Brief - Radio

3/17/2006 The Week Magazine

How big is satellite radio: Though its audience still pales in comparison to traditional broadcast radio, satellite radio is gaining fast. The industry currently consists of two fiercely competitive companies, XM and Sirius, both of which are investing feverishly in technology and in big-name talent, from Howard Stern to Bob Dylan. XM launched its service in 2001 and now has 6 million paying customers. Sirius, which went live a year later, has 3.3 million subscribers. Both networks are projected to add another 3 million listeners this year, and Kagan Research forecasts that by 2014, they could have a combined 46.8 million subscribers. Satellite boosters say the new services will transform radio the way cable changed TV.

What does satellite offer that regular radio doesn't: True variety. Advertising-supported broadcast radio must try to reach the broadest possible audience. That imperative can create dull, predictable programming, especially with regard to music. Subscription-based satellite, though, can afford to have dozens of channels, each reaching a distinct niche. In the industry, this is called "narrowcasting." XM and Sirius each offer more than 125 news, sports, talk, and music channels. XM has channels dedicated to hits from every decade since the 1940s, and a channel that plays only love songs. It also provides the home broadcasts of every major league baseball team, so that, for example, a Baltimore Orioles fan living in Seattle can now hear the Orioles' announcers calling every inning live. Sirius has a hip-hop channel created by Eminem, three Christian music channels, and "Elvis Radio," which plays nothing but Elvis Presley songs, night and day.

How is this programming delivered: Both companies have dozens of state-of-the-art sound studios, where programming is assembled and stored. The digital recordings are compressed so that massive amounts of information can be crammed into limited bandwidth and then beamed up to satellites. The satellites bounce the signal back to Earth, where special radios decode the programs for authorized listeners. Signals can be blocked by obstacles such as high buildings and tunnels, but the radios stuff four seconds of audio into a memory buffer, so the music and talk will keep playing, even during brief interruptions.

How can you get satellite radio: XM and Sirius charge subscribers $12.95 a month. But before you can tune in, you have to buy one of their radios, which range in price from $50 to $2,000. The technology in the radios is proprietary, meaning they are only good for listening to one of the networks. Since most people primarily listen to the radio while driving, both companies are prodding automakers to agree to make satellite radios an option in new cars. That option is becoming widely available.

Is it worth the money: Subscribers seem happy; only about 1.5 percent of them dropped the service last year after giving it a try. The music channels, which are beamed up at a higher quality than talk channels, often sound as good as a CD, and the steady signal means satellite radios have none of the static of traditional broadcast stations. Also, satellite programming is not regulated by the Federal Communications Commission, so nothing is censored. The freedom to curse and to discuss bodily functions and other off-color subjects helped Sirius lure shock jock Howard Stern away from CBS—a coup that has ratcheted up the already cutthroat competition in the industry. Can one celebrity really make a difference?Stern has. His rabid fans have swarmed to Sirius, helping the company add more new subscribers than XM for the first time. XM responded by spending $55 million to sign Oprah Winfrey, adding her to a star-studded roster that includes Dylan and Snoop Dogg. XM also paid $650 million for a 10-year exclusive radio deal with Major League Baseball. Sirius, meanwhile, paid $300 million for NFL games, and also bought rights to some pro basketball and hockey games.

Are these investments paying off: Not yet, that's for sure. Both companies are spending at unprecedented rates, and the losses are mounting. XM reported last month that it lost $268 million in the last three months, up from $188 million in the same period the year before. Sirius, straining under its $580 million, five-year deal with Stern, is also losing more money than ever. Some media analysts wonder whether the market is big enough for both companies, and speculate that only one could end up standing. But for now, both are betting heavily that within a few years, the notion of paying for radio will be no stranger than paying for cable TV. "Satellite radio isn't going away," said Agnes Lukasewych of Media Planning Group, an ad-buying firm. "People want choice."

Terrestrial radio's counterpunch: Traditional radio broadcasters are no longer pretending that satellite radio doesn't exist. The big wake-up call came last year, when electronics stores reported a run on satellite radios by Howard Stern fans. After that, the so-called terrestrial radio companies banded together and launched their own advertising blitz in a dozen major cities, billing themselves as "free radio." But the industry is really pinning its hopes on going digital, which would eliminate satellite's edge in sound quality. Many stations are replacing their analog broadcast systems with digital ones that make AM stations sound as good as FM, and FM broadcasts sound nearly as good as CDs. These radio stations will also be able to start "multicasting"—packing their old dial spot with two to four channels of compressed digital signals. The so-called HD digital radio technology is costly, and listeners won't hear the difference unless they shell out extra money for a digital radio. But the industry is also working to get automakers to make digital radios standard in new cars, which could be crucial to fending off the satellite challenge. "What you're seeing now," said industry expert Mark Ramsey, "is radio responding to the chorus on Wall Street that is saying, 'Hey, what's up with you?'"