Satellite Radio Aims for Higher Orbit

by Bruce Gain

Is satellite radio in trouble — or just in for same dramatic changes?

Yes, they’re fulfilling a cutting-edge niche in entertainment. But with sluggish growth, the future of both Sirius Satellite Radio and XM Satellite Radio has remained mired in uncertainty since the two well-funded pioneers began soliciting subscribers within the last two years.

The situation hasn’t been improving much, even as both services gradually pick up subscribers and ink big OEM deals. During the past few months, negative press has beaten down the stock prices of Sirius and XM both to all-time lows, trading at just below a dollar and $2.60 a share respectively.

The biggest problem facing the fledgling networks is, of course, the number of listeners. XM’s last reported number of subscribers was 200,000 while Sirius has an estimated 16,000 after a late market launch.

But an even bigger problem may be looming in new technology recently approved for the nation’s existing radio stations which could, in effect, short-circuit the subscription model both services are built upon.

Solid backing

Despite the short-term stock woes and an insufficient number of subscribers to bring the companies into the black, high-profile investors continue to back the two ventures. In a recapitalization plan announced this month, for example, Apollo Management and the Blackstone Group promised to increase their stakes by $25 million each in Sirius, after the company ran through more than $1 billion in startup costs.

Too, they continue to line up critical mass in terms of hardware. General Motors owns an investment stake in XM, and offers its satellite radio service in its entire Cadillac line as well as in 25 of its 2003 cars and trucks, including Buick, Oldsmobile, Chevrolet, Pontiac, and GMC models.

Do these investment partners know something that stock market investors do not? Both Sirius and XM Satellite estimate that they need at least four million subscribers to achieve the necessary cash flow to cover operating expenses, a goal both companies say can be achieved in two years.

According to the analyst firm the Yankee Group, however, satellite radio will only reach about nine million subscribers in four years while analyst firm Forward Concepts forecasts that there will be 10 million subscribers in 2006 and only 5.4 million in 2004.

The application is indeed appealing—who would refuse to have over 200 channels to zip through—but the $10 to $13 subscription fee makes it prohibitive, said Mahy Churylo, an analyst for Forward Concepts, in Tempe, Ariz. “I don’t think satellite will take over the mainstream in the way satellite radio companies hope in the near future, and if that does happen eventually, it will not be anytime soon,” she said.

Price is the issue Churylo said. “When you add everything up on a monthly basis that consumers pay each month, they now often have a monthly phone, Internet, and cable bill, so they really don’t want to add on something else just for satellite radio, especially if their [driving] commute range is limited,” she said.

A better alternative?

But the cost, which is unlikely to change in the near future, is low compared to the alternative, said Sirius senior vice president of OEM and special markets, Doug Wilsterman. “Anything is possible, but already, when you look at a cost of a CD, the comparative value of satellite radio can be measured in thousands and thousands of dollars,” he said. “We also know that after someone tries it, there is no going back: it is like an addict in need of a fix.”

Meanwhile, XM Satellite radio claims that it expects to meet its 350,000-subscriber target by the end of this year. “We originally predicted that we needed 4 million subscribers to break even and, following our cost-cutting initiatives, we have brought that number down to 3 million, which we are on target to meet by the end of 2004 or early 2005,” said Greg Cole, Sirius’ Vice president and treasurer.

But while the monthly subscription price will continue to hover around the $10 to $13 a month mark, will XM or Sirius manage to bring something new besides music and talk radio? “We will offer real time weather data, the same service used by the aviation and marine industries, which is based on radar and sonar technologies,” Cole said. “We will also offer unique video and audio applications next year, which we cannot yet talk about.”

Sirius executives downplay the approval by the FCC of a new digital radio product developed by iBiquity Digital and Motorola, which improves upon radio signals and offers digital music delivery as well as digital readouts of music titles. But while noting that the digital sound quality is an improvement over existing radio, consumers are still left with more of the same, Sirius’ Wilsterman said. “You are still left with the radio, with a limited playlist,” he said. However, localized digital radio could offer the same “killer app” that digital cable TV does – custom regional content like weather and talk radio, plus the sound quality lacking in today’s analog transmissions.

iBiquity indeed represents an additional hindrance to satellite radio’s profit potential. On a technology level, iBiquity radios are powered by chip giant Texas Instruments’ signal processing semiconductors, which enable iBiquity AM and FM radio to sound better than CDs. Texas Instruments also plans to add new technologies to the product mix, such as semiconductors that enable the system to download data. Additionally, iBiquity does not require subscription fees to operate, which is a big plus compared to satellite radio, Forward Concept analyst Will Strauss said. "Free always sells better," he said.

Meanwhile, as Sirius and XM prepare new offerings and services, they will collectively burn through billions of dollars in losses and face steep odds before they will make a profit, analysts say. Seeing a wide-scale acceptance, moreover, is indeed a far-reaching goal, Forward Concepts’ Churylo said. “Satellite radio represents a niche market,” she said. “It might be worth it now at the current price for truckers or other commercial drivers, but will not hold as much commercial appeal for the average user.”

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