While satellite radio is showing signs of taking off in the United States, it has so far sputtered in Europe. As unmistakable proof, Luxembourg-based satellite radio hopeful Global Radio recently filed for bankruptcy in its home country, industry sources said.

Global Radio may have been hurt earlier this year when owners of both U.S. satellite radio operators sacrificed a large chunk of their original equity ownership to obtain critical new financing. Bad timing also contributed to Global Radio’s trouble because the company tried raising money too long after XM Satellite Radio [Nasdaq: XMSR] and Sirius Satellite Radio [Nasdaq: SIRI] netted their startup funding in the halcyon days of the 1990s.

“What amazes me, is how a satellite industry subsector, like satellite radio, can do so relatively well in one region of the world and flop in another,” said Jimmy Schaeffler, a satellite broadcasting analyst who heads The Carmel Group in Carmel-by-the-Sea, Calif. “XM and Sirius are growing and building, yet just the opposite has been true for Global Radio.”

While U.S. satellite radio is catching on, none of the fledgling satellite radio companies, including Washington, D.C.-based WorldSpace, have reached profitability. XM has been the most successful, meeting its commitments to Wall Street and passing the 500,000 subscriber mark in early April. However, XM’s original investors needed to dilute the value of their shares by about 50 percent to secure a $475 million financing package, consisting of $225 million in new funds from strategic and financial investors and $250 million in payment deferrals and related facilities from General Motors [NYSE: GM].

The initial investors in rival startup Sirius lost 92 percent of the value of their shares when that company closed a $1.2 billion recapitalization and $200 million in new financing March 7. In that financing, Sirius exchanged $635.7 million of debt for new common stock, swapped all $519 million of preferred stock for common stock and warrants, and sold $200 million in common stock to affiliates of OppenheimerFunds, Apollo Management and The Blackstone Group.

“XM’s original investors have had their equity diluted but I think they will make back their return on investment,” said Steve Blum, a satellite-broadcasting consultant who heads the Marina, Calif.-based Tellus Venture Associates. Sirius investors, on the other hand, lost most of the value of their holdings prior to the company’s recent refinancing, he added.

The sacrifices made by XM and Sirius shareholders enabled each company to avoid bankruptcy and continue their operations uninterrupted. Global Radio was not so lucky. It scoured the financial markets for funding right up until its bankruptcy filing, but it could not hammer out a suitable arrangement, industry sources said.

Global Radio got started “much later” than XM and Sirius, after financial markets had largely closed off for new ventures, said Tom Watts, a satellite analyst with SG Cowen. As a result, Global Radio did not have access to the “robust markets” that existed in the second half of the 1990s, he added.

The European market poses a much more difficult situation than the U.S. market, Watts judged. Not only does Europe have more languages and cultures to contend with, but it also has a less car-oriented potential subscriber base, he added.

“If they would have caught the investment boom two years earlier, the company may have made it,” Blum said. “They missed the bubble and were not able to hang on long enough for XM and Sirius to prove the business model. If the one million subscriber mark is reached by year-end, I think that proves the business model.”

Until then, investors will be wary about pumping additional money into satellite radio companies, Blum said.

Opportunity for WorldSpace

The bankruptcy of Global Radio presents an opportunity for WorldSpace to fill the void and become the only satellite radio operator in Europe. That is the view of WorldSpace Chief Operating Officer Andy Ros-Works, who said the company plans to begin commercial service in Europe soon.

WorldSpace currently operates one in-orbit satellite for Africa and the Middle East and another spacecraft for Asia. A demonstration late last year with terrestrial repeaters in Paris exceeded expectations and provided “impeccable service” within 15 miles of the repeaters, Ros-Works said.

The hybrid digital-broadcasting network that WorldSpace tested operates in the L-band with the West beam of the company’s AfriStar geostationary satellite. WorldSpace partner towerCast deployed the terrestrial repeater network in the Paris. The repeater network uses a T-DAB (terrestrial digital audio broadcasting) bloc allocated by the CSA (Conseil Supérieur de l’Audiovisuel)- the French regulatory authority.

The combined AfriStar satellite signal and terrestrial repeater signal was heard in a vehicle that was specially equipped with a satellite receiver provided by Fraunhofer IIS and Siemens VDO Automotive. Fraunhofer IIS developed the technology for WorldSpace using a modulation optimized for mobile reception.

WorldSpace is committed to partnering with Alcatel Space to create a subscription-based satellite radio service in Europe that would be similar to XM in the United States, Ros- Works said.

“The pathway is a lot clearer because we don’t have any other contending players now,” Ros-Works said.

“We have beefed up our team in Europe to include Europeans familiar with the media area, consumer electronics space, telematics and the automobile industry,” Ros-Works said.

A long-term goal for WorldSpace is to combine telematics and satellite radio. WorldSpace is working on a telematics product in Europe with Daimler Chrysler [NYSE: DCX] and others.

WorldSpace has begun to team up with some of the same companies that developed the XM technology to assist with a service rollout in Europe. “XM’s progress in the United States is making it easier for us to open doors in Europe,” Ros-Works said. For example, the falling consumer equipment costs could help to create the critical mass of users needed to attract broadcasters and advertisers.

Another big challenge is that the European continent is difficult to serve from the WorldSpace satellite deployed to serve Africa and the Middle East.

“We feel comfortable that we can service the continental part of Europe, even though it is a GEO [geostationary] system,” Ros-Works said.

One advantage is that WorldSpace’s use of the L-band provides more favorable propagation of radio signals than the S-band used by XM and Sirius, Ros-Works said.

D.K. Sachdev, president of Reston, Va.-based SpaceTel Consultancy, said it is possible to overcome the technical issues that make launching a GEO satellite radio service in Europe more difficult than in the United States. “It is certainly feasible to design a good satellite radio system for Europe,” Sachdev said.

Key issues to address include:

• Higher latitudes that lead to lower elevation angles from a GEO satellite constellation;
• Limited L-band spectrum availability together with sharing constraints;
• Multiple language requirements that would require spot beams and multiple uplink facilities; and
• Competition from regional traditional radio networks, especially if they adopt digital technology similar to those used by IBiquity.

Ironically, Europe at one time was ahead of the rest of the world in digital radio technology and the associated industrial base, Sachdev said. For example, European companies built a major part of the WorldSpace infrastructure and the payload for the XM satellites, he added.

In addition, the three-satellite Tundra orbital scheme adopted by Sirius originated from work done in Europe, Sachdev said.

“While terrestrial digital radio networks were built in the 1990s in parts of a few European countries, the continent as a whole could never come to a consensus on the satellite component for a total system,” Sachdev said. “When they did finally come around in the last few years, the investment market had dried up and even now does not seem willing to make new investments in this technology until the three existing systems, WorldSpace, XM and Sirius, begin to bear fruit.”

To improve WorldSpace’s financial prospects, the company adopted a subscription business model late in 2002, Ros-Works said. That new business model replaces the company’s earlier plan to raise revenue from advertising and broadcaster payments.

WorldSpace’s subscription business model has been launched in India, Asia and elsewhere, Ros-Works said. “Now, it is a question of building the subscriber base,” he added.

–Paul Dykewicz

(Jimmy Schaeffler, The Carmel Group, 831/643-2222; Tom Watts, SG Cowen, 212/278-4260; Steve Blum, Tellus Venture Associates, 831/582-0700; D.K. Sachdev, SpaceTel Consultancy, 703/757-5880; Andy Ros-Works, WorldSpace, 202/969-6287)

European Market Opportunity

• Population of 570 million in Europe is more than double the U.S. population of 280 million;
• Number of vehicles is higher in Europe than in the United States – 230 million and 210 million, respectively;
• Fewer terrestrial radio programming formats are used in Europe than in the United States

Source: Global Radio