Reflections and Predictions on Satellite Radio
 As
we celebrate the holiday season and the close of 2002, the urge
to look back over how the fledgling satellite radio technology has
fared and where the players in this game are headed begs indulgence.
The XM and Sirius satellite radio services both managed to get
themselves up and running during one of the worst economic downturns
in 50 years. The high-tech implosion and the 9/11 recession triggered
a big bite out of the projected growth and success both companies
hoped to have achieved. After burning money for 10 years, they HAD
to launch, at a time when not many people were willing to spend
extra on entertainment.
In spite of the slow start, the SDARS services are providing something
that terrestrial radio could not - namely, a nationwide service
that could be received almost anywhere, featuring many new channels
of programming and formats not usually found elsewhere, with few
or no commercials. Those who frequently travel the open roads, especially
in sparsely populated regions of the country, have found XM and
Sirius a welcome addition, but at an additional cost.
Humble beginnings
XM has been signing up subscriptions for over a year and counts
about 220,000 as of the third quarter, 2002. In Arbitron terms,
that total rivals the cume for a 2-share, also-ran commercial station
in a major market. Sirius got a much shakier start, mostly due to
receiver chip set problems, and has signed up an anemic 30,000.
There appears to be a long road of red ink ahead for both, if they
even stay on the road at all.
These services carry monthly subscription charges of $10 to $12,
plus the cost of the special radio and a second antenna, typically
around $300. Both say if 10 percent of the existing population using
radio signs up and remains loyal, they will be profitable and successful.
Subscription growth is slower than originally projected and now
totals only about 1 percent of their goal. Annual contract renewals
from the early XM buyers are just now coming in. If at least half
of present subscribers don't convert to renewals, XM and Sirius
will have big trouble surviving as they now exist.
A steep climb ahead
The growth rate of new satellite radio users should level off as
the percentage of those most likely to adopt nears critical mass.
It might even start declining if renewal rates drop off. After those
who really want this service buy it, the only sure way XM and Sirius
can grow sales to reach profitability is to hope that factory or
dealer-installed satellite radios in new cars become attractive
enough for car buyers to swallow the buried costs in their car payment.
One percent down, 99 to go.
The vast majority of radio users seem happy enough with free and
local stations and will most certainly remain so. The satellite
boys were banking heavily on getting a big head start on terrestrial
services in deploying the advantages of digital. As HD Radio ramps
up in 2003, many of those technical advantages will be leveled.
Stay tuned for lots of confusion in the showrooms as sales folk
tell consumers they can have all the advantages of digital radio
without having to pay any monthly fee and still listen to all their
favorite local stations.
A ton of expensive infrastructure is needed to make SDARS work
well everywhere, especially in large metro areas. Not only are the
satellites, the studio complexes and the staffing very pricey, but
the huge network of terrestrial repeaters needed to make reception
seamless piles up a mountain of costs. I won't go into the details
of their balance sheets, but it doesn't take a math genius to figure
out the cost per listener is simply breathtaking. The subscriber
acquisition costs for XM alone are about $120 per person.
Business Economics 101
Both companies are publicly traded, each with several major stockholders
holding the trump cards. They're both trading near their all-time-low
share prices. How long will the banks and investors stay patient,
waiting for the present business models to justify staying the course?
XM says they have enough cash on hand to keep running for another
year. They've just cut 80 positions at their palatial Washington
operations center. Sirius is not nearly as flush. Both have executed
additional refinancing and stock sales on several occasions to prop
up their operations and buy more time with Wall Street.
The ritual of launching a new business enterprise with venture
capital and public stock offerings has been played out countless
times throughout the history of American capitalism. High tech is
especially treacherous. After the disappointment of Iridium's cell
phone service, ventures involving a satellite-based subscription
model have become a bit suspect. At some point, the business plan
must deliver a profit to the investors.
Detroit to the rescue
Both XM and Sirius have major investment backing from the big automobile
companies. General Motors is in fact the largest single stockholder
of XM at about 30 percent. Clear Channel Communications has around
a 12 percent stake and is also a key owner. Ford and Daimler/Chrysler
have lined up behind Sirius. The presence of these players gives
the satellite services more options if their present models don't
pan out as scripted.
It seems likely that by the end of 2003, Sirius will be urged by
its major creditors to do something very compelling or throw in
the towel. Before its present program offerings and business model
goes away, there will no doubt be major cost-cutting, more commercials
and perhaps higher subscription fees in a last-ditch attempt to
rescue this very sick puppy dog.
They could be forced into at least Chapter 11 reorganization bankruptcy,
if not Chapter 7 liquidation. It would take several years to play
out, with a court overseeing who gets what, but don't look for any
deals that might merge XM with Sirius as a quick solution. The FCC
rules specifically mandated two separate services for SDARS using
the S band channels to ensure a competitive playing field. Economic
forces could compel the FCC to change the rules of course, especially
if re-auctioning the spectrum would bring in new revenue.
Mel and Lowry watching closely
It's possible that if Sirius is forced to liquidate, at say 10
or 20 cents on the dollar, a company like Viacom could step up and
become a new controlling interest. With Westwood One and the Infinity
stable of successful major stations, adding a nationwide direct
satellite distribution network might be valuable for future diversification
of their radio holdings. Maybe Mel Karmazin has figured out a business
model for this technology within Viacom that might work.
If XM eventually runs this same course, Lowry Mays and Clear Channel
could become the controlling interest, perhaps in partnership with
GM to extend their Premiere Network and other O&O programming
resources via the existing infrastructure. The program offerings
under such a regime will most certainly include more commercial
content.
Growing the receiver base
I have always believed that given the high costs required to launch
and maintain two separate satellite radio services, only one would
ultimately survive. Different modulation and bit rate compression
formats make the job of reaching critical mass for receiver penetration
more difficult for the receiver manufacturers.
A common satellite platform that integrates well with HD Radio
would jump-start new "multi-mode" digital radio sales
much more rapidly. Designs for such radios are already in the works.
There is a silver lining for satellite radio here. If it can hang
on long enough for such radios to become standard in most new cars,
it will have a much better chance of surviving long-term.
Some have suggested that if satellite receiver penetration grows
significantly by the time Sirius or XM gets absorbed by an existing
major group owner, or even a consortium of owners, the new model
may simply run more commercials and dispense with subscription fees.
Then satellite radio simply becomes more channels and program choices
on the dial with business as usual. Given how expensive running
this service already is, I doubt it would happen anytime soon.
Beyond radio on S band
If Sirius does go bankrupt first, what could also happen is that
one or more of the major investors will pick up what's left and
forge an entirely new business that makes better use of the resources.
If radio listening won't pay for maintaining satellite communications
to the car, it's likely that Ford and/or Daimler/Chrysler would
use them to support their version of GM's On-Star service and other
interactive features that will make driving more convenient, reliable
and secure. The 2 GHz S band is a very valuable chunk of spectrum
that will likely support many new technologies that will find their
way into the motor vehicles of the future. Now is the time to nail
down control.
That would leave the job of providing satellite radio service up
to XM or its successors without a competitor, assuming the S band
rules were changed. Maybe one service could survive with unchallenged
higher fees, if the programming content attracted enough people
who were still willing to pay extra for it. If not, then the car
companies just might wind up owning and controlling all of these
channels to serve their own inventions. But I'm betting satellite
radio in some form is here to stay. It just needs to find a way
to make itself profitable.
So far, satellite radio has had almost no impact on terrestrial
radio, in terms of stealing even a tiny portion of listeners or
advertisers. National advertising almost evaporated for most markets
during the year following 9/11. A few percent of a small number
is meaningless. Only time will tell if this changes, of course.
Predictions and Christmas gifts
I'll crawl out on the wire and predict that a year from now, Sirius
will not be doing business using their present model or name. They
will morph into something else or be absorbed by their major stockholders
or a major media group. XM will still be running but with more commercials
and higher fees. Clear Channel will have more control of the content,
with most of their syndicated shows available on the bird. We could
also have audio feeds of the most successful cable and network TV
talk shows on the menu.
Next Christmas we'll revisit these musings and see if I deserve
a lump of coal or something more useful. A satellite radio with
a lifetime subscription would be nice.
Guy Wire is the pseudonym for a veteran broadcast engineer with major-market radio credentials. His opinions are his own and do not necessarily reflect those of Radio World. RW welcomes other points of view.
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