Sirius XM should dump satellites for the Web.

Sirius XM should dump satellites for the Web.

Sirius XM should dump satellites for the Web.

Innovation, the Internet, gadgets, and more.
Feb. 12 2009 5:08 PM

Satellite Diss

Sirius XM bet on a losing technology. Here's how the company can save itself.

Howard Stern. Click image to expand.
Howard Stern 

Satellite radio is falling out of orbit. Sirius XM, the product of a merger between America's founding satellite radio companies, is reportedly unable to meet a $175 million debt payment due at the end of the month. It has hired bankruptcy advisers and has been talking to satellite TV companies about a possible takeover.

None of this is surprising. Though many of Sirius XM's problems have been exacerbated by the economy—the company loaded up more than $3 billion in debt with the expectation that cheap credit would remain plentiful—satellite radio has always been an idea out of step with the times. Like print newspapers, travel agencies, and record shops, Sirius XM offers what seems like a pretty great service—the world's best radio programming for just a small monthly fee—that has, in practice, been eclipsed by something far cheaper and more convenient: the Internet.

Go online and you can find just about any music or talk show that you want. It's pretty much all free, and it's computationally personalized to suit your tastes. You can get these services on the go, too. Apple's iPhone, Google's Android platform, and other smartphones can stream a huge lineup of radio content through cellular networks. There are still many hiccups—3G wireless networks don't yet blanket the nation nearly as well as Sirius XM's seven geosynchronous satellites—but Internet radio's reach is sure to expand. Indeed, it's already mesmerizing: Load up a program like Pandora or the Public Radio Tuner on your iPhone, plug it into your car's audio-in jack, and you've got access to a wider stream of music than you'll ever get through satellite.

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It's hard to blame entrenched industries for failing to see how new technologies might upend their operations. But unlike other business models that were killed off by the digital transition, satellite radio isn't ancient. The dream began in the late 1980s, when Martin Rothblatt, a lawyer, entrepreneur, and satellite enthusiast, began to lobby the Federal Communications Commission to devote a part of the spectrum to radio beamed from the sky. (Rothblatt, who later underwent a sex-change operation and became Martine, now runs the Terasem Movement, an organization that aims to educate the public on "creating consciousness in self-replicating machines.") In 1992, two companies—Rothblatt's, which later became Sirius, and XM—bought licenses to the spectrum, and over the next decade they set about starting extra-planetary radio stations. They launched satellites, developed portable receivers, and built up huge programming facilities. By the time they began operations—XM in 2001, and Sirius in 2002—they were already outdated.

Remember, this was after the advent of Napster—people were already used to getting every song on demand. Sirius and XM found that the only way to convince customers to pay $10 or more a month for radio was to offer exclusive acts. This proved expensive. In 2004, Sirius signed Howard Stern to a $500 million, 5-year contract; in a bombastic press release, Stern called Sirius "the future of radio," and the company declared the move "the most important deal in radio history." Soon after, Oprah signed with XM. Martha Stewart went to Sirius. Besides talent, the companies also spent a bundle on subsidies to automakers to get satellite receivers pre-installed in cars. And, of course, they had to keep running those satellites.

Altogether, the economics of satellite radio are ugly: Sirius XM—after a long regulatory review, the companies merged last summer—now pays about $100 million a year to maintain its satellites; about $1 billion on programming and royalties; and about $600 million on various "customer acquisition costs," including discounts and subsidies. For a while, these huge outlays worked—the company has about 19 million subscribers—but dampening car sales have cut its growth rate. Sirius and XM never made a profit, and last fall, the merged company predicted that it wouldn't see its first positive cash flows until 2012.

In retrospect, the most important announcement in the recent history of radio had nothing to do with Howard Stern. Instead, it was Apple's unveiling of the iPod in the fall of 2001. The device didn't look like a radio killer—after all, it couldn't receive any signals. But the iPod could connect to your computer, and your computer was connected to the Internet—so, really, the iPod could get everything. In addition to carrying all the music you could get through your favorite file-sharing app, digital music players spawned podcasts—essentially time-shifted radio—which attracted both talented amateurs and established stars.

Then, with the introduction of the iPhone, the iPod went live. How could satellite possibly compete? Music is the nichiest of all popular arts; the more people a radio station reaches, the more people it's got to satisfy, and the more likely you are to hear stuff you hate. Even with its plethora of channels, satellite is still a one-way, mass-media technology, while the portable Internet allows endless interactivity. Don't like a song? Skip to the next one. Like something? Press thumbs up. That's how Pandora works—over time, the station learns about your tastes, and eventually begins to serve up old songs and new stuff that you can't resist. The Internet allows all kinds of other neat tricks: FlyCast, a radio app for the iPhone that features tens of thousands of both terrestrial and Internet stations, lets you skip back to the start of a talk show if you joined late. You can't do that on satellite.

Despite all of this gloom and doom, the Internet doesn't have to be the death of Sirius XM. If the company can get its debt in order, it might find that the network can be its savior. My advice: Forget the satellites, the special radios, and the huge customer acquisition costs. Instead, focus on your content—and figure out a way to get it to the largest possible audience at very low prices. Sirius XM should make sure that Howard Stern and Oprah and Bob Dylan's Theme Time Radio Hour and the NFL and Major League Baseball are available on every Internet-connected device on the market.

At the moment, the company charges $13 per month for Web access to non-satellite-radio subscribers. (Satellite customers used to get online access for free, but Sirius XM recently started charging $3 a month.) If Sirius XM slashed that price dramatically—which it could afford if it stopped paying off automakers—it would see a huge rise in online subscribers. These people would pay to get Sirius not only on the Web but on their phones. There have long been rumors that Sirius is building an iPhone app; the company ought to make those rumors a reality, plus get its service on Android and the BlackBerry. And be sure to make it the cellular radio app, packed with features that allow for personalization—great enough that people will pay $5 a month for it. Also, start doing podcasts! The Stern show is one of the most pilfered programs online. I'm sure that lots of people trade MP3s of his program because they just don't want to pay for it. But I'm guessing that lots of people would pay $1 for an ad-free version of yesterday's show that they could listen to on the train or at the gym. And I'm sure Sirius XM can come up with a bunch more ideas—once you realize that your potential audience is everyone with a Web connection, the possibilities abound.