Behind the Music

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When people are exposed to the idea of satellite radio, more than 35 percent express interest and 28 percent say they'd buy it.

Through XM or Sirius, marketers will have a national reach of consumers through a single broadcaster.

Imagine being able to drive anywhere in the country without losing your connection to your favorite radio station.

By year's end, two companies will likely give consumers that option. New York City-based Sirius Satellite Radio and Washington, D.C.-based XM Satellite Radio each have announced plans to begin broadcasting 100 channels later this year. For $9.95 a month, drivers can travel anywhere in the country without losing the ability to tune in to any of 100 stations. Sirius and XM have invested billions of dollars in satellite technology. General Motors, Ford, and several other major car manufacturers — some of which are strategic investors in XM or Sirius — are poised to offer three-band radios (AM/FM/SAT) in select high-end 2002 models as a first step toward making them available across their entire lines. Sears Roebuck, Best Buy, Circuit City, and other consumer electronics chains have signed on to market satellite-compatible car radios through their retail outlets. Satellite radio signals the most widely anticipated change in the industry since the introduction of FM some 30 years ago. But the question remains: Is it a niche or a mass product?

For now, truck drivers are among the few to inquire about satellite radio directly. At Tommy McKenzie's electronic supply store in Columbus, Georgia, for example, only tractor trailer drivers appear to show any interest in the new product. But because the technology is easy to understand (you simply tune it just like any other radio), and the car radio market is so huge — 17 million new cars are sold every year, with 11 million car radios installed in the after-market — satellite radio has the potential to become “the fastest-selling consumer product of all time,� contends Ryan Jones of the Yankee Group, a Boston-based consulting firm. Jones projects that the fledgling industry will rocket from nearly 1 million subscribers after the first full year of introduction to 21 million after five years.

Satellite radio turns the established radio business on its head. Unlike traditional “terrestrial� radio, which is 100 percent advertiser supported, satellite radio will depend on advertising for only 10 percent of its revenue at the outset, rising to perhaps 20 percent after the first five years, estimates Sean Badding, senior analyst at the Carmel Group, a Carmel, California-based consulting firm. Badding projects that the industry's subscription fees could grow to as much as $3.3 billion by 2007.

Jones and Badding's optimism relies on so-called “heavy-use listeners� becoming satellite converts. These heavy users tune in their car radios for more than an hour a day, and account for an impressive 49 percent of the total radio audience. What's more, these captive listeners are spending more time in captivity. A recent study in Los Angeles by the Southern California Broadcasters Association, Arbitron, and Edison Media Research found that 62 percent of respondents reported spending more time in traffic than a year ago.

And while there are certainly other listening options in most cars, radio is the overwhelming favorite. A study by Arbitron, the New York City-based media research firm, found that 87 percent of drivers say listening to the radio was their most frequent in-car activity; only 13 percent listed cassettes, CDs, and other options. Arbitron also found that 17 percent of Americans say “their local radio options do not serve their music tastes.� Additionally, the company reports that when people are exposed to the concept of satellite radio, more than 35 percent express interest — and at a price point of $9.95, 28 percent say they would buy it.

Perhaps that's because commuters have more money to spend on their cars. Commuters, Jones notes, have an average annual income of $52,500, compared with the national average of $38,885. Yankee Group's Digital Home Entertainment Survey also confirmed that this well-heeled audience is looking for change: 46 percent wanted “fewer commercials,� and 33 percent wanted “more variety.�

More variety and fewer commercials are exactly what XM and Sirius plan to provide. At least half of each company's offerings will be commercial free; the balance will run six minutes of commercials per hour, compared with the average of 20 minutes. While the actual channels are still under development, those already in the works are undeniably intriguing. Among the niche-oriented musical channels mentioned so far: Boleros (Latin standards from the 1930s to the 1960s), reggae, blues, jazz, and emerging country stars. Talk channels will include content provided by C-SPAN, Sports Byline USA, A&E, Biography, Bloomberg News Radio, and Asia One. (In most cases, Sirius will swap content for carriage, occasionally splitting ad revenues with the content providers.)

Most industry experts expect the first buyers to be early adopters — affluent younger males who are attracted to all the latest gadgets. That's in part why General Motors is first introducing satellite radio in two Cadillac models. “We want to change the market,� skewing downward, says Todd Carstensen, a GM spokesman. Cadillac's buyers tend to range in age from 45 to 60.

Traditionally, companies that use radio to reach consumers have had to target specific cities and rely on local media buys. Through XM or Sirius, marketers will have a national reach through a single broadcaster, adds Sirius's Elana Sofko. “It's one-stop shopping with us.� She claims satellite broadcasters will also give advertisers more control over the content that surrounds their messages. “We can guarantee their environment and exact time of day,� something most local broadcasters do not offer, Sofko notes.

That apparently is music to the ears of some of the largest advertising agencies, which have already committed to buying bulk packages from XM. But others are more cautious. While Matthew Warnecke, director of network radio services for Grey Advertising's Medicom, admits that he's “really excited� about satellite radio, he's yet to make any buying commitments. “It remains to be seen where it will net out,� he says. “First we need some sense of where the tuners are going to go and how widespread they will be.�

Concern about tracking the size of the audience, once it materializes, has prompted Arbitron and Statistical Research Inc., a Westfield, New Jersey-based market research firm, to begin looking into the problem. Both XM and Sirius have signed research agreements with SRI, which is well known for its audience measurement services. For its part, Arbitron is testing a listener diary in the first quarter of 2001 that includes a column for satellite and Internet radio.

The rise of Internet radio is another uncertainty lurking on satellite radio's horizon. Internet radio offers thousands of channels for free, yet so far it is not available in the car. But Kurt Hanson, publisher of the Web-based RAIN: Radio and Internet Newsletter, notes that while the development of wireless Internet equipment “is a couple of years away, so is acceptance of satellite radio.� Which one will achieve a critical mass first? “I think the jury is still out,� he says.

Most industry observers expect traditional radio stations to be tuning in to their new competitors, but not doing anything to thwart their would-be rivals — at least at first. “This is not a proven technology or service, so I suspect it will be business as usual for the first 24 months as traditional radio sees how this progresses,� says the Carmel Group's Badding. Michele Skettino, vice president of marketing for Interep, a New York City firm that sells advertising for traditional stations, confirms that attitude: “We expect it will take time for a sizeable audience to grow. We expect technical difficulties at first. With the roll-out of FM radio, it took a long time — almost 10 years — to reach a mass level.�

Advertisers who rely on traditional radio should be on the lookout for audience slippage. “I'll be watching for a drop-off in existing listenership after a couple of years,� notes Peter Kern, a New Gloucester, Maine-based media consultant who buys radio time for clients such as Budweiser and Tom's of Maine.

It's still uncertain exactly how many listeners will tune in — and when. Some analysts worry that one or both companies may miss this year's crucial Christmas season. XM has yet to launch the second of its two satellites, the first was delayed until March. Sirius has launched all three of its satellites, but is still conducting on-ground performance tests. Skeptics also point out that many listeners are attached to local broadcasters, and may resist paying for something they are used to getting for free. After having difficulty selling monthly subscriptions for other car-related services such as the security system Lojack, Bob Charlantini, owner of Car Stereo Systems in Arlington, Massachusetts, is doubtful of satellite radio's potential for success. “One customer came in and asked about [satellite radio], but when I told him there'd be a monthly fee, he said, ‘forget it.’ They can buy a CD changer; it's much less expensive.�

That may be true, but auto manufacturers are hoping to ease the financial pain for car buyers by bundling the cost of the receiver into the vehicle purchase price and building the monthly car subscription cost into the monthly car payment. “That's an ingenious component to the business model,� observes Walter Sabo, president of Sabo Media, a New York City-based media consulting company. Sofko adds that Sirius will bill its other subscribers by major credit card so they won't have to endure a separate bill in their mailboxes. “That should speed penetration,� she says. Stay tuned.

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