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WorldSpace Narrows Focus, Risks

By | November 10, 2003

      WorldSpace Chairman and CEO Noah Samara is marshaling his company’s resources by narrowing its marketing efforts to just a handful of countries, rather than all 100 nations covered by its satellite radio signals.

      The strategy is to conserve cash, while growing subscriber revenues sufficiently to reach the break-even point by year-end 2005 or mid-2006, Samara explained. The list of countries Washington-based WorldSpace is targeting includes India, China, South Africa and France.

      India is the most promising market that WorldSpace is pursuing with its in-orbit AsiaStar satellite. WorldSpace has two in-orbit satellites, AsiaStar and AfriStar, that cover roughly three-fourths of the world’s population, or roughly 4 billion people. However, AsiaStar probably is the company’s best opportunity to generate revenue.

      As one of a number of cost-saving measures, WorldSpace is arranging for its radio receivers to be manufactured in India, Korea and China. In turn, those manufacturers are trying to squeeze their unit costs as much as possible.

      The receivers cost about $50 to manufacture but are sold at retail for between $75 and $150. One of the highest cost units is built in Indonesia for roughly $80, well below the hundreds of dollars a WorldSpace receiver cost to build several years ago.

      During December 1998, Panasonic built a WorldSpace receiver for $200 and sold it for roughly $400. The receivers generally did not sell well at that price, especially since WorldSpace was operating in developing regions of Africa, as well as South Africa and Asia.

      To limit WorldSpace’s financial risk, the company is having distributors that want its receivers buy the units directly from the manufacturers.

      “We are encouraging that,” Samara said. “We are trying to get ourselves out of that loop.”

      WorldSpace also saves costs by not subsidizing the sale of its receivers.

      Efforts now are underway by the company to raise capital to support a stepped up marketing effort. Talks are taking place with “a lot of interested prospective investors,” Samara said. Strategic and financial investors are needed to provide sufficient funding for WorldSpace to tide it over until it reaches the break-even mark by year-end 2005 or by mid-2006.

      To conserve cash, WorldSpace has cut its costs “tremendously,” Samara said. “We have a very low cash burn rate. We have reached a stage where all our costs are mostly toward subscriber acquisition.”

      Specifically, WorldSpace’s monthly cash burn rate is $3 million, compared to a high of $10 million a month two years ago. “Our burn is down to levels needed to monitor satellites, produce content and do legal work,” Samara said. Costs have been limited further by focusing on selected countries with “laser-like” attention, he added.

      The latter decision is based on the practicality of trying to emphasize markets where WorldSpace has the best business prospects, rather than attempting to sell receivers in all the countries that can receive the company’s radio signals.

      India and China are the main markets WorldSpace is looking to serve in Asia, while France is the country where WorldSpace is preparing to launch service in Europe. The company also has ongoing marketing efforts in the Middle East and South Africa.

      “The narrowed focus has enabled us to reduce our cash burn and increase our targeting of subscriber-based services,” Samara said. WorldSpace changed from an advertising-based business model roughly a year ago to a subscriber-based model.

      To entice paying customers, WorldSpace is introducing new services. For example, the company is involved in beta testing a stock quote service in China that would charge listeners an annual subscription fee of $2 to $3 a month. The potential market is enormous because roughly 30 million Chinese invest in stocks, Samara said.

      Chinese Partners

      WorldSpace is partnering with an organization that has 1.2 million customers who are potential subscribers of the stock quote service in China.

      To reach break-even, WorldSpace needs 2 million subscribers in the various markets that it serves to pay $4 a month. That revenue stream would total $8 million a month and $96 million a year.

      India is expected to provide a significant portion of that needed subscriber base. WorldSpace is offering 15 free-to-air channels in that market, along with another 14 or 15 channels that collectively are available for $2 to $3 a month.

      The programming offered in India includes Hindi language and Western-style offerings, along with local Indian languages.

      “WorldSpace is offering an unprecedented variety of local language and Indian classical music programming,” Samara said. One of WorldSpace’s programming partners is All India radio.

      A low budget marketing effort by WorldSpace involves beta testing of new subscription services to 15,000-20,000 people in India. Since people in India typically pay six months in advance for subscription TV services, Samara is encouraged that 90 percent of those involved in the beta testing already have opted to continue their service as paid subscribers once the beta testing ends in six months.

      As WorldSpace offers additional content, it should be able to convert the 40,000 owners of its receivers in India to paying-subscribers, Samara said. Most of them will subscribe but the take up rate so far has been modest due to the company’s need to limit marketing to preserve costs, he added.

      Ultimately, millions of Indian customers are expected to become WorldSpace subscribers and pay $3 or $4 a month. India has a fairly large market involving tens of millions of people who have sufficient incomes to subscribe.

      “Those customers have cell phones and pay $15 to $20 a month for Internet access services,” Samara said. “These are the same customers that buy the 700 million music cassettes in India each year.” India also is a good market for WorldSpace, in light of the 40,000 households in the country that subscribe to pay TV, he said.

      In China, WorldSpace is working with the government to do a subscription service launch through CNR and CRI, two of the word’s largest programmers of Chinese music.

      “Chinese-speaking people represent the same gross domestic product (GDP) as the people in China,” Samara said. “The country has a $1 trillion dollar GDP. We plan to take the great programming that we do and offer it in other markets.”

      The Chinese government’s regulation of content has not proven to be a major obstacle, Samara said.

      “We have done a fantastic job with our regulatory frameworks,” Samara said. “We try to provide content without ruffling the feathers of anybody.”

      WorldSpace uses Chinese-government controlled ChinaSat to transmit its programming.

      The plan for France is to provide an “XM-type” service, said Samara, referring to the subscription-based mobile radio business model used by Washington-based XM Satellite Radio [XMSR] in the United States.

      With XM and rival New York-based Sirius Satellite Radio [Nasdaq: SIRI] exclusively serving the U.S. market, WorldSpace can take its pick of serving other markets.

      For example, France has been targeted as a good market for satellite radio. “We are working with partners on the ground there that know that market,” Samara said. The company’s in-orbit AfriStar satellite could be used to offer a service in France that would cater to in-vehicle use.

      Despite talk that other providers may emerge, none of them could launch a service faster than WorldSpace, Samara bragged.

      WorldSpace’s European initiative is in an advanced startup phase. Mobile satellite radio technology has been developed and WorldSpace has learned by licensing its technology to XM.

      “The WorldSpace technology is working very well,” Samara said. “XM has taken our technology and improved upon it. At the heart of XM is WorldSpace technology.”

      The high-stakes satellite radio business is filled with risk. For example, a prospective European satellite radio service, Luxembourg-based Global Radio, went bankrupt earlier this year (SN, May 12).

      One problem Global Radio encountered is that it was trying to develop a high-cost infrastructure of in-orbit satellites that would use high elliptical orbit (HEO) satellites. With roughly $2 billion needed to launch such a system, Global Radio found it impossible to raise the money during a difficult economic environment, Samara said. However, WorldSpace and XM have found that a lower-cost satellite system is feasible and functional, he added.

      Alcatel Consortium

      WorldSpace is working with a European consortium led by Alcatel Space to introduce satellite radio service in France. The use of WorldSpace’s in-orbit AfriStar satellite will reduce the consortium’s financial barriers to entry.

      Aside from France, other European countries that could be targeted later by WorldSpace, Alcatel and their partners are Belgium, Luxembourg and Switzerland, Samara said.

      Before a European service can be launched, preliminary steps must be taken. One of the prerequisites is to deploy terrestrial repeaters on the ground to ensure signal quality.

      The consortium’s partners will provide content and marketing services. The teaming approach will allow a service to be launched at 5 percent the cost of what would be needed to build a HEO service. WorldSpace plans to announce its European partners at a later date, Samara said.

      Steve Blum, a satellite-broadcasting consultant who heads Tellus Venture Associates, of Marina, Calif., said WorldSpace has a “window of opportunity” to tap specific markets immediately, and Samara’s focus on those markets is exactly what is needed.

      “Low cost receivers distributed through traditional consumer electronics channels is the single best strategy for WorldSpace to grow its audience quickly,” Blum said. “Concentrations of listeners and subscribers in focused, geographically defined markets will be attractive to both content owners and advertisers, and will allow WorldSpace to continue to grow its revenue streams.”

      Roger Rusch, a satellite consultant who heads the Palos Verdes, Calif.-based TelAstra consulting firm, said, “I feel that Noah Samara is hero for trying to provide satellite radio services in the developing world. I know that I am not alone.”

      The challenge is that his efforts must turn into a profitable business and result in paying customers to support his services, Rusch said. The $4 a month subscription price in certain parts of the world could be too expensive for many people to afford, he added.

      “I think it will be a challenge to find those customers [who can afford the service],” Rusch said. “If anyone can do it, I think he can. The reason I say that is that he has re-oriented and restructured the company. He certainly is trying to do the right thing. It looks promising.”

      –Paul Dykewicz

      (Noah Samara, WorldSpace, 202/969-6406; Steve Blum, Tellus Venture Associates, 831/582-0700; Roger Rusch, TelAstra, 310/373-1925)

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