They're Playing Your Song

Are you ready for XM radio? General Motors and Saab are. Any station, anywhere, anytime, delivered digitally on the car radio -- at $10 a month

You fly out of Los Angeles after being stuck on a runway for an hour, land late in Memphis, pick up the rental car, still have two hours to drive. So you turn on the radio and relax, right?

Not so fast.... You want news, but all you find on the dial is country music. You yearn for comforting jazz and get only screaming hip-hop. Scan the stations and finally find one that's barely O.K. -- and then the signal begins to fade. Where are you, KISS-FM? Relief is on the way.

Over the next few months, the audio angst that has long plagued business travelers, vacationers, and truckers traversing the nation's highways may end. On Sept. 12, XM Satellite Radio Inc. (XMSR ), based in Reston, Va., begins a phased national launch of the first radio signals beamed down from satellites, a service that will be available nationwide in November. "XM will transform radio," predicts President and CEO Hugh Panero. "It's an industry that has seen little technological change since FM, almost 40 years ago."

For $9.99 a month, you will be able to tune in to more than 100 channels of CD-quality broadcast, whether you're in a moving vehicle, in a hotel, or at home. The only hitch is that you'll need a radio in your car that can pick up the digital signal. The programming includes 71 music channels -- many commercial-free -- and 29 news, talk, sports, and entertainment channels, including KISS-FM. "This represents the broadest variety of music programming ever offered to the American public," says Panero, who adds that popular music genres rarely heard on commercial stations, such as reggae, blues, and Latin jazz, will also be available on XM.


  In fact, XM promises to offer a more diverse menu than radio in even the biggest national radio broadcast markets. According to broadcast-industry figures, half of all commercial radio stations use one of just three formats: country; adult contemporary; and news, talk, and sports. And out of 30 music formats, half cannot be found in New York City.

XM's signals, which originate at a broadcast studio in Washington, will run the gamut. The company has forged more than a dozen programming deals with companies including USA Today, CNN, C-SPAN Radio, Discovery, Associated Press, and Bloomberg News Radio -- even Firesign Theatre and MTV. In addition, it will offer channels aimed toward African Americans, and others broadcasting in Spanish and Asian languages. XM will also carry religious programming.

Far from being a coltish telecom startup, XM represents a carefully executed strategy that has been underway for almost a decade. XM was founded as the American Mobile Radio Corp. in 1992, when the Federal Communications Commission designated a part of the spectrum known as the S-band to digital audio, adding a third bandwidth along with AM and FM.


  While the company began developing the technology for mobile radio in a skunk works in Boca Raton, Fla., it wasn't until 1997 that the FCC issued the first two licenses for satellite-digital audio radio service (SDARS). The breakthrough came after a long battle with the National Association of Broadcasters, which saw the new technology as a threat, Panero claims. One FCC license was granted to XM, the other to Sirius Satellite Radio Corp., which is developing a similar service.

Within months, XM contracted with Hughes Space & Communications (now Boeing Space Systems) to build two satellites. It also licensed its radio technology to Pioneer North America for development of satellite car radios. Other consumer electronics companies soon followed.

XM turned to STMicroelectronics to develop a set of "systems on a chip" that would integrate the technology for receiving digital signals with a unique identifying code to allow paid subscriptions -- just like a cellular phone or direct-broadcast television. The linchpin of the strategy was a 1999 package that pulled in $250 million in capital. The money came from Clear Channel and a group of private investors -- $75 million each -- and $50 million each from General Motors and DIRECTV.

The deal combined Clear Channel's 625 radio channels, 19 television stations, and approximately 302,000 outdoor advertising displays, as well as DirecTV's expertise in delivering digital television to more than 8 million subscribers. And it added it to the marketing muscle of General Motors, which made 28% of the new cars sold in 2000 -- all, of course, equipped with radios. A few months later, XM went public with an IPO of $12 a share. The stock now trades just under $10 a share.


  The first satellite, dubbed "Rock," was lofted in March 2001, and the second, "Roll," followed flawlessly in May. The 150,000-square-foot digital studio in Washington ramped up. And prototype radios and special antennas were tested over thousands of miles of driving.

Unlike satellite TV, where the antenna must be aimed directly at a satellite, a vehicle is a moving target. Moreover, trees and buildings in urban areas can block the signal. Ground-based repeaters were installed in major urban areas to overcome local reception problems. "It was a lot easier to solve the problem of getting a satellite signal to a fixed location, like the home, than [to] a mobile environment like the car," says Panero.

The conclusion of the tests: XM blankets the nation with consistent, high-quality sound. The first major order to deliver chips to radio manufacturers went to STM in August. And XM launched a $100 million media blitz with a TBWA/Chiat/Day advertising campaign showing first in 3000 movie theaters, then moving to other media in the fall.

At its initial rollout in San Diego and Dallas in September, XM seems to have all the pieces in place to become a blockbuster. Audio manufacturers, such as Sony, Alpine, Pioneer, Clarion, Blaupunkt, Delphi-Delco, Visteon, Panasonic, and Sanyo, are pumping XM compatible radios and converters for existing sets into retailers such as Sears, RadioShack, Circuit City, and Best Buy.


  Meanwhile, under a 12-year agreement with GM, the carmaker will offer XM as an option in its 2002 Cadillac Sevilles and DeVilles, expanding to 20 models next year. Honda and Saab are also on board. "Automotive is the next big market," says Richard Pieranunzi, president and CEO of Geneva-based STM's North American operations. "Entertainment and information will have a major place in tomorrow's cars."

For America's 3 million truckers, including the 1.1 million long-distance haulers, XM has signed up cabmaker Freightliner. And business travelers can pick up their XM-equipped cars from Avis Rent A Car, which is phasing XM satellite radio into its 1 million-car fleet.

But at $10 a month, will the customers come? Industry statistics seem to support the investors' optimism. Americans live on the road -- and some 75% of them choose radio over CDs and cassettes when they are in the car. A Yankelovich Monitor Study last year noted that the average U.S. driver now spends two hours a day in his or her car.

As for monthly subscriptions, just add another small bite to the bills from the cell-phone, Internet-service, and cable-TV providers. According to the National Cable Television Assn., 68% of households with television subscribed to basic cable television in 2000 at an average monthly cost of $30, and a study by Paul Kagan Associates found that more than 11% of television households now subscribe to satellite television.


  Kagan estimates that by the year 2007, Internet media-services revenues will grow from $6.1 billion to $63.1 billion, wireless services revenues will more than triple from $33.4 billion to $111.6 billion, and cable and satellite revenues will increase from $33.8 billion to $91.9 billion.

XM's projection is in keeping with the rest of the pack. "The major entry point is the 16 million to 17 million people who buy cars each year with a factory-installed stereo and the 10 million or so people who buy replacement radios for their cars from electronics retailers," says Panero. The bottom line: XM expects to break even in 2004, when it expects to have 4 million subscribers.

Meanwhile, Sirius, based in New York, is still a player in the game. It has put up three satellites, built a broadcast studio, and forged partnerships with receiver manufacturers and auto manufacturers including Ford, Daimler Chrysler, and BMW. It plans to offer 50 channels of audio broadcast for $12.95 a month. But so far, Sirius has not announced a launch date.

For now, XM is in the driver's seat for the next wave in radio. But the promise of both contenders is clear: We'll be able to listen to whatever we want to hear, wherever we are.

By Alan Hall in New York

Edited by Beth Belton