Despite what observers consider to be unnecessarily burdensome restrictions, Sirius Satellite Radio and XM Satellite Radio ultimately are expected to agree to the terms set forth by the Canadian Radio-Television and Telecommunications Commission (CRTC) and proceed with offering subscription-based satellite radio service to the citizens of Canada (SN, June 20, p. 1).

“My gut is that they will move forward and that they will accept the conditions,” Sean Butson, analyst with Legg Mason told Satellite News.

Jimmy Schaeffler, chairman and senior research analyst at The Carmel Group, agreed. “I think there are some business models that can work [in Canada]. It just depends on what are the future restrictions and how can they work around them,” he told Satellite News.

Before any potential future restrictions are levied against services provided by XM and Sirius, the satellite radio companies first need to get around the current ones, which include requirements on the number of channels and the percentage dedicated to Canadian-produced content, as well as the 5 percent of gross revenues that must be paid to Canadian organizations that help promote the development of new Canadian talent.

Sirius declined the opportunity to be interviewed for this article, saying the company’s press release on the subject was the only statement being made on the CRTC license at this time. A spokesman from XM did not return calls.

Acceptance Not A Given

While Butson and Schaeffler ultimately predict that Sirius and XM will proceed, both noted that it would not be all that surprising if the satellite radio companies decided to take a pass, particularly considering the gray market revenues each provider likely is receiving.

The CRTC’s restrictions “create a situation where it is not a home run for XM or Sirius,” Butson said. “They are going to take the time and figure out whether this a good use of their capital.”

Butson predicted they would proceed because technology gives them the flexibility to meet the CRTC requirements.

“In the end, I think that both companies probably will do it if only because the compression technology continues to get better,” Butson said. “So what may have taken up eight channels for Canadian content in the old world, as compression technology improves, may only take up four channels. Maybe it takes up two in terms of the use of spectrum.”

However, given that it is not a “home run,” Butson predicted the actual capital investments by XM and Sirius might be more limited, especially given that one of the requirements is that 5 percent of gross revenues from the Canadian business must be given back to help develop Canadian talent.

“If it was 5 percent of profits, that is one thing,” Butson noted. “But it is 5 percent of gross revenues. If your long-term margins are 25 percent [prior to the payback], now your margins are 20 percent. That is a 20 percent reduction in profits. That is significant.

“I think they are going to try and limit their investment and bring in outside investors to help fund” Canadian expansion, Butson added, noting that Canadian Satellite Radio, XM’s Canadian partner, already is talking about taking the company public.

Ultimately, the lure of the Canadian market will probably spur the two companies to accept the government conditions and proceed, said Schaeffler. “They will move forward because there are 30 million people they want to access,” he said. “There are many people who are on the U.S./Canadian border and continue to [receive service] in an illegal way [through gray market acquisition of service] which is not preferable. They want to also use it as a model to grow into other countries.”

The gray market, where a Canadian resident establishes a U.S. mailing address for the sake of paying for the service even though it is used in Canada, is lucrative and could give reason for both to skip delivering service directly to Canada.

“The flip side is the gray market is extremely profitable for both companies,” Butson said. “One of the risks the Canadian government runs with these extremely restrictive rules is that both companies may say, ‘Thanks but no thanks,’ and the gray market will continue to grow.”

The Content Debate

The biggest cause for concern are the content requirements, which call for at least eight original channels produced in Canada with a maximum of nine foreign channels to be offered for each Canadian channel. At least 85 percent of the musical selections and spoken word programming broadcast on Canadian channels must be Canadian.

The CRTC also stipulated that at least 25 percent of the programming on the Canadian channels much be in French, 25 percent of the musical selections on the Canadian channels must be new Canadian musical selections and an additional 25 percent must be by emerging Canadian artists.

Butson and Schaeffler argue that there are too many restrictions. Canadian watchdog groups argue the restrictions are not tight enough.

“Basically what the CRTC is doing is violating [Canada’s] version of the First Amendment,” Schaeffler said. “They are saying, ‘We are so worried about the ability of our citizens to choose the proper content that we have to completely control the content that they can receive or not receive.’ It is a real knock on the Canadian consumer. It is too much control, and it is too heavy handed and it takes too much of the thought process away from the ultimate audience.”

However, Jim Thompson, spokesman for watchdog group Friends of Canadian Broadcasting, said the restrictions did not go far enough.

“It is kind of ironic that the Canadian regulator which has to, as one of its mandates, make sure there is shelf space for Canadian programs, has rendered a decision that may cause the Canadian bid to walk away,” Thompson told Satellite News, referring to the third company licensed by the CRTC, Chum Ltd., wanting to offer subscription- based radio services. Chum’s offering would be purely terrestrial in nature. He noted that Chum, due to the technology it is using, would be third to market, putting it at a significant competitive disadvantage.

The requirements placed on XM and Sirius also do not match the Canadian content requirements placed on conventional radio broadcasters, Thompson said.

“I think that Sirius and XM got a really sweet deal relative to other conventional broadcasters in Canada,” Thompson said, adding that if the licenses were not successfully appealed, other Canadian broadcasters may seek concesions similar to those granted to XM and Sirius. “That will lead to further eroding of the presence of Canadian artists on our own airwaves.”

Thompson said no groups have filed objections to the licenses yet, but they have 45 days from the June 16 issue date to do so. He added that the licenses have been a subject of debate in the Canadian Parliament.

However, if Sirius and XM felt the restrictions were too imposing, they could always just walk away.

“The best-case scenario is that all three companies decline to accept the conditions, forcing the Canadian government to loosen them,” Butson said. “I don’t necessarily give that a high probability of happening.”

–Gregory Twachtman (Jimmy Schaeffler, The Carmel Group, 831/643-2222; Jim Thompson, Friends of Canadian Broadcasting, 613-567-9592; Sean Butson, Legg Mason, 410/454- 5917)