Via Satellite’s Satellite Executive Of The Year 2002: An Interview With Hugh Panero

Innovation fueled by pure entrepreneurial fervor. Those two elements have literally created a new market segment for the commercial satellite industry.

And now that it is here, hundreds of thousands of subscribers often wonder how they lived without it for so long. Amazing. Even more amazing is that this introduction occurred during one of the most socially and economically challenging times in recent history for doing any sort of business, let alone a start-up that pushed envelopes from the Earth to the sky.

Now, five years after this fledgling inception and a few months after closing its most successful year to date, XM Satellite Radio Inc. is commanding listeners nationwide and expanding a genre that has not seen change in more than 40 years. In much the same way that cable and satellite television services permanently broadened viewing options, satellite digital radio is augmenting listening trends. And behind this great frequency wave stands an individual who inspired and led his company from the drawing board to the dashboard.

"I enjoy start-ups and bringing various elements together to make something unique happen," says Hugh Panero, XM’s president and CEO. "Having come from a cable industry background, I was invited to look at the XM opportunity and I saw that it could possibly do for radio what cable did for television."

Headquartered in one of Washington, DC’s, oldest and most neglected northeast neighborhoods, Eckington, XM Satellite Radio’s broadcast operations center breathed new life into the former home of the Judd and Detweiler printing press building and its surrounding area. "I’ve spent four years working with the management team to make XM a reality and now have seen both the company and the revitalization of the neighborhood begin to take shape," Panero says.

From the outside, the brick and glass industrial structure looks like any typical warehouse. Inside, however, the high-tech architecture of chrome, steel and glass creates a tangible bridge to XM’s cutting-edge business. The 150,000 sq. ft. facility is equipped with more than 80 all-digital broadcast studios and a 2,300 sq. ft. performance studio making it one of the largest audio broadcast facilities in the United States. This $65 million location also houses two 7-meter satellite dishes–not a common skyline profile for downtown DC. "We have a great building and I work with a great and diverse group of people," Panero says. "Like the personification this building has to XM’s business, our diverse and passionate individuals fuel our work. You work harder to preserve work places like that."

And it was at this location, two months after the terrorist attacks on September 11th, that Panero launched nationwide service. Today, the company uplinks through those dishes more than 1,500 hours of live programming every week connecting to XM’s orbiting satellites "Rock" and "Roll", and downlinking to more than 360,000 subscribers from as far west as Honolulu, HI, to as far east as Bangor, ME. Subscribers receive more than 100 channels of music, news and entertainment for a monthly price of less than the cost of a CD.

Indeed the programming is a benchmark of Panero’s business plan and one that sets him apart from his traditional competition. "We wanted to simplify people’s ability to get what they want from radio programming," Panero says. "I saw that vertical programming was successful for cable television and wanted to apply that same principal to radio. Many music genres like showtunes, blues and dance often are underplayed on standard FM and AM stations due to lack of local advertising. Many of our channels are commercial-free and give a platform for these programs to hit the airwaves."

In addition to daily programming, XM also offers live performances. From Melissa Etheridge to Wynton Marsalis, many have played here and–via satellite–have been heard. "Even though I love the diversity of our channel lineup, I also love the notion of bringing back the live radio segments and what that medium brings to a listener," Panero adds.

It is these listeners–the subscribers–that have hit Panero’s chart at number one. Many industry analysts following the DARS market conservatively estimated the initial numbers and with time, became more aggressive. As a result, their expectations grew throughout the quarters, as they eagerly awaited returns on their investments during challenging economic times. "No one could have imagined the collapse of the economy, September 11th or the demise of the telecom industry that has had dramatic affect on the satellite sector," Panero says. "But we learned from the cable and DBS industries, we have control of our technology and offerings and in a sense, control of our destiny."

XM did receive a significant boost in subscribers throughout the 2002 holiday season. Roughly 150,000 new subscribers signed on to the service during the time period between late October through December’s end. "We also had 19,000 radio units sold but not activated. That’s pretty amazing considering these were Christmas presents," Panero adds.

In addition to making subscriber numbers, investors also had equipment sale and vehicle inclusion expectations. Sights were set aggressively high for aftermarket sales and key auto manufacturer deals were paramount in Panero’s mind. In November 2001, General Motors (GM) became the first automaker to offer XM as a factory-installed option for the 2003 model year; GM expanded to 25 car, truck and sport utility vehicle models, and Cadillac was the first division to offer XM across its entire product portfolio. At the start of the 2004 model year, XM will be available on 44 models, about 75 percent of GM’s cars.

Likewise, Honda and Toyota also offer satellite radio in their vehicles. Toyota’s Scion brand vehicles will introduce XM radios with an initial roll-out this summer in the western United States and be available nationwide in 2004. Toyota decided on the Scion because it is targeted toward the youth market, and many channels within the XM lineup are serving that demographic. The auto manufacturer is hoping targeted listeners of channels like "Boneyard," "Squizz" and "Liquid Metal" will find this model attractive enough to buy. In addition, Honda is offering XM satellite radios as an option this year within their 2003 top-selling car in the United States, the Accord. And Wall Street is taking note of this auto market intake of XM. "Even though the aftermarket has not been as positive recently as we would have expected, we are very pleased with what has happened with [the auto manufacturers]," says William Kidd, satellite analyst with Lehman Brothers.

But winning over Wall Street has not been an easy task for XM and Panero. With mounting pressures to make expected earning numbers, the company, like most doing business within the technology arena, made cuts and streamlined operations in 2002. Last November, XM announced a cost-slashing program that included eliminating 80 out of its 480 jobs. The measures were designed to buy time for the satellite radio company to raise much-needed financing to keep it going through the first quarter of this year. Some of the cuts came in its news department that offered USAToday Radio. In addition, another channel, "Babble On," that featured teenage talk programming produced by XM staffers was replaced. The new channel carries audio from CNN watched by television viewers. In addition, the company retained CNN HN.

Two new music channels were added to XM’s lineup that would create a stronger programming lineup. "XM Live" is dedicated to the live programming of concerts; performances from XM’s studios and events available from the company’s library of live performances. "Squizz," referring to an Australian word that can be used interchangeably with "look," offers hard alternative rock.

The cost-cutting and programming strategies were factored into these new channel offerings, and the changes adopted by management offered new financial guidance predicting that XM could achieve cash flow breakeven earlier than expected. Panero says that XM should reach that milestone in 2004. "XM officials have learned more about what programming motivates subscribers and how to produce it more efficiently. Radio is a medium where a relatively few talented and creative people can make the difference," says Steve Blum, president of Tellus Venture Associates. "Now XM is better positioned to wrap up the financing it needs."

And brighter financing indeed surfaced. In late December, XM announced a set of definitive financing agreements totaling $475 million–consisting of $225 million in new funds from strategic and financial investors and $250 million in payment deferrals and related credit facilities from GM. In addition to the financing package, the company will commence an exchange offer for all $325 million of its outstanding 14 percent senior secured notes due in 2010 in exchange for new 14 percent senior secured discount notes due in 2009, warrants and cash. "With this financing package, we believe we have achieved full funding through cash flow breakeven," Panero says. This deal helps keep the company from severe dilution and XM’s existing shareholders still would control roughly 55 percent of the company, rather than 100 percent.

Moving forward, Panero has set his sights on various business developments that he hopes not only will keep XM in business, but propel it forward as one of the strongest segments within the satellite industry. "Even though our vision four years ago is now a reality, this is a tough time for the satellite industry," Panero says. "More commercial services like DBS and satellite radio have to flourish for satellite-based services to rebound from this economic downturn." Panero understands that even though his company is currently successful, it could be gone as quickly as someone channel surfs or turns a dial. "There is much room for improvement within our industry and we will rebound but we have to work at it. It will not merely happen."

In 2003, Panero has a goal to surpass the million-subscriber mark, expand into the home and portable marketplace and introduce XM into the aviation and trucking industries. "I’m excited about 2003 and beyond. I am proud of what we have accomplished so far, but there is more to do," he adds. "And we will do this with setting realistic expectations that are fueled in part through creative innovations grounded in solid business objectives." And it is this down-to-earth approach that is currently inspiring Panero. In his office behind his desk, Panero has hanging the Pets.com logo puppet. He says that is a constant reminder that substance over form prevails and anything else fails. "As a kid I grew up loving television. I have traded that love as an adult for listening to music all the time," Panero says.

Nick Mitsis is Via Satellite’s editor.