Growing pains for satellite radio

John W. Schoen Senior Producer • Profile • E-mail

Spurred by deals with high-profile talker Howard Stern and talk show goddess Oprah Winfrey, along with deep price cuts in satellite radio receivers, Sirius Satellite Radio and rival XM Satellite Radio are writing a new chapter in the history of radio.

But it’s not at all clear how this chapter will end.

The optimists point out that the two rapidly growing companies have a combined customer base approaching 10 million subscribers, each paying about $150 a year to hear hundreds of commercial-free music channels, as well as sports, talk and lifestyle programming.

But the half-empty types point to the fact that each company has lost more than $2 billion over the past four years, as they spent heavily to add programming, promote their brands and subsidize the cost of the receivers sold to new customers. On Thursday, XM, the bigger of the two players, said that losses widened in the fourth quarter to $270 million. Sirius, which reports fourth results Friday, is expected to report losses of more than $290 million. Neither company is expected to turn a profit for at least several more years.

Meanwhile, new competitors are coming down the pike, as wireless broadband Internet service begins to take hold. Cell phones, MP3 players and Web-based radio may soon converge on cheaper, more powerful portable handsets. And Auto makers are busy working to develop wireless broadband services for your car.

So the question both companies face is: How long can we afford to continue to lose money? The answer to that question has sparked a high-level corporate battle at XM that resulted in the departure Thursday of a company board member, who warned of "a significant chance of a crisis on the horizon."

By any standard, satellite radio’s growth so far has been meteoric. From a modest base of a few hundred thousands subscribers three years ago, XM now boasts about 6 million customers, about twice as many as rival Sirius. Spurred by steep cuts in the price of receivers — now selling for as little as $30 to $50 — subscriber growth exploded last year. Some analysts predict the market will hit 40 million in four years.

“This is a razors-and-blades business,” said Craig Moffett, an analyst with Sanford C. Bernstein. “Discounting of radios is one of the obvious levels they've got to stimulate subscription demand, because over the long term that's where they make their money.”

Because so much radio listening takes place in cars, both Sirius and XM have made exclusive deals with automakers to offer their receivers in new cars. XM has locked up General Motors, which plans to install 1.5 million XM radios in new cars this year. XM has made similar deals with Toyota, Nissan, and Hyundai. Sirius, will have its receivers installed in new Ford and DaimlerChrysler vehicles.

But the big draw is programming, and both XM and Sirius have invested heavily to give subscribers plenty of choice. Each service offers subscribers more than 60 music channels, without interruptions from commercials (or, in some cases, from DJs) and dozens more channels of talk, news, sports, traffic and weather.  Sirius has signed a $220 million deal to carry National Football League games; XM paid $650 million for Major League Baseball.

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