XM, Sirius And NAB Squabble

NEW YORK–The top executives at Washington, D.C.-based XM Satellite Radio [XMSR] and Sirius Satellite Radio [SIRI] verbally sparred with each other last week about which company is pursuing the best growth strategies.

A big difference of opinion arose over whether Sirius “overpaid” by agreeing to a seven-year, $220 million agreement to broadcast National Football League (NFL) games outside their home markets. That operational disagreement, on the other hand, did not stop the highly competitive CEOs from teaming up to rebut criticism from the National Association of Broadcasters (NAB), asserting that both companies were skirting the law by offering local weather and traffic services.

XM CEO Hugh Panero, during a panel discussion at the one-day SkyForum conference here Tuesday, described the NAB’s complaints as “noise making.” He instead focused most of his attention on discussing his company’s rapid growth and its plan to reach cashflow breakeven in first half of 2005.

To that end, Panero explained the price sought by the NFL for offering its rights to rival Sirius will boost the company’s subscriber acquisition costs (SAC). The move also may put Sirius at risk for potentially requiring more time to reach that cashflow breakeven stage.

With XM meeting or exceeding its growth projections during each quarter since it began commercial service during Fall 2001, the company did not need to take such a gamble, Panero said.

Sirius CEO Joseph Clayton strongly defended his decision. He cited the benefit the NFL has brought to other broadcasting companies as he tried to refute any suggestion his company paid too much for the rights to carry nearly every NFL game nationally for the next seven years.

The NFL contract is an “astute” business decision that gives Sirius access to the marketing muscle of all 32 teams in the league, Clayton said. “Satellite TV’s growth was driven by NFL Sunday Ticket,” Clayton told the SkyForum attendees. “I think the same thing will be true with us.”

Indeed, Monday Night Football helped to develop a loyal, sports-loving audience for ABC, Clayton said. In addition, gaining the rights to televise National Football Conference games helped to put Fox [FOX] on the map in the United States, Clayton continued.

175 Million Fans

The NFL also has a whopping 175 million fans in the United States, and 50 percent of them don’t live in the same market where their favorite team plays, Clayton said. For the contract to pay for itself financially this year, Sirius needs just 5,000 subscribers per team, he added. “I think I can even get that number in Buffalo,” one of the smaller NFL markets, Clayton said.

The financial risk to Sirius from the contract also is reduced because the pact is back-loaded and requires limited upfront payments from the fledgling satellite radio company, Clayton said.

In contrast, Panero said sports broadcasting rights deals are “dangerous,” and they often do not produce the kinds of revenues required for them to pay off. Another question is how many out-of-market NFL fans would buy a subscription satellite radio service to listen to what likely would be just 16 regular season games played by their favorite teams, he added.

Though costly, the NFL programming package does give Sirius a chance to differentiate its service and to give it a chance to close the gap in subscriber numbers between it and the front-running XM. So far, XM has topped 1.68 million subscribers, while Sirius is nearer to 300,000.

The NFL pact ultimately will pay off handsomely when the teams entice new customers to subscribe to Sirius through joint marketing programs, Clayton said confidently.

Key considerations that led XM to walk away from such a pricey NFL programming deal included the company’s unwavering focus on reaching profitability in the first half of 2005 and on keeping its cost of adding new subscribers at reasonable levels, Panero said. Instead, XM is tapping the NASCAR fan base with its service. NASCAR is a “perfect match,” with satellite radio, and it also offers a wealth of marketing opportunities to spur interest in satellite radio from prospective new subscribers, Panero said.

NAB Barbs

The NAB was not represented at SkyForum but it voiced concerns about the foray of both U.S. satellite radio services into local weather and traffic service through a petition it filed last week with the Federal Communications Commission (FCC). The powerful broadcasting trade group called the offering of local content in major U.S. markets by XM and Sirius directly contrary to the reasoning behind the agency’s licensing of both companies to provide national radio service that otherwise would not exist.

“In lieu of the promised niche audiences, foreign-language services, [and] senior and children’s programming, they have instead devoted substantial bandwidth to compete directly with local broadcasters with local content, without being subject to any public interest obligations,” the NAB complained in its petition. “This is not ‘local broadcasting’ but instead centralized content stemming from two companies.”

Satellite radio companies providing centralized “local” service that essentially duplicates existing programming from traditional radio stations does little to foster diversity and localism, the NAB argued. To the contrary, such centralized local service can exist only to the detriment of the dissemination of free and over-the-air local services to communities nationwide, the petition continued.

NAB particularly is concerned that XM and Sirius may be developing next-generation satellite radio receivers that would deliver “localized” programming, including advertisements and news, and then to deliver it to their subscribers with Global Positioning System (GPS) and store-and-forward technologies. Using these technologies, a satellite radio service provider could beam to its listeners local content feeds stored in memory chips or on hard disk drives through next-generation receivers, the petition explained.

In turn, these receivers might be able to filter and place local content that would be tailored to an individual listener’s location, according to the NAB. Ultimately, satellite radio services could modify their content sufficiently to become “indistinguishable” from local radio, the association added.

Before XM and Sirius invest millions of dollars into developing such technology, the FCC should clarify what the satellite radio companies can do, the petition explained.

Specifically, the NAB urged the FCC to make clear satellite radio service providers are prohibited from:

• Using any technology to permit the delivery of content that would be aired on a receiver in one location that differs from the content that would be aired on a receiver in a different location; and
• Providing locally oriented services on nationally distributed channels.

Rising Threat?

Clearly, the rapid growth of satellite radio in the United States has struck a nerve among broadcasters. Certain local radio stations have begun attacking satellite radio in on-air advertisements. What the local stations cannot duplicate is the niche programming offered by XM and Sirius that has the potential to lure away listeners and advertising revenue from traditional radio.

The NAB opted to voice its objections now rather than to wait for further local content to be provided by XM and Sirius. The financial stakes are large for local radio stations that typically adopt formats that appeal to big potential audiences, while leaving listeners who are passionate about a particular music genre unfulfilled. Many of those serious fans of particular styles of music are finding satellite radio too enticing to resist.

As the number of satellite radio subscribers grows, the reality is that both XM and Sirius are emerging as a collective threat to erode the audience of traditional radio stations. With more than 100 channels provided by each satellite radio service, XM and Sirius can address the listening tastes of market segments that can be sizable on a national basis but would be too small to serve in a financially viable way locally.

Chasing XM

XM has been aided immensely by its close partnership with General Motors [GM], a minority investor in the satellite radio company. GM has led the automotive industry in providing the service through factory-installed equipment that helps XM in attracting new subscribers.

Chrysler [DCX] and Ford [F] have not been the same kind of champions for Sirius, Panero said.

In addition, XM was the first to enter commercial service, and it has the “technology lead,” Panero said.

Clayton acknowledged his company was “late to the party” in offering a plug-and-play unit that has been a popular seller for XM. However, Sirius now is bridging that gap, aggressively marketing to such niche segments as truckers, boaters and RV users, he added.

“Do not underestimate the importance of these markets,” Clayton said.

XM is concentrating its thrust on the mass-market audience of car owners, Panero said. Satellite radio has appealed to new-car buyers of all demographic groups, and not just younger ones who originally were expected to be the most passionate, he added.

However, the aftermarket satellite radio unit buyers tend to fit that mold of skewing toward younger, male drivers, Clayton said. For that reason, Sirius used Pamela Anderson to promote its service in a recent advertising campaign that stirred up a bit of controversy.

Panero predicted ultimate financial success for both companies. While Sirius is attempting to distinguish itself as a premium service, and it is incurring higher costs to do so, both companies are projecting they will reach cashflow breakeven next year.

The suspension of radio personality Howard Stern by Clear Channel [CCU] due to indecency concerns has led to speculation that the “shock jock” may bolt for satellite radio, but that prospect appears dim in the short term. Panero said Stern remains under contract and likely would be too expensive to lure away. However, if either company landed Stern down the road, he would help to raise the “awareness” of the entire category, Panero said.

–Paul Dykewicz

(Chance Patterson, XM Satellite Radio, 202/380-4318; Jim Collins, Sirius Satellite Radio, 212/901-6422; Dennis Wharton, NAB, 202/429-5350)