Satellite Radio Aiming High

With a bluster reminiscent of high-tech boom years, Hugh Panero, president of XM Satellite Radio Holdings Inc., boasted recently that his pioneering radio service had signed up 30,000 subscribers since launching Nov. 12.

That’s 30,000 down and at least 4,970,000 more to go.

Although XM is seeing early success, analysts believe that the Washington-based company and its main competitor, Sirius Satellite Radio Inc., each will need 5 million to 6 million subscribers to break even.

That’s a long road for any new technology to travel--and it’s one fraught with daunting obstacles.

“We are in a time of huge transition in the radio industry,” said Tom Taylor, editor of M Street Journal, a radio industry publication. “The next year in radio is going to feel like the late ‘90s did with the Internet.”

The problems facing the satellite companies are many, with the most obvious hurdle being cost. At about $10 a month, subscription fees for the mostly in-car service have some analysts wondering what would motivate consumers to pay for radio when they already get so much of it free.

“The paid-content [media] market is for stuff you can’t get free, like movies or boxing,” said Michael Tracey, director of the University of Colorado’s Center for Mass Media Research. “Maybe there’s a niche music market for truck drivers and people who are real music junkies, but there clearly is no mass market.”

The satellite radio services also are facing competition from new car entertainment options--from digital radio to in-dash MP3 players, fancier mobile phones and wireless data ventures such as General Motors Corp.’s OnStar vehicle security and travel advisory service.

XM and New York-based Sirius are unfazed by the concerns. “Radio hasn’t had a technological innovation in 40 years--since the invention of FM,” Panero said. “We want to do what cable television and satellite TV did to the TV world.”

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Firms See Opportunity in Program Offerings

Executives at both companies believe that consumers--fed up with spotty reception and limited programming--will pay for satellite alternatives that can transmit 100 channels of content such as jazz, country, classical, comedy and talk radio.

Both companies say they may need only 500,000 to 600,000 subscribers to break even. Panero said XM could have 350,000 subscribers by year’s end.

“Will people pay for radio? The answer is a resounding yes,” Panero said.

The technology that paved the way for XM and Sirius got off the ground a decade ago when the Federal Communications Commission set aside airwaves in the 2.3-gigahertz band for satellite-based radio services. XM and Sirius eventually won FCC licenses to use the spectrum to broadcast dozens of static-free digital radio channels from coast to coast.

XM beams its programming from two Boeing Co. satellites 22,000 miles above Earth. The signals are received by a short, stubby antenna attached to a dashboard-mounted unit capable of tuning regular AM and FM as well as XM broadcasts.

A few models are portable and can be taken out of the car and used indoors.

In addition to airing programming that is mostly free of commercials (Sirius says it will air no ads), both companies said they expect to lure customers by offering CD-quality sound, exclusive interviews with music stars and programming for every conceivable taste.

Sirius, for instance, will offer channels dedicated to bicycling, motor sports and health when it launches its service this month; XM has a Hindu channel and 15 channels of rock and Latin music.

“It’s a terrific product proposition for the American public: At the push of a button you have 100 radio stations--most of which you can’t get anywhere else,” said Joe Capobianco, senior vice president for content at Sirius.

The companies’ strategy is to first win the battle for the dashboard, where consumers spend more than $2 billion each year to install about 11 million aftermarket car radios. An additional 17 million radios are installed annually by auto makers.

General Motors, which owns a 6% stake in XM, is offering an XM radio and up to one year of subsidized service as an option in selected car models. That means XM will get a check for about $100 for each vehicle sold under the promotional offer.

Sirius is in partnership with Ford Motor Co., DaimlerChrysler and BMW, among others.

The two companies have worked to trim operating costs by engineering smaller radio chips, encouraging subscribers to pay in advance and sign up for radio service on the Web or directly through car makers.

Utilizing a strategy that made subscription satellite video service DirecTV a success, Sirius President Joe Clayton said his company may try varying the price of its proposed $12.95 monthly service fee regionally to reflect variations in the cost of living.

Still, it is taking mountains of cash to keep the services afloat.

Sirius previously announced that it raised $148 million to help finance operations through the second quarter of 2003.

Heinz Stubblefield, XM’s chief financial officer, said the company will spend $25 million to $50 million in the next few months, mostly for programming and satellite operating expenses. The company reported a loss of $144 million for the last quarter of 2001.

Much of XM’s money has been spent on its Washington headquarters, where 450 employees are housed in a remodeled 150,000-square-foot building with 82 digital production studios.

The mounting debts to build and operate the system, along with its uncertain future have sent the stocks of both companies gyrating.

Over the last year, Sirius shares have been as high as $34 and as low as $2.20. They closed Friday at $7.13, up 90 cents on Nasdaq. XM has seen its stock hit $21 over the last year--and plummet as low as $3.87. Its shares Friday closed at $12.17, up 81 cents, also on Nasdaq.

Both services have drawn a mixed reaction from the nation’s 13,000 radio broadcasters, which stand to lose audience share if satellite radio takes off.

Though some broadcasters are attracted to the prospect of a national audience, XM has been under fire from the industry’s dominant trade group, the National Assn. of Broadcasters, as well as some local station owners, who fear the companies might develop local programming and advertising to compete with existing stations.

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Competition Will Skyrocket

Satellite radio is arriving just as a torrent of new radio competition is ready to flood the market.

Two years ago, the FCC authorized low-powered radio--a service that could create up to 1,000 new stations. Their signals won’t travel very far, but they will spawn a great deal of new content.

The FCC also is planning to auction up to 350 now-dormant FM stations this year and set a standard for the nation’s AM and FM stations to switch to new digital technology, which would allow broadcasters to offer better-quality sound as well as new programs and services.

“There is going to be a tremendous increase in competition, and broadcasters are going to have to increase their focus on format diversity--you can’t have five country stations in a market all making money,” said Mark O’Brien, executive vice president at BIA International, a radio and television industry research firm.

Some experts say local broadcasters have the advantage over the new satellite technology since only they can offer traffic reports, local sports scores and community talk shows that appeal to rush-hour motorists.

But XM’s chief programmer, Lee Abrams, said the advantage ultimately may be small compared with satellite radio’s promise.

He likened its potential impact to that of FM radio in the 1970s. He said FM’s superior sound and lack of commercial clutter eventually triggered a huge audience shift away from its AM rival.

“We play every imaginable type of music,” Abrams said. “The old FM playbook is obsolete.... We are in a Palm Pilot-Internet-cell phone era and traditional radio is no longer part of the equation.”