Sirius and Xm Satellite Radio Satellite Radio

¶ … Sirius and XM Satellite Radio

Satellite radio has emerged in the past few years as the hot new trend in broadcasting. Operating similar to DirecTV, satellite radio companies bounce their signals off satellites to beam high-quality digital service coast-to-coast, offering exclusive ad-free programming. Satellite radio offers listeners the opportunity to hear any show anywhere in the United States, combining the benefits of premium quality sound and convenience when traveling on the road. Research indicates that similar to the way FM radio grew against dominant AM radio, satellite radio is becoming known for "edgier" alternative programming (McCarthy, at http://www.usatoday.com/money/media/2004-10-6-radio-compare_x.htm). The entire satellite radio industry is currently made up only two companies, XM Radio, which started broadcasting in 2001 and has 2.5 million customers, and Sirius, with 600,000 subscribers since going live in 2002. This paper will offer a comparative analysis of the two companies and a general overview of the satellite radio industry itself.

Overview of Satellite Radio

Just as many TV viewers have come to consider cable TV a life necessity, so too is satellite radio becoming a mainstream replacement for traditional AM/FM listening. Similar to cable, this service has to be paid for, but just as with cable, you get a lot more channels and edgier, more innovative programming. An additional benefit is that there is no loss of your favorite station as you travel across the state or country. As an added plus, satellite players show the artist and name of the song, which is definitely an incentive for those who like to know what they're listening to. I

In 1992, the U.S. Federal Communications Commission (FCC) allocated a spectrum in the "S" band (2.3 GHz) for nationwide broadcasting of satellite-based Digital Audio Radio Service (DARS) (Gustafson, at http://ezinearticles.com/?Sirius-SatelliteRadio-vs.-XM-Satellite-Radio-- -- which-streams-should-you-choose/). Of the four companies that applied for licenses, only two were granted rights to broadcast; Sirius (formerly CD Radio) and XM (formerly American Mobile Radio). Each company has satellites in orbit above the earth to transmit their programming. Programs are beamed to one of the satellites, which then transmits the signal to the ground, where your radio receiver picks up one of the channels within the signal (Gustafson, at http://ezinearticles.com/?Sirius-SatelliteRadio-vs.-XM-Satellite-Radio-- -- which-streams-should-you-choose/). Signals are also be beamed to ground repeaters for listeners in urban areas where the satellite signal can be interrupted.

In many ways, research on the industry indicates that Sirius has set the tone for the industry, being the first to offer commercial free programming on all its music channels and has larger selection of receivers, adapters and other products. XM has a cheaper subscription fee, at least for its basic plan, which offers much the same fare as its competitor. Both providers have partnered with automobile manufacturers to offer satellite radio in new car models. Each has systems that will search the channels for your favorite music and alert you when and where the songs are playing. A further comparative analysis is offered in the paragraphs that follow.

Research indicates that satellite radio is in the very early stages a predicted long, multi-year growth curve. There are over 208 million drivers in the United States, and most of those drivers listen to traditional broadcast radio during their daily commutes or on the way to their local convenience store (Tracey, at 23). In 2004, Americans purchased over 28 million car radio systems, 17 million installed into new vehicles and 11 million sold for installation into used cars (Tracey, at 23). Much like cable, satellite radio offers a wider choice for consumers. Even in large metropolitan areas like New York and Washington DC, there are only 15 to 20 broadcast radio stations available (Tracey, at 23). Outside of the major cities, the programming choice is even narrower, whereas satellite radio offers 100-plus channels available literally anywhere in the United States.

One key to the industry's strategy is that satellite radio is not limited by the geographic boundaries that govern regular radio stations. With the potential to reach people across the country, even channels of relatively narrow interest, classic country and western or pop music just from the 1970s, for example, can reasonably be expected to attract a large enough audience to justify their existence, according to industry analysts (Silverstein, at http://www.space.com/businesstechnology/technology/satcom_radio_industry_031112.html). Secondly, satellite radio companies are creating an array of channels to appeal to every taste. For example, XM offers 122 channels, consisting of 68 commercial-free music channels, 33 news, sports, talk and entertainment channels, and 21 weather/traffic channels (McCarthy, at http://www.usatoday.com/money/media/2004-10-6-radio-compare_x.htm). Sirius offers 120 channels, consisting of 65 commercial-free music channels and 55 channels of sports, news, talk, entertainment and weather (McCarthy, at http://www.usatoday.com/money/media/2004-10-6-radio-compare_x.htm). Sirius is also the satellite radio of the NFL and broadcasts live NFL and NHL games.

As with any service, there are start-up costs associated with satellite radio. Potential subscribers have to start by purchasing special receivers and antennas, which cost around $150 at retailers such as Wal-Mart, Sears, Best Buy or Circuit City. Units are available for homes, cars and boats, but each unit takes a separate subscription, with some portable units that can be moved from the car to home and back again. Besides hardware, consumers also have to subscribe to either XM or Sirius. Sirius costs about $12.95 per month or $142.50 for a year, and also offers service this year for $499.99 for the lifetime of a consumer's radio (McCarthy, at http://www.usatoday.com/money/media/2004-10-6-radio-compare_x.htm). XM costs a flat $9.99 per month.

Critics of the satellite radio industry and service have expressed concerns that satellite radio will lead to a decline in the number and variety of local radio stations and programming and greater concentration of mass media in the hands of fewer companies, and a loss of jobs in the radio industry. Satellite radio has also gained popularity in other countries as well. In Britain, satellite radio is delivered by Sky Television, as part of their satellite television service. As of June 2004, there were around ninety radio stations on the Sky Digital service. Unlike in the United States, where satellite radio is seen as a way of gaining additional choice, in Britain, most major radio stations also simulcast on satellite radio. Reception is currently limited to stationary receivers, and is not available in automobiles yet.

In November of 2004, the Canadian Radio-Television and Telecommunications Commission began hearing applications for Canada's first satellite radio operations. Currently, three applications have been filed: one by Standard Broadcasting and the CBC in partnership with Sirius, one by Canadian Satellite Radio in partnership with XM, and one by CHUM Limited.

CHUM's application is for a subscription radio service delivered through terrestrially-based transmitters rather than directly by satellite, although satellites would be used to deliver programming to the transmitters. The CHUM service is all-Canadian whereas the other two applications propose to offer a mix of Canadian-produced channels and existing channels from the American partner services. A small gray market already exists for Sirius and XM receivers in Canada. Worldspace has its own satellites covering most of Europe, Asia and Africa. This signal can be received by specialized Worldspace receivers, however, a lot of the programs are only available to subscribers.

Overview of Sirius Satellite Radio

Sirius Satellite Radio Inc. was one of two winning bidders at an FCC auction in April 1997 for a license to operate a satellite digital audio radio service, and in July 2002, launched its service nationwide in the U.S. Sirius' programming originates from its national broadcast studio in New York City, and in November 2004, named Mel Karmazin as its CEO pursuant to a five-year contract (Sirius Satellite Radio, at http://research.businessweek.com/business_summary.asp?Symbol=SIRI). The company counted over 1.1 million subscribers as of December 31, 2004. Sirius radios are primarily distributed through automakers and retailers. In the auto market, the company has agreements with Ford Motor Co., DaimlerChrysler Corp., BMW of North America, Nissan North America, Volkswagen of America and Porsche Cars North America to offer Sirius radios as both factory and/or dealer-installed features (Sirius Satellite Radio, at http://research.businessweek.com/business_summary.asp?Symbol=SIRI).

Sirius distributes its service through special markets such as trucks, boats, recreation vehicles and aircraft. In the autosound aftermarket, Sirius radios are available for sale at national and regional retailers, including Best Buy, Circuit City, RadioShack, Wal Mart, Ultimate Electronics, Tweeter Home Entertainment Group, Crutchfield, Good Guys, Office Depot, Target, Kmart and DISH Network outlets, up to around 25,000 retail locations as of December 31, 2004 (Sirius Satellite Radio, at http://research.businessweek.com/business_summary.asp?Symbol=SIRI).

Sirius offers a host of equipment options. Customers can choose from over 15 plug and play options. Average receivers sell for $99.95 and can be combined with a car or home adapter, or a choice of different boomboxes. For the same $99.95, the Sirius Sportster adds special features for the sports enthusiast such as Game Alert, which prompts you when your favorite NFL or other sports teams are playing and Game Zone, which lists all of the play-by-play games and scores on Sirius by league. For $149.99, all listening needs can be covered with the Sanyo CRSR-10 Plug & Play System, which includes home and car kits for use at home, office, truck, RV, boat or car and antennas for home and car. It has 20 presets and a built-in wireless FM transmitter for use on all 100 FM frequencies. A home system that integrates with existing audio equipment is also available, with prices ranging from $250 up to $2,000. A head unit can also be placed in a car, and Sirius has over 15 headunits to choose from in prices ranging from under $200 to over $1,000. Some of the more reasonably priced units come with CD players and removable fronts.

Sirius has two Loral FS-1300 satellites in orbit, which cover the entire United States, with each satellite designed to have a useful life of about 15 years from time of launch. Its system uses terrestrial repeaters to maintain signal quality in areas with high concentrations of tall buildings; about 33 repeaters were deployed in 92 urban areas as of December 31, 2003 (Sirius Satellite Radio, at http://research.businessweek.com/business_summary.asp?Symbol=SIRI). In October 2004, Sirius entered into an agreement with Infinity Radio jockey Howard Stern, from January 1, 2006, through December 31, 2010, for Stern to move his radio show to Sirius as part of a channel created by Stern, with the expectation that Stern develop and produce additional channels (Sirius Satellite Radio, at http://research.businessweek.com/business_summary.asp?Symbol=SIRI). The financial terms of this contract include aggregate fixed obligations of about $100 million per year, in addition to other incentives.

In February of 2004, Sirius signed a seven-year agreement with the National Football League (NFL) to broadcast all NFL games live nationwide, and to become the official satellite radio partner of the NFL. The consideration include a payment of $188 million in cash to the NFL over the term, 15.2 million shares of SIRI common stock, and warrants for another 50 million shares at $2.50 per share (Sirius Satellite Radio, at http://research.businessweek.com/business_summary.asp?Symbol=SIRI). Under the terms of the contract, Sirius carried the entire NFL regular season in 2004, and starting in 2005, will carry the conference championships and the Super Bowl. Some of the other financial agreements of Sirius include agreements with Penske Automotive Group and United Auto Group, which own and operate about 144 auto dealerships in the U.S., to order Sirius radios in their purchased vehicles and leased trucks. In consideration, Penske acquired warrants for 38 million Sirius shares at $2.392 per share, in addition to other sales commissions (Sirius Satellite Radio, at http://research.businessweek.com/business_summary.asp?Symbol=SIRI).

Overview of XM Satellite Radio

After winning one of two successful bids at an FCC auction in April 1997 for a license to operate a satellite digital audio radio service, XM Satellite Radio Holdings Inc. completed its IPO in October 1999, and subsequently completed a national rollout of its service in November 2001 (XM Satellite Radio, at http://research.businessweek.com/business_summary.asp?Symbol_XMSR). XM Satellite Radio broadcasts from its studios in Washington, DC, New York City and Nashville, over 130 digital-quality entertainment channel. These channels consist of 68 channels of 100% commercial-free music, over 40 channels of sports, talk, comedy, children's and entertainment programming, and 21 channels of metropolitan traffic and weather information (XM Satellite Radio, at http://research.businessweek.com/business_summary.asp?Symbol_XMSR). The company added radio personalities Opie and Anthony to its programming lineup in October 2004, and plans to add Dr. Laura Schlessinger and G. Gordon Liddy in February 2005. XM Satellite Radio counted over 3.2 million subscribers as of December 31, 2004 (XM Satellite Radio, at http://research.businessweek.com/business_summary.asp?Symbol_XMSR).

XM has several choices in equipment. The Delphi XM Roady receiver can be purchased for just under $120. This complete package comes with a micro-antenna, cassette adapter, 12V power adapter, and a universal mounting bracket. For an additional $10, you can upgrade to the Roady2, proclaimed as the smallest satellite receiver available. In addition to the typical satellite radio features, it allows you to scroll up to 20 stock symbols and has 30 channel presets. The Delphi XM SKYFi is a receiver with a more advanced display. It gives you more information about each song and the five-line display lets you see what's playing on other XM channels before you switch. The SKYFi2, which costs $30 more, gives pause and play functions. It must be combined with an adapter kit for home, vehicle or audio system, which range from $70-$100 in price. Coming in November of 2004, the Delphi XM MyFi, touted as the world's first XM2go receiver, becomes available from XM. It comes with car kit, home kit, rechargeable battery, headphones, antennas and more for $349.99.

This company has two Boeing 702 high-power satellites in orbit, both of which were subsequently noted by Boeing to have a power anomaly. In July 2004, XM Satellite Radio settled with its insurers for $142 million, or 80% of the insured sum, and in August filed an arbitration claim for the remaining 20% (XM Satellite Radio, at http://research.businessweek.com/business_summary.asp?Symbol_XMSR). XM plans to launch XM-3, its spare satellite, in the first quarter of 2005, and XM-4 in 2007, with an option to procure a fifth Boeing satellite (XM Satellite Radio, at http://research.businessweek.com/business_summary.asp?Symbol_XMSR). XM distributes its satellite radio service primarily through automakers and retailers. Under an exclusive multi-year agreement with General Motors, a major investor, GM would install XM radios in its vehicles in consideration for $400 million payable by XM over the 12-year term, with GM also sharing in attributable subscription revenues (XM Satellite Radio, at http://research.businessweek.com/business_summary.asp?Symbol_XMSR). GM recently announced a 1 million subscriber tally under this program, and plans to install radios in another 1.1 million vehicles for the 2005 model year (XM Satellite Radio, at http://research.businessweek.com/business_summary.asp?Symbol_XMSR).

Honda also plans to double production of XM-equipped vehicles to 400,000 in its 2005 model year. In December 2004, XM and Toyota will offer factory-installed XM radios in Toyota and Lexus vehicles in 2006 (XM Satellite Radio, at http://research.businessweek.com/business_summary.asp?Symbol_XMSR). Additionally, Toyota, Nissan, Isuzu and Volkswagen also offer XM as a dealer option in several of their vehicle models. As a result, XM will be available in more than 120 different vehicle models for 2005. XM radios are available under the Delphi, Pioneer, Alpine and Sony brand names at national and regional retailers, including Best Buy, Circuit City and Wal-Mart. Additionally, XM is also available in Avis, National and Alamo rental cars, and will soon be available on JetBlue and AirTran Airways. In January 2005, XM unveiled plans to roll out to 20 major United States metropolitan cities its NavTraffic service with new, aftermarket vehicle navigation systems. XM NavTraffic is the nation's first satellite traffic data service that delivers current traffic information directly to a vehicle navigation system. The company also has several products specifically targeted at the home and portable markets.

In October 2004, XM announced a $650 million multi-year agreement with Major League Baseball (MLB) to broadcast MLB games live nationwide (XM Satellite Radio, at http://research.businessweek.com/business_summary.asp?Symbol_XMSR). The contract terms provide for XM to pay up to $50 million for 2005 and $60 million per year thereafter through 2012, renewable at $60 million per year for three more years at MLB's option, in addition to other incentive payments (XM Satellite Radio, at http://research.businessweek.com/business_summary.asp?Symbol_XMSR). Finally, XM plans to launch an MLB radio channel in February 2005, and broadcast all MLB games starting in March.

Comparative Analysis of Sirius and XM Satellite Radio

The cancellation policies of both Sirius and XM satellite radio are the same, allowing subscribers to cancel monthly at any time. Sirius' cancellation policy states that if the subscription is canceled prior to the expiration of a prepaid subscription, the customer will receive a refund of any unused Subscription fees based on the number of days remaining in the subscription. Lifetime Subscriptions are nonrefundable, and if a lifetime subscription is canceled prior to the end of a prepaid subscription or committed subscription period, a cancellation fee of up to $75.00 may be charged. XM's cancellation policy states that the customer may cancel service by notifying XM. This notice will become effective at the end of the billing cycle. The customer is responsible for payment of all outstanding balances accrued through that effective date. XM will refund amounts prepaid on a quarterly, annual or multi-year basis representing those months beyond the billing cycle month during which the service was canceled.

Although subscriber numbers are on the rise, neither Sirius nor XM are yet profitable. Sirius reported a pretax loss of $79.8 million for the third quarter of 2003 and generated $4.3 million in revenue during the period, whereas XM posted a $64.4 million pretax loss for the quarter on revenue of $26.9 million (Silverstein, at http://www.space.com/businesstechnology/technology/satcom_radio_industry_031112.html). From a broad perspective, XM and Sirius are employing similar strategies to attract subscribers. For example, both emphasize that they offer channels that are unavailable on the traditional AM and FM bands, including genres of music that do not attract enough listeners to justify their own terrestrial radio stations and audio feeds of programming primarily intended for TV viewers, such as CNN and Fox News, now also available via satellite radio. However, both XM and Sirius have different approaches to dealing with commercials. Some XM music channels are commercial free, while none of Sirius' music channels have commercial interruptions, although Sirius charges $3 more a month than XM (Silverstein, at http://www.space.com/businesstechnology/technology/satcom_radio_industry_031112.html).

Sirius was first to orbit, however, technical difficulties cost it the ability to inaugurate service ahead of the competition. As a result, XM took full advantage of reaching the market first, building a substantial lead over Sirius in terms of subscribers, something that remains an issue for Sirius officials (Silverstein, at http://www.space.com/businesstechnology/technology/satcom_radio_industry_031112.html). Both companies are counting on car manufacturers to propel sales. The firms have relationships with virtually all the major automakers that call for dozens of car models to come equipped with factory- or dealer-installed satellite radio receivers either standard or as an option (Silverstein, at http://www.space.com/businesstechnology/technology/satcom_radio_industry_031112.html). The idea is that the cost of a satellite receiver can be rolled into a vehicle's price like other options. Similarly, both companies skirted with financial disaster in 2002, as funding nearly ran out before they could sign up enough subscribers to meet expenses. Sirius managed to avoid bankruptcy by giving up equity control to creditors in exchange for the elimination of most of an unmanageable $700 million debt load (Silverstein, at http://www.space.com/businesstechnology/technology/satcom_radio_industry_031112.html). XM won financial concessions from a chief backer, General Motors.

Both satellite radio companies are competing to invest in improvements to the equipment subscribers use to receive programming streams. For example, both are developing new versions of the chips that enable receivers to decode satellite signals. These new chipsets will consume less power and take up less space than the current chips, which could eventually lead to smaller, more portable satellite radio units. Although they are competing for listeners, XM and Sirius are working together to create radios that are compatible with both companies' systems (Silverstein, at http://www.space.com/businesstechnology/technology/satcom_radio_industry_031112.html). They are required to develop such interoperable technology by their FCC licenses, but receivers that can work with either XM or Sirius are not expected to be available for at least several years.

Recent research also indicates that growth can remain very strong for both stocks in the industry. First, both are aggressively tackling the automobile market by setting up deals with the major automakers. In 2001 no new cars were equipped with satellite radios; by contrast, this year manufacturers like Toyota, Honda and General Motors are offering factory-installed satellite radios on many of their new vehicles. Eventually, some models are likely to offer the radios as a standard offering. Furthermore, both companies are also moving outside the automobile, offering devices that receive satellite radio transmissions in the home or even via portable radio devices. As a result, consumers who don't drive regularly or don't own cars will still be able to receive satellite broadcasts, giving these firms an even larger potential market.

With a total subscriber base of about 2.5 million, XM Satellite Radio is much larger than any other licensed satellite radio broadcaster. Research on the satellite radio industry indicates that the FCC will most likely not allow another competitor into the satellite radio business in the near future, because of the extreme expense involved in the launch of satellites and building of on-ground repeaters (Tracey, at 23). As a result, the FCC won't grant new transmission bandwidth to a company without sufficient financial backing. This is the main reason why XM's only real competitor is Sirius Satellite Radio.

Analysis of the two companies indicates that XM's competitive advantage over Sirius has always been in advanced hardware. Satellite radios are more sophisticated than traditional AM/FM receivers, and therefore require more advanced electronics. In this area, XM has been about 6 to 9 months ahead of Sirius in introducing new hardware products (Tracey, at 23). An example of this is XM's new wearable MyFi device, which is scheduled for launch Christmas of 2005. This device is similar in size to an iPod or Walkman and has an internal antennae which this allows users to receive all of XM's content from a very compact device (Tracey, at 23). Additionally, XM has also added several unique features to its MyFi product. Users can pre-program the device using a timer to receive and record a particular program automatically. Furthermore, XM may also include a button that enables users to purchase and download a particular song they hear on the radio. Sirius does not yet have a similar product, but offers a boom box-sized desktop radio device. XM's head start with its MyFi and other new receivers will most likely be a major advantage for the stock.

Research also indicates many positive growth drivers for XM, who has been successful in winning key contracts with a number of major automobile manufacturers. These contracts ensure that XM's radios will be factory-installed in millions of future automobile models. Since over 16 million cars were sold in the U.S. last year and XM's subscriber base stands at just 2.5 million, there is plenty of potential for XM to grow simply by installing receivers in new cars (Tracey, at 23). Additionally, XM holds exclusive distribution contracts with both General Motors and Honda, which install only XM radios in their new models. Other manufacturers, including Toyota and Nissan, are non-exclusive distributors that offer both XM and Sirius radios as a factory-installed option (Tracey, at 23). In total, about 100 car models in the upcoming 2005 model year will offer XM Satellite Radio, up from only a handful of models two years ago (Tracey, at 23). This is the most prominent avenue of growth for XM.

Another important growth prospect is the MyFi personal radio product. XM already has a good relationship with most of the nation's major electronics retailers, including Best Buy and Circuit City. As a result, these stores will prominently feature MyFi alongside XM's other radio receiver offerings. The company expects to have about 100,000 MyFi units available for sale Christmas of 2005 (Tracey, at 23). Additionally, once a consumer spends $350 on MyFi, they're unlikely to switch service to Sirius. Therefore, if XM can extensively popularize MyFi months before Sirius launches a similar product, then XM stands in an excellent place to dominate the new market.

Although neither XM Satellite or Sirius are profitable right now, and neither company is expected to deliver a profit until at least 2008, a comparison of their strong subscriber growth and solid cash position suggest that XM will be a very profitable company once it attracts a sizable customer base. Currently, XM's total market capitalization stands at 7.2 billion and the company sports 2.5 million subscribers. That equates to about $2,900 per existing subscriber, and assuming that this valuation drops to a more reasonable $750 in 2014 and the company has 30 million subscribers, the company could be worth over $22 billion (Tracey, at 23).

Sirius Satellite Radio is the smaller company, and offers a more limited range of satellite receivers than XM does. However, what Sirius lacks in hardware and scale, it makes up for in content. Sirius has negotiated some important deals over the past year to broadcast highly specialized content. Research in the media business indicates that content is significant, as companies with superior content will inevitably attract listeners to their service (Tracey, at 23). Sirius has negotiated a few key content deals, such as the contract with the National Football League (NFL) to broadcast a specialized football channel. This channel will offer game coverage, highlights, scores and weekly analysis of NFL action 24 hours a day, seven days a week. Since this is an exclusive contract with the NFL, XM will not be able to offer this content on its system. Also on the sports side, Sirius has a similar deal with the National Basketball Association (NBA) to offer coverage of their games (Tracey, at 23).