Automakers that have invested more than $200 million in satellite radio are banking on customers spending $9.95 a month to access the new technology.
Satellite radio - which will be broadcast beginning this summer by Sirius Satellite Radio of New York and XM Satellite Radio of Washington - is a format that has no commercials on some of its stations and fewer ads than AM or FM radio on others.
Together, XM and Sirius plan to offer as many as 200 stations of music, news and live entertainment. Some of their content will come from partnering news and entertainment providers, such as Bloomberg News Radio, NASCAR, A&E Television Networks and CNBC.
Signals will be broadcast from studios to satellites and sent back down to special antennas and tuner modules in vehicles. In metropolitan markets, special relay towers will help provide clear signals to vehicles that are traveling through tunnels or are obscured by skyscrapers. (See illustration on next page.) Broadcasts will include music genres ranging from reggae to opera and can be heard across the continental United States.
Sirius, which already has launched and tested its three satellites, will offer 50 channels of commercial-free music. Sirius also will broadcast as many as 50 channels of news, sports and entertainment, which will have an average of about four to six minutes of commercials per hour. The company expects 10 percent to 20 percent of its revenue to come from advertising.
XM does not yet have either of its two satellites launched. Its first launch, originally scheduled for January, was postponed because of a problem with the launching rocket. It has been rescheduled for March 18. The second launch is planned for May. Both satellites then must be tested, which is expected to be complete by mid-June. The company currently is testing its signal using rented satellites and its terrestrial repeaters.
XM plans to offer about 20 commercial-free stations this summer. As many as 80 other stations will have a maximum of six minutes of commercials per hour. Many AM-FM radio stations have about 15 to 22 minutes of commercials per hour, says Dan Murphy, vice president of retail marketing and distribution for XM Satellite Radio.
In its first two or three years, XM expects about 10 percent of its revenue to come from advertising. Betting that it will be able to charge more for ads once the service is established, XM expects this percentage to increase.
The first satellite radio units, as well as Sony Corp.'s XM-compatible plug-and-play model, will be offered in aftermarket retail stores this summer.
Although Sirius and XM believe satellite radio eventually will make its way into homes in the form of plug-and-play units, both companies' initial success lies in automakers' adoption of the new technology and drivers' acceptance.
Ford Motor Co., DaimlerChrysler AG, General Motors and American Honda Motor Co. have invested well over $200 million in XM and Sirius.
XM, in a filing last month with the Securities and Exchange Commission, said it needs $150 million to $175 million to operate through the end of this year. To raise this money, the company plans to issue an additional 5 million shares of stock. It also plans to raise $100 million by selling bonds.
In addition to expected subscription revenue, the company says it needs $250 million to $300 million to operate through the end of 2002.
GM, whose North American president, Ron Zarrella, is on XM's board of directors, is the first automaker scheduled to introduce satellite radio. The automaker plans to launch the service in its 2002 Cadillac DeVilles and Sevilles this fall.
XM's sluggish start is not swaying GM's loyalty to the company.
'GM has made an investment in XM, and we are absolutely committed to them,' said Debbie Frakes, a spokeswoman for GM's OnStar Division. 'XM is ahead in a lot of different areas. At this point, we're confident that we're going to remain on schedule to deliver Cadillacs equipped with XM this fall.'
GM, including its Hughes Electronics Corp. subsidiary, has invested about $120 million in XM. The automaker owns 15 percent of the company.
'Radio hasn't gone through any major transformation in the last 40 years,' said Rick Lee, executive director of satellite radio services for OnStar. 'With cable and satellite TV, you can quickly draw very similar conclusions as to where this is going to evolve.'
Although bullish about satellite radio's anticipated acceptance among new-vehicle buyers, GM, like its competitors, isn't certain how it will charge consumers for the new service. One of the options automakers are considering is to incorporate the $9.95 fee in a monthly lease payment.
An undisclosed portion of the subscription fee will be shared with the automaker. Both Sirius and XM may also offer automakers the opportunity to sponsor satellite stations.
A GM station?
Creating a radio station that would be exclusive to its customers is something GM is considering, Lee said. The automaker may combine OnStar's capabilities with XM's satellite radio, though no timetable has been set.
'A huge strategic advantage is integrating OnStar and XM hardware, so we're bringing to life services that the consumer benefits from,' Lee said. 'We're able to feed you information based on your location.'
Honda, which has invested $50 million in XM, owns 2.5 percent of the company. Honda may launch satellite radio in its 2002 Acura RL luxury sedan.
DaimlerChrysler and Ford have invested $100 million and $20 million, respectively, in Sirius, and are silent equity partners. Daimler-Chrysler owns about 3.3 percent of the company; Ford owns less than 1 percent.
Sirius has enough funds for operation through mid-2002, not including revenue expected to come from subscriptions.
Automakers that have signed up with Sirius would not disclose their strategy for introducing satellite radio in vehicles. But Ford is considering a launch in the 2002 model year, and it is likely the automaker's youth-oriented vehicles, which might include the Ranger pickup and Focus, will be the first to offer the service. BMW and DaimlerChrysler's heavy-truck units also plan to work with Sirius.
In addition to being a potential profit center and communication tool for automakers, satellite radio also provides a new revenue stream for automotive Tier 1 suppliers and suppliers of consumer electronics.
Automakers must include specially designed radios, tuner modules and antennas in their vehicles to receive the satellite signals. Delphi Automotive Systems Corp. of Troy, Mich., and Visteon Corp. of Dearborn, Mich., each have agreements to develop the technology that will accept Sirius or XM broadcasts.
Visteon, which hopes to secure more than 20 percent of the satellite radio market, already has won a contract from Ford to develop satellite radio hardware that will debut on either a 2002- or 2003-model vehicle. Delphi has been chosen to supply GM with radios.
The two broadcasters are working together to create radio units that receive both XM and Sirius broadcast signals. Once that technology is available, automakers that are interested in satellite radio but had not signed an exclusive agreement with either broadcaster as of February 2000 must allow consumers to choose their broadcast provider. That includes all automakers except GM, Ford, DaimlerChrysler and BMW.
A radio that can accept both XM and Sirius signals is expected to be available within four years. A temporary solution may be offered before then, said Sirius spokeswoman Mindy Kramer. The solution would be a radio that could control either an XM or Sirius tuner module consumers could have installed in the trunk of their vehicle.
Murphy said he expects this technology to be ready in 2002, although Kramer would not confirm this timeline.
Will people pay?
Independent surveys conducted by Yankee Group, a Boston technology research firm, suggests consumers are ready to pay for radio that offers less advertising and more variety. Yankee's telephone survey of 4,500 people found that regardless of the cost, 1,800 people would pay for a radio service if it contained the programming they want to hear.
Yankee forecasts the satellite radio market will have 21 million subscribers by 2005 as long as:
XM and Sirius provide superior reception.
There are enough receivers to satisfy demand in the aftermarket and at dealerships.
Automakers and aftermarket distributors market the service aggressively.
Said Yankee analyst Ryan Jones: 'It can't have any weaknesses compared to the free services.'