. “Think of the guy locked behind that wheel: What does he need? Entertainment and information,” he said. “These guys are a super, super opportunity. Truckers are just clamoring for it.”

In the end, it may be the on-air personas, or the atmosphere of the programs, that attract subscribers.

XM program directors with names such as “Taz,” “Phlash” and “Bladerunner” sit intently at Macintosh computer stations, mixing funky personal promos. Stuffed Looney Tunes characters and an inflatable Spider-Man dangle from the retro-industrial ceilings, crammed with piping and ventilation ducts.

Sirius also has spotless new high-rent studios, 36 floors above Sixth Avenue in midtown Manhattan, which Wilsterman said supplies a steady stream of recording artists who drop by while performing on MTV, “Late Show with David Letterman,” “Saturday Night Live” or “Today.”

At Sirius, programmers seem to have fewer tattoos and body piercings but hover over similar high-tech studio workstations with plenty of keyboards and flat-screen panels.

Both broadcasters have hired veteran DJs, record producers and musicians as programmers, turning them loose with the mandate to put together nonstop shows featuring their genre.

Consider reggae: Sirius’ programming is led by longtime New York radio personality Pat McKay. At XM, it’s Dermott Hussey, a former associate of Bob Marley, and “Papa” Wabe, who hosted a reggae radio show in Washington, D.C., for 23 years. “We have the awesome and blessed task of doing something that’s never been done in reggae before: 24/7,” Wabe said.

Hussey also brings something besides experience. “We have hundreds of hours of unreleased Bob Marley material,” he said. “We’re going to be playing it.”

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Satellite Radio Outlets

A look at the two satellite radio companies, which are gearing up to start business this year.

Sirius Satellite Radio

Monthly fee: $12.95

Automotive partners: Ford, BMW and DaimierChrysler, including Mercedes-Benz

Main broadcast partners: BBC, Bloomberg Radio Networks, C-SPAN Radio, CNBC, CNN news group, Comedy World, DirecTV, Discover Channel, Hispanic Broadcasting Corp., Kennedy Center, National Public Radio, Public Radio International, Speedvision, USA Today, Weather Channel

*

XM Satellite Radio

Monthly fee: $9.95

Automotive partners: General Motors and Honda

Main broadcast partners: AsiaOne, BBC, BET, Bloomberg Radio Networks, CNN news group, Country Hall of Fame, C-SPAN Radio, Hispanic Broadcasting Corp., NASCAR, “The NewsHour with Jim Lehrer,” Salem Communication (Christian programming), the Sporting News, USA Today, Weather Channel

Sources: The companies; Media General; Hoover’s Online; Salomon Smith Barney

Projected numbers of subscribers, in millions:

2001: 10,000 for Sirius, 50,000 for XM

2007 estimate: 14.5 million for Sirius, 14.6 million for XM