XM Takes $650 Million Swing

Washington, D.C.-based XM Satellite Radio [XMSR] joined the big leagues of sports-programming rights holders last week when it agreed to spend $650 million to air all the Major League Baseball (MLB) games for the next 11 years, starting in 2005.

The $650 million price to air all the MLB games is the single largest programming rights agreement thus far in the young history of satellite radio. That new mark is significant, because rival Sirius Satellite Radio [SIRI] gambled big earlier this year by striking a seven-year, $220 million deal with the National Football League to air virtually all their games starting this season.

Unlike the NFL’s arrangement with Sirius, XM seems to lack the same commitment from all the MLB teams to help market the satellite radio service. Sirius arranged a pact with the NFL to give each of the teams a financial incentive to direct their fans to subscribe to Sirius.

No such marketing tie-in exists between XM and MLB. “XM will be doing all the selling,” said Michael Cargill, principal of the New York public-relations firm Robert Marston and Associates, which represents MLB.

However, XM, which serves 2.5 million subscribers, will have the opportunity to work with MLB and all the individual teams on marketing, said Chance Patterson, XM’s vice president of corporate affairs.

A “comprehensive marketing plan” will be developed and implemented to leverage XM’s new appeal to baseball fans nationwide, he added.

Because XM already airs all the NASCAR races and many other motor sports, the blockbuster MLB deal now makes the company the satellite radio “leader” in sports programming, Patterson said. Sirius had been attempting to lay claim to the same title as the champion of sports programming with its NFL deal and a follow-up pact with 23 elite sports universities.

“The 73 million people who attended Major League Baseball games in the 2004 season can attest that baseball is a great sport to watch live and to listen to on the radio,” Patterson said, adding the pace of baseball games is ideal for people to listen to while they drive or participate in other activities. “More people go to baseball games than any other sport,” said Patterson, who highlighted baseball’s popularity as a reason to justify the rights for the programming.

“Baseball is the premier radio sport,” Patterson said. “This is the deal we’ve been waiting to sign. It will be a landmark deal in the years to come.”

Baseball appeals to a “huge variety” of people, including women, who represented some 32 percent of fans attending MLB games in 2004. The number of women who watch professional football or who attend the games is lower, Patterson said. Taking into account the growing U.S. Hispanic population, XM will offer selected games in Spanish. XM also will add to fan appeal by offering local feeds of the games for each team.

Market research indicates MLB games will give people a big incentive to buy satellite radio, Patterson said. More than 2,000 games a year will be available to XM’s subscribers as each season spans nearly nine months of the year and games are played virtually every day.

“Millions and millions of displaced baseball fans live away from their home markets,” Patterson said. Each baseball team schedules 162 games a season, compared to NFL teams that play just 16 games regular season games a year.

XM also was able to arrange its deal with MLB by offering strictly cash and not offering the company’s stock as an inducement. According to Patterson, rival Sirius gave the NFL incentives that included options for 50 million shares of the company’s common stock, priced at $2.50 each.

The investment is a big departure from industry leading XM’s previous strategy of trying to differentiate itself from its New York City-based Sirius through superior music channels that feature “live” performances and that cater to market niches typically ignored by terrestrial radio. In addition, XM now likely will need to delay the date when it can reach cash flow break even due to the high cost of its programming deal. Debate was raging among industry analysts last week about whether XM overpaid or struck a fair deal with MLB. No analyst contacted by Satellite News believed XM had obtained a bargain.

Bob Peck, a satellite analyst with Bear Stearns, told his clients in a research note last week that he thought XM might need to tap the financial markets to fund the deal. Overall, he thought the contract with MLB was a good development for satellite radio generally to further distinguish itself from terrestrial radio. However, further evaluation will be needed to assess the cost and benefits. The same kind of analysis took place shortly after Sirius reached accords with the NFL and shock jock Howard Stern, Peck added.

Alden Mahabir, a satellite radio analyst with New York-based Vintage Research, said he did not expect XM to need additional financing to pay for the MLB deal but he conceded it looked “pricey.” While the pact will help XM to bridge a comparative advantage in sports programming previously held by Sirius through its NFL contract, XM will pay roughly $59 million a year for its rights to MLB games. That price is much higher than the roughly $31 million annually that Sirius will average in its seven-year pact with the NFL.

(Chance Patterson, XM Satellite Radio, 202/380-4318; Bob Peck, Bear Stearns, 212/272-6665; Alden Mahabir, Vintage Research, 646/472-5216; Jimmy Schaeffler, The Carmel Group, 831/643-2222)