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The solution to these companies’ present woes is simple: consolidation. They’re not in trouble yet but there will be. Each has something the other lacks, and given that the horizon for significant market penetration will be delayed by one year it will become a survival strategy.

With the demise of some major online radio undertakings, and the snags in launching this service, the struggle to define the new frontier of Radio continues..



Rivals in the Satellite-Radio Business Share Brunt of Wall Street’s Wariness

By Jerry Knight

Monday, April 9, 2001; Page E01

Just five weeks ago, Wall Street lined up to invest more money in the two competing companies that are putting radio stations into orbit — XM Satellite Radio Inc. of Washington and Sirius Satellite Radio Inc. of New York.

Both promise to be on the air next year with pay-to-listen systems that will let listeners in the continental United States tune in 100 channels of music, news and talk in CD-quality digital sound.

Going to the market simultaneously early last month for a final round of financing, XM Satellite raised $201 million by selling stock and notes while Sirius Satellite sold $230 million worth of shares.

Today it’s doubtful that either company would find Wall Street so generous.

The stock that Sirius Satellite sold for $21 a share in early March closed at $7.75 Friday. The new XM Satellite shares that went out at $10.18 were down to $4.13. Both stocks hit new lows last week and are off 90 percent from their peaks early last year.

The satellite radio stocks are falling out of the sky because of a series of last-minute technology glitches that are keeping Sirius Satellite from sticking to its schedule to go on the air this summer. Sirius is the Dog Star, but XM Satellite is dogged by its rival’s woes.

Satellite industry sources say the snags at Sirius Satellite are serious but not life-threatening, certainly not bad enough to vaporize two-thirds of Sirius’s stock value in less than a week.

“I don’t think these are problems that can’t be overcome. There’s really no reason for these stocks to drop the way they did,” said Elliott Hamilton, senior vice president of the Strategis Group, a Washington consulting firm.

Though their technology is different, Sirius Satellite and XM Satellite look like twin constellations through Wall Street’s telescope.

Both promise 100 programming choices. Both plan to charge about $10 a month.

Sirius Satellite has orbited three satellites to blanket the United States with radio signals. XM Satellite uses two satellites, one launched, the other almost ready. Both companies are supplementing their broadcasts from space with stations on the ground to get their signals into big cities and deep valleys where there is no clear shot at the satellites.

Both are beginning their rollouts with car radios. About one-third of all radio listening is done behind the wheel and drivers don’t have to travel far before they find themselves out of range of the radio stations they were listening to.

Concentrating on cars also gives satellite broadcasters a powerful distribution network — thousands of auto dealers, which can easily roll a $500 radio into the cost of a new car. After-market models for cars and home radios also will be offered.

Put them all together and the business plans for the two companies read like they came off the same word processor.

“We’re in a duopoly market,” said Hugh Panero, the president and chief executive of XM Satellite.

“When you’re in a duopoly market — particularly prior to execution — you unfairly benefit from each others’ good news and have an exaggerated reaction from bad news.”

That said, Panero quickly flips the dial.

“His problems are not my problems,” he said. “One needs to differentiate the execution.”

And, he added: “We are executing our strategy,” leaving unsaid the implication that the competition is not.

Sirius Satellite executives said Friday that they’ve found an answer for the glitches that scared off investors.

A software flaw in the complex Sirius Satellite radios that caused signals to momentarily fade out has been fixed, said Doug Wilsterman, vice president for marketing and distribution. The problem was serious enough that Lehman Brothers, which is providing financing for Sirius, held up a credit line until it was eliminated.

Technical problems also have delayed development of the eight custom chips needed for the Sirius Satellite receivers. At a news conference last week, Sirius Chairman David Margolese disclosed that the company making the microcircuits has only just shipped the first samples to the manufacturers that are going to make the radios.

As recently as last November, Sirius Satellite was saying it would have radios available in the first quarter of this year. Until last week, analysts were projecting there would be enough receivers available for the company to sign up 100,000 customers by year end.

Credit Suisse First Boston analyst Ty P. Carmichael Jr. cut that estimate to 25,000 last week.

Wilsterman said the radio manufacturers still need to “tweak” the chip set and make sure it works as designed before production can begin. He said chip production then could start by “mid-year,” which would be in about 11 weeks. “Assuming that keeps on track, you’ll be able to start producing radios in the third quarter,” he said.

To hedge their bets on the chips, Sirius executives now say they’re pursuing production of an alternate receiver design that uses only off-the shelf components. Linking standard chips to accomplish their goal rather than counting on specially designed components could get the radios built sooner.

Sirius had been counting on the first satellite radios to be offered on 2002 models from Ford Motor Co. and other car makers. But last week, executives disclosed that Detroit hasn’t ordered any of the radios yet. Based on auto-industry lead times and the schedule Sirius is now talking about, automobiles for the new model year could beat the radios into production.

Sirius executives are no longer making promises about when their service will begin full-scale operation.

Will all 100 channels the satellite can broadcast go on the air at once? “Whether we launch that way is under discussion,” Wilsterman said. What are advertisers being told about when service begins? “We’re keeping those folks abreast of the timing.”

The imprecise answers given during a conference call last week are one of the reasons why the stock dropped so far, analysts said.

The bottom line as the result of the delays seems to be that Sirius Satellite has lost much of its lead over XM Satellite in the race to be first with a satellite radio system.

Panero cautiously claims to have caught up, if not taken the lead.

“We are launching our service this summer,” he said. XM Satellite radios will be an option in 2002 Cadillac’s Seville and Deville models, he said. The final version of XM’s hardware — which uses just three custom chips — is already in the hands of radio makers.

But XM Satellite orbited the first of its satellite broadcasting stations only three weeks ago. The satellite, called Rock, is undergoing a shakedown exercise to assure engineers that it is operating correctly. It’s companion — Roll, of course — is scheduled to be launched May 19.

Neither company has completed construction of ground stations that are needed to make sure their signals can be heard in urban canyons and natural valleys. Until all the satellites and relay stations are fully operational, neither broadcaster can guarantee the nationwide penetration that is the key to their business plans.

The next step is getting out as many radios as possible as fast as possible. That means subsidies probably will be required to keep costs within reach of even the audiophiles, technogeeks and other early adopters who will be the first buyers. Prices are projected to be $300 to $500, including a special antenna.

Wall Street is enamored of the economics of the business because once XM Satellite and Sirius complete their billion-dollar build-outs, operating costs will be relatively modest. As a result, profit margins would rise like a rocket once the companies pass the break-even point.

XM Satellite needs about 5.5 million customers paying $10 a month to break even, Credit Suisse First Boston analyst Carmichael calculates. That means signing up 2.5 percent to 3 percent of radio listeners. At 7 million subscribers — a market share of a little more than 4 percent — the return on investment hits a healthy 14 percent a year. At 10.6 million customers — 5 percent penetration — the return soars to 50 percent a year.

Because Sirius has spent more money on its system, it needs 6.5 million to 7 million customers to break even. At the 5 percent penetration level — 10.6 million customers — the return on investment hits 30 percent a year.

“The economics of the business model essentially reduce the fundamental investment decision-making process to a single variable,” Carmichael concluded: Will listeners pay about $10 a month for radio services?

Though analysts have pushed back their estimates of the satellite broadcasters’ growth and stressed that the stocks are going to be highly volatile until the business becomes established, they still strongly recommend both stocks.

The problem for the stocks right now is the market.

“The macroeconomics have been bad out there,” Panero said.

“Terrible,” Sirius’s Wilsterman agreed.

“Obviously the market overreacts now to any negative news,” said Strategis analyst Hamilton. “I look at these stocks today and say, ‘They’re at a great price. There’s nothing in the technology that can’t be surmounted.’ ”

© 2001 The Washington Post Company