Satellite Radio Services Duel for Consumers' Ears

Cable World, Jan 24, 2000 by Alan Breznick

Taking a cue from the success of satellite TV, XM Satellite Radio Inc. and Serius Satellite Radio Inc. are building up their coffers in an effort to launch 100-channel national audio services that will deliver subscription-based services to customers.

Now that satellite TV has become a mass-market hit, will satellite radio be next?

Two fledgling firms, XM Satellite Radio Inc. and Serius Satellite Radio Inc., are certainly counting on it. Blessed with large backers, the two aggressive startups are racing the clock and each other to launch 100-channel national audio services for a potentially huge audience of auto, truck, portable and even home radio listeners tired of the relatively limited local fare they receive now.

Holding exclusive FCC licenses for their spectrum, both XM and Serius plan to offer their advertiser-supported digital radio services on a subscription basis, charging customers $9.95 a month for their competing packages of music, news, sports, talk and children's programming stations. Consumers will also need to buy new, pricier radios specially equipped to receive the XM or Serius band in addition to the standard slate of AM and FM stations.

With Serius seeking to introduce its service by the end of next year and XM aiming to follow several months later, both companies have been frantically raising capital for their $1 billion-plus launches, pitching stock in the public and private equity markets. In recent months, XM collected $114.2 million through an initial public offering and completed a $250 million private financing deal with General Motors Corp., Clear Channel Communications Inc., DirecTV Inc. and three venture capital firms.

"We will pursue additional fundraising efforts," said Hugh Panero, an 18-year cable industry veteran who's now president/CEO of the Washington, D.C.-based XM. While boasting that the company has now gained up to $500 million in equity, he noted that "we need to raise $600 million more to get to commercial launch."

Major car manufacturers

The two satellite radio contenders are also building several satellites, lining up the major car manufacturers in exclusive arrangements, striking agreements with the big radio equipment makers, constructing music and other production studios and hiring hundreds of staffers.

For example, both companies have notched deals with such leading radio manufacturers as Alpine, Audiovox, Clarion and Delphi Delco Electronics systems to build their specially equipped receivers, which will cost consumers around $200 apiece. Besides these two manufacturers, XM has also enlisted Motorola Inc., Mitsubishi Electric Corp., Pioneer Electronics (USA), Sharp Electronics Corp. and Sony Electronics to design and produce its radios while Serius has also recruited Panasonic, Visteon Inc. and Kenwood Corp. to develop its sets.

In addition, Serius and XM are busily signing up programming suppliers, program hosts, artistic coordinators and other creative talent for their respective services, including such cable network stalwarts as BET, Bloomberg News, CNN, C-Span, CNBC, Sci-Fi Channel and the Weather Channel.

In late November, for example, Serius scored its biggest programming coup yet by snagging Sting as a "creative consultant" and program host. At the same time, the New York-based company announced similar arrangements with rap stars Grandmaster Flash and MC Lyte.

"We've already hired some of the foremost programmers and DJs," said Ira Bahr, SVP-marketing for Serius, which recently changed its name from CD Radio Inc.

Scrambling to get all the pieces in place, executives at XM and Serius think they can quickly sign up millions of subscribers once they turn on their respective services. Serius is gunning for 1.5 million to 2.0 million customers to start turning an operating profit while XM is shooting for 4 million customers to do the same.

Radio on the road

Serius and XM leaders are zeroing in on the potentially vast market of auto commuters and truck drivers in the U.S. These two groups, which spend time on the road listening to the radio even if they have a cassette or CD player, combine to form a daily potential audience of 115 million to 120 million people.

"We're not talking about a service where you have to hit some scary penetration numbers," Panero said. With 115 million new car radios slated to hit the road over the next five years, "we just need 5% to 6%," he noted.

Bahr concurs. "We think the real revenue potential is in vehicle and portable (radios)," he said. "This business, in our estimation, sinks or swims based on its acceptance in the vehicle market."

Satellite industry analysts largely agree because of the captive audience of commuters and truckers and the lack of any national competition from terrestrial radio broadcasters. Often comparing the market to the satellite TV business, they estimate that the satellite radio business could command as many as 34 million to 43 million subscribers over the next decade.

In a recent report, Merrill Lynch projects that the two satellite radio players will sign up as many as 39.9 million customers by 2008, generating $10.9 billion in subscription, advertising and other revenue. The normally cautious Yankee Group is even more bullish, projecting 42 million satellite radio subscribers in as little as five years.