Satellite radio launches, but will it make money?

INFORMATION TECHNOLOGY
Comparing companies
XM Satellite Radio Inc.
Headquarters: Washington Major investors: GM, DirecTV, American Honda Clients: GM, Freightliner, Peterbilt, Porsche Status: Service has started
Sirius Satellite Radio Inc.
Headquarters: New York Major investors: Ford, DaimlerChrysler Clients: Ford, DaimlerChrysler, Freightliner and Sterling trucks, Porsche Status: Service starts mid-February

Nick Noetzli has spent more than a year whipping up enthusiasm for satellite radio, an in-car service offering 100 channels of digital-quality talk and music.

As a national training manager for Kenwood USA, Noetzli touts the technology to large retailers and audio installers.

He even wired his own car in anticipation of Kenwood's introduction later this year of an aftermarket satellite receiver.

"People are dissatisfied with radio as it is today, and they are ready to pay for something better," Noetzli says.

Some people in the auto industry are betting Noetzli is right. And now XM Satellite Radio Inc. and Sirius Satellite Radio Inc. - the only two companies licensed by the U.S. government that offer the service - are ready to test their concept on consumers.

XM () launched its service in September in San Diego and Dallas and is expanding nationwide.

Sirius () will begin a rollout in Houston, Denver and Phoenix by mid-February.

Neither company plans to extend its service beyond U.S. borders.

Auto companies have invested at least $270 million in the new industry. At XM, investors include General Motors and its DirecTV unit, each $50 million; and American Honda, $50 million. At Sirius: Ford Motor Co., $20 million; and DaimlerChrysler, $100 million in stock.

Cadillac first

Numerous supply agreements have been signed. Cadillac was first this fall with a factory-installed XM radio, and GM will expand its XM option to more than 20 cars and trucks. XM also will supply Freightliner and Peterbilt heavy trucks this year.

Sirius announced deals with Ford, Jaguar, Lincoln, Chrysler, Mercedes-Benz, BMW, Jeep, and Freightliner and Sterling trucks. Porsche Cars North America has agreed to offer both XM and Sirius services.

But do consumers want or need another in-car option - especially when not all of the channels will be free of commercials?

No one knows. Those building the industry draw parallels to the early days of cable or satellite TV.

Naysayers doubted the services would be successful when everyone had access to free TV. But millions subscribed.

Because of the limited programming choices offered by most commercial radio stations, there is a "huge pent-up demand" for satellite service in the United States, says Ken Erickson, product line manager for audio business at Delphi Automotive Systems Corp. (delphiauto.com). The supplier builds receivers for XM or Sirius service.

XM offers 100 channels at $9.99 a month. Sirius says it will have the same number of channels for $12.95 a month.

Erickson expects the market for satellite radio to be about one-third of the U.S. new-car buying public. If current vehicle sales hold, that would mean more than 5 million annually.

Pat Kemp, Cadillac's brand manager for the DeVille, predicts that at least 10 percent of DeVille and Seville buyers - the first two models to get the service - will purchase the service, and the option rate could go as high as 25 percent.

Cadillac (cadillac.com) is first with a factory-installed satellite receiver. The division offers a $295 receiver as an option on the 2002 DeVille DTS and DHS, and Seville models with Bose audio systems.

Justifying the investment

If the market takes off, the investment to integrate satellite radio receivers with other instrument panel systems could be justified, says John Slosar, product development director for telematics and multimedia systems at Visteon Corp. (visteon.com). The supplier is developing a receiver for launch next year.

Slosar foresees a day when satellite radio might be integrated with other telematics systems to provide services such as push-button purchasing of music or audio files.

Perhaps, Slosar suggests, image files downloaded from the Internet might be combined with a satellite radio-generated children's audio book. That would allow the child to look at pictures on a display as the story progresses.

Neat stuff to think about. But the satellite radio business must build a huge audience base to succeed. And that's going to take a lot of money.

J. Patrick Fuhrmann, an analyst with investment bank C.E. Unterberg, Towbin in New York

(unterberg.com), points out that XM must arrange another round of funding - in the neighborhood of $150 million - by early 2002. The most likely source of new funding is from an automaker, Fuhrmann says.

XM says it is confident of arranging further funding, though it wouldn'tdiscuss specific plans.

Sirius says it had $375 million in cash as of Oct. 31, enough to fund its business through 2002.

Fuhrmann expects XM and Sirius to reach the break-even point once they build a base of 4 million subscribers.

Depending on the financial measure used, that could happen as soon as 2004 or 2005. "The market is plenty big for both of them," he says.

Critical needs

Making investors happy is one thing. Satisfying consumers is another. Erickson points to three critical needs that must be satisfied before satellite radio is a success with vehicle owners:

1. Provide content not available elsewhere.

2. Have powerful marketing and advertising to capture the public's attention.

3. Provide uninterrupted, coast-to-coast coverage - as promised.

Erickson, for one, is sold. "Having driven the system, it works well," he says. "It really does cut down on the monotony." it

Special Correspondent John Couretas is a Caledonia, Mich., free-lance writer.

You can reach John Couretas at autonews@crain.com

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