A Sound Future?

Pay radio is up and beaming from XM and Sirius

what's unknown is how many people will sign up

November 16, 2003|By Dan Thanh Dang | Dan Thanh Dang,SUN STAFF

Hugh Panero was driving toward his home near Chevy Chase two years ago when he noticed a strange black device about the size of a small travel iron atop the roof of a car in the next lane.

Panero cruised up next to the driver, coaxed him to roll down his window and asked him about the funny-looking gadget. The driver babbled on about how it was an antenna for XM Satellite Radio -- a new service, he said, that beamed 100 channels of music, talk, sports and news from two satellites straight to his car radio with CD-quality sound and reception.

"'Thank you for being a customer. I'm the president and CEO of XM Radio,'" Panero said to the driver, who was unaware that he was reciting the company spiel to the boss. "It was so cool. When I got home, I told my wife about it and said how great it would be if I could go around thanking each and every one of our new subscribers. She said that was probably an unrealistic idea."

If it wasn't unrealistic then, it certainly is now.

XM Satellite Radio Holdings Inc. of Washington signed up its 1 millionth customer last month. Sirius Satellite Radio Inc. of New York, the other major player in this fledgling technology, has about 150,000 customers.

Two years after satellite radio's launch in November 2001, doubts have dissipated about whether anyone would pay for radio -- a medium received for free since KDKA in Pittsburgh began the first commercial station in 1920 to broadcast presidential election returns. Now, the main question is whether enough people will pay for it.

It's a tenuous time to be building a new model for pay radio -- and not just because investors are suspicious of can't-miss technology promises after the dot-com bust. Satellite radio is toddling past infancy just as the music industry is slashing prices on compact discs and making it easier to legally download music on computers.

Moreover, hundreds of new radio stations have been created in the past few years, nurtured by federal deregulation of the industry and advances in digital broadcasting.

Of course, common wisdom a half-century ago was that no one would pay for television programs, but today nearly 74 million U.S. households subscribe to basic cable. Less than a decade ago, it was thought that no one but the wealthy could afford or would desire portable phones, but now 152 million Americans have those, too.

On satellite radio, listeners can still get their dose of pop-tart sensations like Christina Aguilera and Justin Timberlake, but niche audiences can also fulfill their need for such genres as classic country, jazz, blues or big band, even world events on the BBC World Service or 24-hour NASCAR. After an initial cost of $200 to $300 for the radio equipment, XM charges customers $9.99 a month for its service. Sirius charges $12.95.

"It's still too early to declare victory on the scale of pay TV or CDs, but they could make a real significant impact on the way we listen to radio," said Steve Mather, an analyst at Sanders Morris Harris Inc. in Los Angeles. "The honest-to-goodness answer is it looks like it could get really big, and I mean big big."

Satellite radio gained 1 million customers quicker than did compact disc players, radio, television, videocassette recorders, cable or satellite TV, according to research by Greystone Communications and the Yankee Group.

Burning cash

Some analysts predict satellite radio could reach between 11 million and 17 million subscribers within four years and as many as 25 million subscribers by 2010, according to international research firm Ipsos-Reid.

Not everyone is convinced that the two current providers will be around long enough to see that happen, however, with both companies still burning through cash.

XM sank more than $1 billion into developing three satellites, launching two into space (nicknamed "Rock" and "Roll") and erecting 800 antennas atop city buildings across the country to beam its signal to customers. Sirius, which introduced its service a year after XM, spent more than $2 billion to do the same using three satellites.

This month, XM said its third-quarter loss widened to $145 million, or $1.12 a share, swallowing a fivefold increase in revenue. Sirius' net loss was $106.7 million in the third quarter, or 11 cents per share, almost unchanged from a year earlier.

Neither company is profitable. XM carried almost $568 million in debt by the end of last year, while Sirius reported $1.3 billion in debt.

To break even, analysts say, XM has to add 3 million to 4 million customers by the end of next year -- three times what it has now in the next 13 months. They predict that Sirius needs 2.5 million customers by mid-2005 -- 17 times its current base.

"A lot of people come here asking for it, especially as a gift," said a clerk at a Circuit City store in Catonsville, one of several major electronic retailers that have carved out departments to display the new technology.

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