LAS VEGAS–Long-time National Association of Broadcasters (NAB) President Edward Fritts used his powerful trade group’s annual meeting here last week to accuse the U.S. satellite radio operators of illegally offering local weather and traffic in major markets, of failing to win consumer acceptance and of suffering from financial distress.

The verbal barrage drew firm rebuttals from executives at both Washington, D.C.-based XM Satellite Radio [XMSR] and Sirius Satellite Radio [SIRI] who disputed the claims. They suggested traditional radio would be better off improving its existing service than taking baseless pot shots at new competitors.

Fritts, a seasoned trade association executive who has headed the NAB for more than 20 years, verbally bashed satellite radio and, to a lesser extent, satellite TV operators during his opening remarks at the conference. He directed his most scathing criticism at XM and Sirius for providing local weather and traffic services in major U.S. markets in competition with traditional radio stations. “We believe this directly contradicts FCC rules, under which satellite radio was licensed as a national service,” Fritts said.

By providing locally oriented services, XM and Sirius are “skirting the FCC rules,” Fritts claimed. “That must not happen. I urge all radio broadcasters to contact their members of Congress in support of H.R. 4026, the bill that orders the FCC to investigate the XM and Sirius violations.”

The claim that both XM and Sirius are operating illegally was followed by assertions that that the satellite radio companies are losing 25 percent of their subscribers each year. In addition, Fritts claimed both companies face “serious” financial problems.

Chance Patterson, vice president of corporate affairs at XM, called the NAB’s criticism “desperate and inaccurate.”

Breaking Rules?

The NAB’s claim that satellite radio is in violation of FCC rules is “absolutely false,” Patterson said.

“XM has and continues to operate completely in accordance with the FCC rules,” Patterson said. These rules address how satellite radio content is delivered, and they have nothing to do with whether the content is more appealing to listeners of a specific geographic area, Patterson explained.

Jim Collins, vice president of corporate communications at Sirius, said his company has been and remains a premium, “nationwide” satellite broadcast service.

“At no time do we do local broadcasting,” Collins said. “All of the information, such as traffic and weather for the top 20 U.S. markets, that we provide is available to all of our subscribers…whether they are in New York or Los Angeles. There is a big difference between broadcasting to a local area — which is not part of our license — and distributing content of a ‘local’ nature to our nationwide audience — which is within our permit from the FCC.”

As far as high subscriber churn is concerned, the satellite radio executives countered those NAB claims by pointing out the subscriber losses of the two satellite radio companies are relatively modest compared with other subscription services. Indeed, both U.S. satellite radio services collectively have amassed close to 2 million subscribers since XM became the first to offer the service commercially during September 2001.

“XM has a lower churn rate than any subscriber business in the United States,” Patterson said. “Our churn is about 1.3 percent per month. That compares very favorably to numerous subscriber businesses out there today.”

For example, U.S. satellite television service providers have averaged a churn of roughly 1.7 percent a month, Patterson explained.

Cable TV has an even worse churn rate that ranges between 2 percent and 3 percent per month, Patterson said. For digital cable, research shows that between 5 percent and 8 percent of subscribers drop the service each month.

“Even though the service is still fairly new, our churn is quite low,” Collins said. “Frankly, we are perplexed by these comments. We have always said that we believe satellite radio is a ‘complement’ to local radio and not a replacement for it. We believe that there will always be a place for local radio, but that consumers can turn to Sirius for more variety, selection and choice that they simply cannot get on regular terrestrial radio”

In addition, satellite radio offers commercial-free music typically only is available on traditional radio for limited amounts of time during the broadcasting day, if at all.

Officials for both satellite radio companies disputed any talk that their organizations were in any financial distress. In fact, both companies recently arranged for new financing on extremely favorable terms, and each company was recapitalized successfully early last year.

Hugh Panero, XM president and CEO, responded to question from Satellite News Senior Editor Paul Dykewicz at SkyForum in New York earlier this month about the company’s declining cost of capital by saying it was able to finance itself with “cheap money.”

Sirius CEO and President Joseph Clayton replied to the same question by pointing out his company raised $300 million of gross proceeds through an offering of low-interest, 2.5- percent convertible notes during the first quarter of 2004. Also during the first quarter, holders of the company’s 3.5-percent convertible notes accepted 56.4 million shares of Sirius common stock to eliminate $69 million of its long-term debt.

“Sirius is in excellent financial shape,” Collins said. “We ended 2003 with approximately $800 million in cash and only $59 million in true, interest-bearing, long-term debt. In essence, we have zero ‘net’ debt.”

The company’s cash position fell to $707 million by the end of the first quarter of 2004, Sirius indicated last Wednesday when it reported financial results for the same period. Cash flow from operating activities for the first quarter of 2004 was a negative $71.9 million, compared with operating activities that caused the company’s cash flow to dip by $71.1 million for the first quarter of 2003.

XM has roughly $400 million in cash left but it is projected to become the first of the two satellite radio service providers to become cash flow-positive during the first half of next year. Sirius has issued guidance predicting that it would reach the same milestone by the end of 2004.

Investors also seem to like XM’s prospects, based on a jump in the company’s stock price from $3 a share in early 2003 to $28 a share now.

“Given the performance of our company’s stock over the last year, it is obvious that the investment community believes that the financial future of XM looks extremely bright,” Patterson said.

Criticizing Competitors

“The NAB has a history of lobbying against new services that consumers desire,” Patterson said. Decades ago, when the NAB only represented radio stations, the trade group protested the introduction of television, he added.

“These entertainment services that are very desirable to the public historically are opposed by the NAB,” Patterson said. “The NAB’s position with satellite radio is clearly bad for consumers, and our hope is that one day the NAB will focus on making traditional radio better rather than spending time lobbying against the next generation of radio.”

Fritts also poked fun at XM for a faster-than-expected deterioration in the life of its satellites due to a manufacturing problem. XM still has several years of useful life left on both of its satellites, and it is arranging to build and to launch an in-orbit spare earlier than expected to remedy the problem.

However, Fritts omitted that XM had taken steps to help ensure the continued operation of its service. Instead, he said the life expectancy of XM satellites has fallen from 17 years to fewer than seven years.

“That’s why every morning when I get up, I look out the window to make sure an XM satellite is not plummeting toward my roof,” Fritts said during his opening address.

Fritts also took aim at the U.S. satellite TV operators. He declared that both DirecTV and EchoStar Communications [DISH] should provide access to every local channel in all 210 U.S. TV markets as part of the renewal of the Satellite Home Viewer Improvement Act (SHVIA).

–Paul Dykewicz

(Edward Fritts, NAB, 202/429-5300; Chance Patterson, XM Satellite Radio, 202/262-5213; Jim Collins, Sirius Satellite Radio, 212/901-6422)