The biggest development in radio since the popularization of the FM band will launch next month, putting to the test a multibillion-dollar bet that millions of consumers will gladly spend $9.95 a month to hear what they want, when they want it and to escape the barrage of commercials they hear every day going to and from work.
After years of anticipation and long technical delays, satellite radio will make its debut. Its proponents hope to build an in-the-car radio business on the same sort of consumer demands and frustrations that have made cable television a potent competitor to broadcast TV.
Sirius Satellite Radio Inc. of New York will begin quality tests in early January, broadcasting 100 channels of music, entertainment, sports and news–50 of them commercial-free. If all goes as planned–and that is a big and critically important if, analysts say–the fledgling satellite radio industry could mount a potent challenge to the nation’s 12,000 local radio stations.
“Our objective is to have every car equipped with a satellite radio,” David Margoles, the company’s chairman and chief executive officer, told Wall Street analysts in New York recently. “When you get used to commercial-free programming, you won’t go back.”
About two-thirds of American households are hooked to cable television. Satellite radio operators say they will need subscriptions from only a small fraction of the nation’s 200 million motor vehicles to make a successful business.
This will not be easy. The car is not the home, and the dynamic of selling an entertainment subscription service in cars and trucks is unproven. Furthermore, to make this work, consumers will have to spend about $200 for a satellite receiver, which dealers would likely install, plus $9.95 a month for the service.
To get consumers hooked, Sirius and a second satellite company, XM Satellite Radio Inc. of Washington, D.C., first will have to prove the technology is all they say it is–a nationwide link to high-quality sound that will be clearly reliable in rain, snow, sleet, hail and tunnels. Then they’ll have to get exposure to consumers, which is why they have signed agreements with all the major automakers to have satellite radios installed in new cars and sold in major electronics outlets, like Best Buy and Circuit City.
As an inducement, they plan to offer consumers one year of free service, much like computer manufacturers bundle a year of free Internet service.
The timing is not ideal. Auto sales are slumping and the economy is slowing, both of which underscore the question of whether consumers will be inclined to pay for yet another source of entertainment–and an unproven one at that.
Sirius has launched three satellites and is preparing to begin broadcasts of, for example, 17 rock and hit music stations, five country, six rhythm & blues, six jazz, five Latin and three classical stations. In addition, it will offer individual channels devoted to reggae, blues, New Age and dance music and Christian hits, all commercial-free. Information channels will include Bloomberg News Radio, CNBC, C-SPAN, BBC WorldService, NPR Talk and Public Radio International.
The company will broadcast from studios in New York’s Rockefeller Center.
“It’s certainly ambitious, and there’s certainly enough money behind this thing for them to hope that it works,” observed Greg Solk, vice president for programming at Chicago’s WLUP-FM. “Everyone’s waiting to see what this will entail.”
“It’s going to take a long time to get the receivers in place,” said J.T. Anderton, an analyst at Duncan’s American Radio, a broadcast industry consultant in Cincinnati. “Does the technology work? And will the average consumer be willing to pay first for a receiver and then pay $10 a month for service?”
Margoles is undaunted, and here’s why: An intense wave of consolidation in the radio industry has raised debt levels of the biggest radio station owners, resulting in a big increase in the number of commercial minutes to pay off the debt. While radio commercial clutter varies from station to station, with as little as 10 minutes of ads per hour on some stations to as much as 25 minutes on others, some radio and advertising industry executives say clutter is angering listeners and creating a potential market for satellite radio.
“The clutter thing is an issue,” said Paula Hambrick, president of Hambrick & Associates, a media buyer in Orland Park. “As advertisers, we have told stations we are less eager to do business with them because of clutter.”
At the same time, radio has lost some of its program format individuality, as proven popular formats designed to attract a broad audience replace less popular formats. Detroit and Philadelphia, for instance, have lost their classical music stations. Chicago’s WNIB-FM, a classical music station, is widely expected to switch to a more mainstream contemporary format once Bonneville International Corp. completes its purchase of the station.
The threat to broadcast radio is an issue of considerable debate. Radio’s clear advantage is that it is free and receivers are cheap. But the overall audience for radio has flattened out. CD and tape players in cars have stymied radio growth, and satellite radio has the potential of drawing from listeners who have grown tired of commercial clutter and the lack of variety and originality in radio formats. If satellite radio could attract say, 10 million subscribers (5 percent of the nation’s motor vehicles), it may well hurt stations that draw small audiences and increase the already tight ratings competition among broadcast stations.
Radio broker Jack Minkow, who represented Bonneville in the purchase of WNIB, said the allure of satellite radio is that it can offer specialized entertainment without commercial interruptions.
“I think this will be less of a threat in major markets, where you have a variety of formats to choose from, but it could be a significant threat to stations in the medium- and smaller-size markets,” Minkow said.
Jimmy de Castro, the former Chicago radio executive and former CEO of radio giant AMFM Inc. (now Clear Channel Communications Inc.), said satellite radio “will be a nice little business but not a big threat to broadcast radio. It’ll be a nit, much like satellite television is to broadcast TV.”
De Castro said commercial clutter alone will not be enough to make satellite radio “compelling.” To do that, he said, Sirius or XM would have to hire talent that would make them unique–“like paying Howard Stern $25 million. Commercial clutter is not enough of a foundation,” he said.
Margoles founded Sirius in 1990 with the belief that satellite radio could follow the lead of the cellular revolution. Publicly traded, the company is still in the development stage. It has yet to report revenue and recorded a $31.7 million loss in the third quarter, according to a recent filing with the Securities and Exchange Commission. Its stock was trading in the mid-$50 area as recently as October, but has slid to just under $30 since then. Michael Haynes, vice president and treasurer at Sirius, said consumer “frustration with the commercial environment is key” to the company’s strategy. Haynes said there will be a “relatively visible push” to sell subscriptions through auto dealerships, with large quantities of radios installed in new heavy trucks. Haynes declined to forecast sales, but did not argue with Wall Street expectations of 100,000 to 200,000 subscribers in 2001 and 1 million to 1.5 million in 2002.
Satellite radio will not broadcast local channels, which saddles it with a handicap that had long hindered the growth of satellite television. Haynes downplayed the significance of that, pointing to studies that show more than three out of four car radio listeners listen to music, not information. The satellite radio will effectively be the addition of a radio band, meaning listeners will be able to easily switch back to the AM or FM bands.
Haynes said satellite radio would not replace broadcast radio, but “as a product, there are certain things that we will clearly do better than broadcast radio: a better music product with no commercials and more choice.”
All of this hinges on satellite radio getting of to a successful launch next month. If that goes off without a hitch, the industry’s hope is that automakers will start to make satellite radios standard equipment in many new cars, much as they have with compact disc players.
But that is still down the road. Bishop Cheen, a broadcast analyst for First Union Capital Markets in Charlotte, said he does not see significant sales until the last quarter of this year.
“I can see the end game a lot more clearly than the near term,” Cheen said. “Radio is all about windshield time.”
“A thousand analysts telling you how wonderful it will be does not a business make, but I believe in this. Cable made a bundle on niches, and this doesn’t need a major mass to succeed.”
