Radio for rent
Satellite system gives listeners more variety, fewer ads for a price
07/23/98
By John Kirkpatrick / The Dallas Morning News
Technology has found another way for you to pay for something that's always been free.
Remember the days before cable, when television cost nothing - although it was extremely limited? Radio seems headed down a similar path.
Two companies are spending close to $2 billion total on satellite-based, digital radio systems. The services, initially targeting car radios, are set to debut in 2000.
Satellite service has three big hooks: Each company will deliver up to 100 channels of widely varied music and information; many channels will be commercial-free; and the companies promise that you can drive anywhere in the United States and still get all the channels.
And, like cable TV, the new radio service will cost. Subscribers will pay about $10 a month, plus extra money for the necessary hardware. Switching from the new system to traditional radio is expected to be no more difficult than pushing a button, like going from AM to FM.
The market for satellite radio - or pay radio, as it's been called - is huge, says David Margolese, chairman and chief executive of New York City-based CD Radio Inc. The market, he says, will be driven by drivers: commuters who thrive on radio, younger people who traditionally spend big money on car stereos, long-haul truckers who hate having to search for stations on the road, and just about anyone who wants great sound and a variety of formats that might be unavailable in their hometowns.
The Federal Communications Commission last year gave its blessing to pay radio by auctioning off two licenses. The top bidders were CD Radio, which paid $83 million for a license, and American Mobile Radio Corp., which shelled out $89 million. For that, the two have the market all to themselves.
CD Radio Inc. expects to plow roughly $960 million into its system before signing up the first customer. With three satellites in the air by early 2000, it plans to offer the service soon afterward.
AMRC, based in the Washington, D.C., area, has plans that are similar to CD Radio's.
CD Radio's Mr. Margolese sees his target as the 200 million vehicles in the United States. The company needs only about one-half of 1 percent of them - or about a million cars - to break even on a cash-flow basis. And he intends to get a much larger share than that.
Merrill Lynch vice president Thomas Watts said he expects CD Radio to have about 6.9 million subscribers by 2005.
CD Radio customers will need two gizmos for their cars: a disk about the size of a silver dollar that sticks to a window and picks up the satellite signal; and an adapter that plugs into a cassette deck or CD player, with a text display that names the song, artist and channel. A car's existing electronics and speakers will handle everything else.
The total hardware cost is expected to be about $200, and the buyer can install the equipment in just a few minutes, Mr. Margolese says. Some manufacturers are expected to build pay-radio technology into car stereo systems sold at Best Buy and other retailers, and automakers may eventually offer it in their own models.
Half of CD Radio's 100 channels will be commercial-free music channels. "Once you hear it, you won't want to go back," Mr. Margolese says.
Want 24-hour reggae? It's yours. So are almost every type of rock and pop. Listeners who favor classical get three channels, including chamber music and opera. Hispanic music is extensively covered with channels ranging from ballads to Tex-Mex to Spanish rock. Gospel music, big bands and a kiddie channel aren't forgotten.
CD Radio's remaining 50 channels will carry news, sports, talk and the like - and with commercials. But the company pledges to air far fewer ads than one normally hears on traditional radio.
Not everyone is crazy about the coming of pay radio. Particularly annoyed is the National Association of Broadcasters, which represents traditional - or "terrestrial" - radio stations. The NAB fought the idea from the start but failed to keep the FCC from granting the licenses.
Pay radio could "threaten the very foundation" of radio, which is local programming, says Dennis Wharton, the NAB's senior vice president of corporate communications. Pay radio is a national medium and is expected to have little if any local content.
"One of the hallmarks of radio is delivery of local news, information and sports on a timely basis," Mr. Wharton says. "The possibility would exist that the local radio station would not be there if they [pay radio companies] would drag enough listeners away."
In the "immediate future," pay radio poses no financial threat to regular radio, Mr. Wharton says. "But the potential down the road is - well, we'll have to wait and see."
Some radio company chiefs are a bit more relaxed about the prospect of pay radio.
"To be honest, I haven't lost a lot of sleep about it," says Steve Hicks, chief executive officer of Austin-based Capstar Broadcasting Corp., which owns 320 stations in midsize and small markets. One reason he's not scared is his recollection of the time "when the advent of cassette tapes was going to put radio out of business."
He, too, points to local content as radio's strength. CD Radio and AMRC "can't talk about the temperature in Dallas and how it'll be in the next 18 days, what the Rangers did last night and the other things we expect in radio."
And radio is supported largely by local advertisers. With its national distribution, pay radio "can't sell local advertising," Mr. Hicks says. "A car dealer in Lubbock won't buy it." About 80 percent of Capstar's ad revenue is from local buys, Mr. Hicks says. That percentage is in line with the national radio industry.
Mr. Hicks, however, said he thinks pay radio "is a nice service" with exciting technology. "I would probably have the service for when I travel on the road. It would be nice for $10 a month. Maybe I'd do that. Driving across Texas, there are places where you don't get a lot of quality radio. There is a benefit."
Newfangled radio "will serve a niche, but it's a niche that we don't have any intention of serving," says Dave Kennedy, president of Susquehanna Radio Corp., based in York, Pa. The company owns 23 radio stations, including KLIF-AM (570), KPLX-FM (99.5) and three others in Dallas-Fort Worth.
It's "possible" that CD Radio and AMRC "will be be another source of entertainment and information for people," Mr. Kennedy says. "To that extent, some of the time spent listening to traditional radio could be eroded, but we don't see that as a major threat over the long term."
Although executives in traditional radio don't mind taking swipes at pay radio, AMRC's chief executive officer is happy to reciprocate.
Hugh Panero points to radio's megacompanies, including Irving-based Chancellor. By buying several stations in a market, companies such as Chancellor and CBS have been "able to own that market, segment that audience, eliminate fixed costs and provide cookie-cutter formats of music."
Lost in the shuffle is variety, Mr. Panero says. AMRC will "have a feeling and a look that will cross many demographic and ethnic groups."
The satellite technology to be used for pay radio has been criticized by the Consumer Electronics Manufacturers Association, a trade organization and lobbying group. Relying on a 1996 test, the association predicts problems with reception in urban areas with lots of skyscrapers.
Although the reception interference may be brief, "Will the radio-listening public deal with that? Consumers are used to seamless service," says association spokeswoman Lisa Fasold.
"That is so ridiculous," says Mr. Margolese, who is infuriated by the association's position. The test cited by the association did not come close to simulating pay radio's technology, he says. And the system has gotten a green light from the FCC as well as technical experts, he says.
To alleviate reception problems in urban areas, both CD Radio and AMRC are building land-based retransmitters. There will be "dead zones" where the service could fail, such as in long tunnels, but regular radio doesn't work in those conditions, either, Mr. Margolese says.
The leaders of CD Radio and AMRC have backgrounds that seem to fit what they're up to.
Bearing an entrepreneur's credentials, Mr. Margolese was a pioneer in Canadian paging and cellular-telephone companies.
Mr. Panero is a cable TV veteran. Before AMRC, he was president and chief executive officer of Request Television, the pay-per-view network owned by Tele-Communications Inc. and Twentieth Century-Fox.
Given his background, Mr. Panero is fond of using cable television as a model for how pay radio will do. "When you offer convenience, quality and choice, people will pay for it and migrate to it."
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