Two start-up companies are betting that new
satellite-delivered audio services launching over the next two years will do for radio
what cable did for television: provide an incentive for programmers to develop new content
and create an all-new revenue stream from subscription services.
XM Satellite Radio Inc. made news earlier this month when
it announced that it received $250 million in new financing from four backers: DirecTV
Inc., General Motors Corp., Clear Channel Communications Inc. and a private-investment
group including Columbia Capital, Telcom Ventures L.L.C. and Madison Dearborn Partners.
The company needs another $670 million to launch its two
satellites, as well as its consumer service, within the next two years, according to CEO
Hugh Panero.
CD Radio Inc., XM's publicly traded competitor, has already
raised $1 billion through a combination of debt and equity, chairman David Margolese said.
In addition to financing, XM gains significant distribution
assistance from its partnerships with GM and DirecTV. GM will factory-install new radios
combining AM/FM/XM bandwidths into its new cars, and its dealers will be able to
demonstrate the new technology when customers come in to test-drive the vehicles. The
cars' exteriors would also be equipped with cigar-sized satellite antennas.
Panero said GM's backing is a huge vote of confidence for
the new technology. CD Radio is in serious discussions with car manufacturers, too.
DIRECTV'S PITCH
DirecTV will pitch XM's aftermarket car radios, as well as
home-audio equipment, to its current consumer-electronics retail accounts. The
direct-broadcast satellite provider will also lend operational assistance to XM in matters
such as conditional access, billing and customer service.
The new technology will bring to radio "the same
convenience, choice and quality that cable and DirecTV have brought to television,"
Panero said.
Multichannel-audio service is not entirely new: Companies
like DMX and Music Choice provide commercial-free music to cable and DBS subscribers in
their homes and businesses, most often as add-ons to video subscriptions.
But XM and CD Radio are expected to have a more direct
appeal because they plan to target captive audiences where they're most likely to listen
-- rather than view -- content.
Subscription radio is expected to appeal to car owners,
truck drivers and recreational-vehicle enthusiasts who spend a great deal of time on the
road.
Because XM and CD Radio are national services, drivers can
travel between different markets without worrying about losing a signal in the middle of a
song or talk show.
In larger, urban markets, terrestrial repeater networks --
much like those used for wireless telephones -- will help to protect against interference
from tall buildings.
The potential financial upside for the new companies is
greater than that for cable television or DBS, executives and analysts predicted.
Bruce Leichtman, analyst for Boston-based market-research
firm The Yankee Group, said there are several reasons why the market is poised to do well.
When asked about their interest in such a service,
consumers readily understood the product proposition and grasped what the benefits would
be, Leichtman said, which isn't always true with new technologies.
At $10 per month, the service carries a reasonable price
point, he added. And the service will be ubiquitously deployed from day one, so customers
won't be forced to wait for the service as they might for cable-modem availability, for
example.
Leichtman predicted that up to 20 percent of the country's
200 million vehicle owners would sign up for satellite-radio subscriptions within the
first five years of the service launches.
And in the event that those projections fall short, the new
satellite-radio companies are poised to make a profit, even with more modest market
penetration.
Margolese said CD Radio would reach breakeven on a
cash-flow basis with less than 1 percent penetration. But he clearly expects the service
to appeal to a larger audience.
Although skeptics might question whether consumers are
willing to pay for yet another monthly subscription service, Margolese remains confident.
As in the early days of cable television, some asked why
consumers would pay for something that they're accustomed to getting free-of-charge.
"They're usually the same people sitting with a bottle
of Evian in front of them while tap water is available three feet away," Margolese
said. "People pay for things that they could get for free all of the time."
DBS ANALOGY
Margolese said he thinks that CD Radio's launch has a
market potential similar to those of DBS providers DirecTV and EchoStar Communications
Corp. "if they had launched back in 1970, when cable wasn't entrenched, and when the
main competition was free, over-the-air television."
Through its $50 million investment in XM last week, DirecTV
will own about 10 percent of the company. DirecTV also gains access to a portion of XM's
satellite capacity, which it will use to launch its own original audio programming as a
complement to XM.
DirecTV has not yet started to develop the new audio
content, senior vice president of new ventures Steve Cox said, although the DBS provider
has created original programming for its video service, including pay-per-view concerts.
"Music is a logical involvement for us," Cox added.
Over time, DirecTV may negotiate with XM to bring some of
its programming over to its DBS platform. Cox predicted that DirecTV -- which already
offers Music Choice audio channels to its DBS subscribers -- would bring only a subset of
XM's channels to its customers.
Cox added that since DirecTV and XM appeal to similar
consumer demographics, the companies would develop cross-promotional opportunities, which
may eventually include discounts for subscribers who sign up for both services.
Premium and even pay-per-listen options are also
possibilities for both XM and CD Radio down the road, although both companies said they
would launch their services with basic packages of about 100 channels for $10 per month.
DirecTV and XM may look at bringing seasonal sports
packages, such as the National Football League's "NFL Sunday Ticket," over to
the audio format, but the sports leagues would have to be involved directly in deals of
that nature.
XM and CD Radio have already struck content deals with
brands recognizable to cable and DBS subscribers: C-SPAN, Black Entertainment Television,
Cable News Network and Speedvision, for example.
"One of the significant things about providing content
that works well in a mobile environment is that you get a terrific brand extension in the
car," Panero said.
In most cases, the cable-programming companies will produce
unique content for the audio platform, Margolese said. The exception would be
talking-heads-type programming like that of C-SPAN, which translates well to radio.
CD Radio plans to offer 50 channels of commercial-free
music, while another 50 channels of talk and information programming would be
ad-supported.
As in the early days of cable, commercial-free programming
will be one draw for the satellite-radio services. Other benefits similar to cable,
Margolese said, would be the ability to get programming that you can't get on the radio
today and the ability to get a clear signal where you otherwise could not.
A NATIONAL PLATFORM
Eventually, XM and CD Radio consumer hardware will be
interoperable, as mandated by the Federal Communications Commission, Margolese said.
"What we're creating is a national radio platform,
which does not exist today," Panero said.
"The business feels very similar to cable," he
added. "That's one of the reasons why I feel very comfortable in it. It has a lot of
the same excitement that existed in the early stages of cable and the early stages of
DBS."
