NY Times. Satellite Companies Bet on Demand for Digital Radio
nytimes.com
December 28, 1998
By ANDREA ADELSON
he promise of a crisp radio signal that can be heard
anywhere in the nation, considered a futuristic pipe dream a
decade ago, now appears to be only about a year from reality.
Two companies with government licenses to bring
satellite-delivered digital broadcasts to radio -- CD Radio Inc. and
XM Satellite Radio Inc. -- have lined up technology and
programming partners and plan to roll out their services in 2000.
Adopting a business
model used by pay
services like cable and
satellite television, both
would-be satellite radio
broadcasters say they can
build a business from
fee-paying listeners who
want more than the
standard AM or FM fare,
or who hate to hear their
signal fade when they
drive out of range.
Traditional radio
broadcasters, enjoying a
record year in advertising revenue, are skeptical that satellite
services will ever be serious competition to the free, over-the-air
industry. They tend to see audio programming over the Internet as
the more serious threat.
But some on Wall Street seem to share the view of the trade
publication Radio Ink that satellite broadcasters will be "the
Marconis of the millennium." The investors Sid Bass and Leon
Black, for instance, recently paid a total of $300 million for
separate stakes in CD Radio, a publicly held company that
expects to blanket the nation with signals from its three satellites by
early 2000, a few months ahead of its privately held rival, XM
Satellite.
Both companies say their prime targets will be ethnic audiences,
car commuters, long-haul truckers and listeners outside big cities
-- whom they hope are so dissatisfied with local stations that they
will pay $10 or so a month for national services with up to 100
channels.
Listeners will need a satellite-radio adapter that will fit into a
cassette or CD player and a palm-sized antenna that will pick up
the signals. The receivers, expected to cost $300 or less, will
include digital displays showing the channel number, the format and
the title and performer of each piece of music.
CD Radio's technology partners include Loral Space
Communications and Lucent Technologies, while XM's include the
Hughes Electronics unit of General Motors, STMicroelectronics,
Pioneer Electronic and Sharp. The groups hope eventually to
persuade automakers to offer satellite receivers as a standard
option for car-audio systems.
The satellite players'
ambitions are a marked
contrast to the technical
conservatism of the
conventional radio
industry, which has seen
few innovations in the
decades since the FM
band was updated to
deliver stereo sound.
Broadcasters, who
lobbied against satellite
radio, are themselves
reluctant to pursue digital audio because of the expense and a
perception that consumers are not dissatisfied with the status quo.
But that has not deterred the satellite radio companies from
proceeding with their plans. To obtain exclusive programs for
African-Americans, XM went to Black Entertainment Television
and Radio One Inc., a radio station owner that, like XM Satellite,
is based in Washington. And among its other dozens of channels of
music, news and talk, XM expects to broadcast the first national
Hindu and Mandarin Chinese radio programs.
XM Satellite is owned by American Mobile Satellite Corp., which
provides wireless service to business, and World Space Inc.,
which plans to offer satellite radio service outside the United
States. In March, XM made a deal to buy two satellites from
Hughes and expects to start broadcasting late in 2000.
CD Radio, public since 1994, has made deals with the Hispanic
Radio Network, Sports Byline, Bloomberg Radio News and
C-Span to provide programming. Half of its 100 channels are to
be commercial-free music in formats that include jazz, opera and
reggae -- niches that would not survive on many local AM or FM
stations.
"We see broad-based appeal," said Bruce Leichtman, a media
research director for Yankee Group, a research firm hired by CD
Radio to study the service's potential market.
CD Radio, which has tallied $63 million in losses since its founding
in 1990, has raised nearly all of the $960 million needed for its
start-up costs. Its shares, following the vicissitudes of a technology
start-up company, hit a 52-week high of $44 in May, dipped
below $15 in October and closed the week's trading last Thursday
at $34.875.
Next November, the company expects to launch the first of its
three satellites, which along with a spare will cost $718 million.
An unresolved technical issue is the industry's development of a
receiver that can accept either CD Radio's or XM Satellite's
service, a requirement stipulated by the Federal Communications
Commission when it granted the two companies satellite licenses
last year.
"The odds are for the first generation, we
won't get there," said David Margolese,
chairman and co-founder of CD Radio,
which is building its studios in Rockefeller
Center. "Whether we hit it or not, it's not
that relevant," Margolese said, even
though failure to find a common receiver
would require a regulatory waiver.
CD Radio executives say the company
can break even its first year with 1 million subscribers. It is a
daunting target for a brand new-service, and one analyst cautioned
that to stimulate demand, satellite broadcasters would probably
end up subsidizing subscriber equipment, which could cut into
potential profits.
That is close to the situation playing out at DirecTV, a satellite
broadcaster owned by GM's Hughes Electronics unit that has
about 4.3 million subscribers, and has yet to break even after four
years in business. But "CD Radio doesn't have anywhere near the
programming costs" of DirecTV, Leichtman said.
CD Radio intends to nearly match what DirecTV spent on
advertising in its first year, budgeting $60 million. That marketing
may be necessary to help CD Radio distinguish itself from
competitors. A third satellite radio rival has recently emerged:
WCS Radio Inc., a Menlo Park, Calif., consortium that holds
licenses for still-to-be-determined wireless services.
In a hastily arranged FCC auction ordered by Congress in 1997, a
portion of the radio spectrum initially set aside for digital audio
service was redesignated for general purposes, in the expectation
that innovative uses would emerge. The 18 winning companies,
which include some of the regional Bell telephone companies, paid
a total of $13.5 million for the licenses. Now, after spending a year
trying to figure out a business plan, the WCS Radio 10-member
consortium has sought permission to offer digital audio services
similar to XM's and CD Radio's.
"We believe there is tremendous pent-up demand because there is
an appalling lack of formats," said John Mason, WCS' vice
president for business development. "People want more selection."
Hugh Panero, XM's chief executive, contends that listeners are
underserved by the free programming offered on most
ad-supported AM and FM stations, which he derided as repetitive
and formulaic. He blamed deregulation, which has concentrated
ownership of the nation's stations into fewer hands, intent on using
proven money-making formats. "Radio is risk averse," he said.
"We're dedicated to bringing back what radio has lost."
The plan calls for most XM channels to carry six minutes of
advertising an hour, about half the level heard on most stations.
Revenue is to be split equally with programming partners. Like CD
Radio, though, XM has not yet disclosed any list of confirmed
advertisers.
Some conventional broadcasters question whether the satellite
companies will be able to lure advertisers, and point to the
services' reliance on expensive, unproven technology.
"Even if these services are able to attain a substantial number of
subscribers, their actual listener base won't be anywhere near the
size of the audiences of the national radio networks," predicted
David Kantor, president of AM FM Radio Networks, a unit of
Chancellor Broadcasting, one of the nation's largest station
owners. "Advertisers are interested in measured audiences, not
number of subscribers."
Related Sites
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CD Radio Inc.
XM Satellite Radio Inc.
DirecTV
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