The Wild West of the airwaves

STEVE MAICH May 15 2006

The Wild West of the airwaves

STEVE MAICH May 15 2006

The Wild West of the airwaves


So far, the nascent satellite radio phenomenon has produced only one feat worthy of the financial record books. When Sirius Satellite Radio signed host Howard Stern to a five-year $500-million contract (all figures US), it made Stern’s foul mouth the most valuable orifice on earth. Thanks to Sirius, the market for fart jokes will never be the same. But more importantly, Stern has become the very symbol of the fledgling industry: the Wild West of free expression, where big money, ego and hype reign; where restraint and discretion of all kinds are seen as signs of weakness.

Last week, Sirius reported its first quarter results to great fanfare. It attracted a record 761,187 new subscribers in the first three months of Stern’s show, each paying a little over $10 a month. The company has now topped the four million mark and expects to have 6.2 million customers signed up by year-end. Sirius’s rival, XM Satellite Radio, reported results a week earlier, and the story was much the same: a 72 per cent gain in subscribers, revenue more than doubled to $208 million.

Analysts and pundits presented both as landmark achievements in the emergence of the next great media platform. With dozens of commercial-free music channels for every conceivable taste, plus dozens of talk, news, sports and comedy channels, all with digital-quality sound, satellite radio has brought niche broadcasting to another level. The companies predict that over the next decade, pay radio will attract upwards of 50 million subscribers in North America, making it as ubiquitous and profitable as cable television.

And maybe it will. The real question, however, is whether XM and Sirius will survive long enough to deliver investors to the promised land of profit. Or will the lust for rapid growth and extravagant hype be their undoing? There’s a big difference between a great product and a great company, and telling them apart isn’t always as easy as it appears.

For now, analysts and enthusiasts prefer to talk only about growth, not profits. Or rather, the conspicuous lack thereof. XM was $149-2 million in the red through the first three months of the year, while Sirius bled $458.5 million—more than double its loss of a year ago. Both companies are pouring out huge sums to subsidize the cost of satellite receivers, in hopes that by providing cheap radios they’ll sign up customers much faster. Cellphone providers do the same thing, but it’s a gamble. Sirius spent $113 on subsidies for every subscriber it acquired in the first quarter, XM spent $94. That means it’ll take almost a year of membership fees just to recoup the cost of selling the receiver, and that doesn’t even begin to cover the highpriced on-air talent, promotional budgets, or regular expenses.

Neither company is projected to earn a profit until 2009 at the earliest, and though

Satellite radio is spending like crazy. It’s like the dot-com craze—just before the crash.

analysts insist it’ll be worth the wait, a lot can go wrong in three years. Industry watchers are already eyeing the growth of rival services like wireless mobile Internet, and digital broadcasts on cellphone networks. If the industry does turn out to be a money-maker, you can bet Sirius and XM will face an influx of competition. And with the arrival of new satellite receivers capable of downloading and storing music files, the recording industry is already demanding higher royalties.

Any or all of those issues could derail plans to turn a profit in 2009, but the real question dogging both companies is discipline. After Sirius shelled out for Stern, XM followed with its own string of gaudy deals: $55 million over three years for an Oprah Winfrey channel, and $650 million over 11 years for Major League Baseball. The ferocity of XM’s marketing blitz even triggered an investigation by U.S. regulators into whether it broke anti-spam laws and other regulations in its pursuit of growth.

If all this sounds familiar, it should. The par-

allels with the dot-com mania of the late 1990s are hard to miss. Then, as now, companies ran a desperate race to boost traffic with little or no concern for how to translate market share into profitability. No marketing expense was too outlandish to justify, and Wall Street eagerly played along, insisting that multi-billion-dollar losses were a small price to pay for the privilege of investing in the dominant online pet food retailer.

A couple of months ago, one of XM’s board members cautioned that the company is headed down that very same path to trouble. Pierce Roberts’ repeated calls for spending restraint had fallen on deaf ears, so he resigned, warning that there’s “a significant chance of a crisis on the horizon.” Now, if a General Motors director said something like that, analysts would run around like their hair was on fire. But XM has cool technology and a tantalizing story to tell, and that

still counts for a lot on Wall Street. Analysts shrugged off Roberts’ concerns, and urged investors to do the same.

Fortunately, there are still a lot of people who remember how profligate spending crushed so many promising dot-coms. Both companies have seen their share prices fall by more than 25 per cent this year, and Sirius’s rapid revenue growth hardly budged the stock last week. Unlike 1999, investors are now waiting to see if management has the smarts to turn a good service into a good business.

Truly great technologies always survive, of course, but many of their early pioneers do not. Played any Atari video games lately? How about a Commodore personal computer? RCA built the first colour TV, then stumbled, got taken over, and now nine brands hold a greater share of the market. Remember Netscape? The less said, the better.

Like television, computers and the Internet, satellite radio is here to stay. But XM and Sirius? Not necessarily. M