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WHY MEL KARMAZIN IS SIRIUS ABOUT RADIO ADVERTISING

An Interview With the New Satellite Media Mogul

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NEW YORK (AdAge.com) -- Sirius Satellite Radio's ad revenue will rocket from $1 million to $100 million by 2007, CEO Mel Karmazin predicts, turning one of the hottest consumer electronics segments into one of the fastest-growing advertising mediums.
Photo: Darryl Estrine
Mel Karmazin sees satellite radio ultimately matching the audience reach of cable or satellite TV.

But the bullish executive will have to reconcile his aggressive advertising growth plan with subscribers’ strong resistance to commercials.

In an exclusive, broad-ranging interview with Advertising Age, Mr. Karmazin said he is in exploratory talks with the likes of Apple, Sony and Motorola to embed satellite capabilities into iPods, hand-held game players and cellphones.

“One day maybe iPod will be interested in putting in a satellite radio,” said Mr. Karmazin. He said he last talked to Apple CEO Steve Jobs late last year, and while he didn’t specify the topic of that talk, added, “The conversations are always ongoing about things we can do together, even if it’s not necessarily music but some of our other content. We’re constantly talking to all potential partners, including cellphone people and game companies, to make the product as widely distributed as possible.”

His bullish outlook for the nascent -- some say interim -- radio technology includes Sirius turning a profit by 2007. He predicts satellite radio, now with five million subscribers (about 1.4 million for No. 2 Sirius), will ultimately match the reach of cable and satellite TV, with about 100 million subscribers.

Mr. Karmazin, who recently hired two veteran radio executives to build a sales force, said Sirius will record ad revenue of up to $8 million this year, $50 million in 2006 and $100 million by 2007. Yet he has no plans to introduce ads, or even sponsorship opportunities, on Sirius’ 65 music channels, since commercial-free programming is the lead factor in driving paid subscriptions.

Instead, Sirius plans to sell ads on its 55 news, talk, entertainment and sports channels, relying for growth on flexible ad units -- including 2-minute commercials and program sponsorships -- premium ad pricing (based on less clutter), and satellite’s national footprint.

“The advertising piece is a very material piece,” said Mr. Karmazin, 61, the former Viacom chief operating officer who joined Sirius last November. Ad revenue in 2007 combined with an expected 6 million paying subscribers will generate profits for Sirius that year, he said.

In his talk with Ad Age, Mr. Karmazin also shared his views on the de-consolidation of the company he formerly led, Viacom; the specter of the Federal Communications Commission regulating satellite radio; and the possibility that Sirius and rival XM—which has 3.8 million subscribers -- will eventually merge. A full transcript of his comments appears below.

Advertising Age: This medium is either going to transform radio or be an interim step to some new form of digital audio. Which is it?

Mr. Karmazin: Satellite radio will be bigger than cable and satellite television combined today. Cable and satellite television have about 90% penetration in 108 million homes. If you add our market to the home market, there’s 200 million cars on the road, so I believe the market is going to be bigger than most believe it’s going to be. The single most important benefit that satellite radio has is the two streams of revenue. We’re assuming that advertising is going to be anywhere from 10% to 30% of our revenue. So you take the 30% model, we still see 70% of it coming from subscriptions. We also have the ability to make things national, so that when Howard Stern joins, instead of being syndicated in 40 or 50 markets, he will be available throughout the U.S. There’s no question in my mind that this thing is not only for real, it’s huge.

AA: How much do you worry about advances such as streaming audio, or iPod cutting deals with automakers?

Mr. Karmazin: There’s always competition. I remember when they put 8-tracks in the car, everyone said, ‘What’s going to happen to radio?’ Listening to radio is a very different experience than listening to your own music. The iPod product is a great product; it will be ubiquitous. But it will co-exist with radio. Before you have satellite radio, you’re spending about 47% of the time listening to FM radio, 37% listening to iPod or a CD player or other music and 12% listening to AM. You put a satellite radio in your car, you’re spending 83% of your time listening to satellite, 7% to other music devices and the rest is split between AM and FM. It’s more likely that the iPod use in the car will be dramatically lower because of satellite radio.

We will have a new-generation chip set that will be out there for the holidays and it will put the sort of PVR device in the satellite radio so you’ll have storage of your music. One day maybe iPod will be interested in putting in a satellite radio.

AA: What was the last conversation you had with Steve Jobs?

Mr. Karmazin: It was before the [Consumer Electronics Show], before the end of last year. The conversations are always ongoing about things we can do together, even if it’s not necessarily music but some of our other content. We’re constantly talking to all potential partners, including cell phone people and game companies to make the product as widely distributed as possible.

AA: How do you reconcile the advertising potential of this medium with the appeal to subscribers of its commercial-free nature?

Mr. Karmazin: You should assume that we will never -- well, never’s a long time -- have commercials on our music stations. We have 65 music channels. We then have 55 other channels that are mostly news, talk, sports, where we will have limited commercial inventory. We want people to see a definite distinction between satellite and terrestrial radio so even when we run commercials, there will be far less clutter. We haven’t yet disclosed the number of commercials the Howard Stern show will run but they will be materially, noticeably lower than the number of commercials he’s currently running. Supply and demand will tend to dictate that the price per unit will be higher if there’s not as much inventory available

AA: Last year you sold $1 million in ad time out of $67 million in total revenue, but you think you can get to 30% of revenue?

Mr. Karmazin: Most analysts forecast 10% to 30%. I don’t need to go to 30%, but I’m giving you the sense ... that $1 million becomes $7 [million] or $8 [million] this year. That becomes $40 [million] to $50 [million] next year. That becomes about $100 million the following year. The base is very small. The advertising piece is a very material piece, and we think it will even get more national advertisers to use radio because for the first time they have this national platform.

AA: How else will you differentiate what you do with advertisers?

Mr. Karmazin: We have the opportunity to creatively accommodate advertisers. When terrestrial radio’s trying to get more advertisers to go to 30s, we’ll give you a two-minute commercial. You want to buy out a channel and be the sole sponsor? We can entertain it.

AA: You put a qualified never on advertising on the music channels. Why not do other things there, like have someone sponsor a certain hour?

Mr. Karmazin: It’s such a strong, compelling argument when people go into retail to buy the product. Traditionally, this commercial-free idea of music was the No. 1 driver for why people subscribe to Sirius. The No. 1 annoyance consumers have to music on radio has been the commercials. Our business works so well with that paid subscriber that we don’t need to mess with it by putting commercials on it.

AA: Don’t you need better audience and listener data as you become more of an advertising business?

Mr. Karmazin: We don’t think that necessarily having Arbitron or Nielsen ratings is what companies are really interested in. They’re interested in getting results for their investment. Anything we need to do in the areas of research, we will. We’re also very focused. We have a gay lifestyle channel, and advertisers who want to reach that market are on with us now. When advertisers feel they need to have these more quantifiable research data, we can obviously consider it.

AA: When are you going to be profitable, and what’s the critical mass of subscribers you need to get there?

Mr. Karmazin: In 2007, we generate positive cash flow. If you look at most analysts, they would have us in 2007 at the 6 million subscriber level. We haven’t given more guidance than that, but that’s about where it becomes profitable. Then, the satellites are up, you’ve paid for your programming, so once you’ve exceeded your fixed costs an extraordinary amount of the incremental drops down to your bottom line.

AA: What is terrestrial radio’s biggest weakness?

Mr. Karmazin: Terrestrial radio’s a great business. It’s just become a mature business. I look at radio as very similar to newspaper business, very similar to TV in that it is a GDP growth business. It’s withstood an awful lot of competition, and it will be around for a very long time.

In competing with satellite radio, they have definite disadvantages. One is that our sound quality today is better. The other is the commercial-free nature of the music. The other advantage we have has been our bandwidth, that when a local radio station can run one football game in a market, we’re running every football game that’s being played.

AA: There are questions about whether this market can sustain two players. Why can’t I get football and baseball? What’s going to happen there?

Mr. Karmazin: I don’t know what will happen, but I certainly wouldn’t rule out anything that is in the American public’s best interest. You are dealing with two companies -- it would be great if there was a monopoly, but the second best thing to a monopoly is a duopoly. And if the market is as big as we think it is, you’re going to get two very profitable companies. There is nothing inherent that would ever preclude the two companies from either having interoperable radio or shared content. That’s not the current business plan, but nothing would ever stop that.

AA: Are there talks along those lines?

Mr. Karmazin: No. The only talks that are going on right now is we committed to the [Federal Communications Commission] that we would develop an interoperable radio. We have a team of people working in a lab that both companies are funding to get interoperable radio done. I believe in about a year there will be such a device. What you do with that device is to be determined.

AA: What’s the likelihood that these companies will be merged?

Mr. Karmazin: I don’t know where the government would be on that. I know that at the time when Echostar and Direct TV were talking, the government thought there was an interest in having two companies on the TV side. There certainly would be economies of scale and efficiencies if there was a combination of those companies, but we haven’t had any discussions.

AA: But you’re not automatically opposed to it?

Mr. Karmazin: The business model that we are following is that we are an independent company. We’re growing dramatically, and prospects for the future are really good. We don’t need to combine with anybody [or] be part of a bigger company.

AA: XM is focused more on distribution deals while Sirius has played up content deals. What are the plusses and minuses of each strategy?

Mr. Karmazin: XM started ahead of us, so their next generation chip set was always out before ours. That head start enabled them to have a lead on the product and have a lead on some of the distribution deals they had with automakers. In 2002, we had 8% of the satellite radio market. Most analyst estimates have us well over 30% of the market this year.

At the end of the day what is going to make one company bigger than the other company -- and I do think this is a Coke/Pepsi -- is the one who gives the consumer and advertiser the best content.

AA: Howard Stern did a lot to raise awareness of the brand name of Sirius. What else do you guys need to do in terms of consumer marketing?

Mr. Karmazin: Our brand awareness has gone from 6% in 2003 to 36%. But there’s still a big market we haven’t penetrated. We have a very large advertising budget. We will continue to do campaigns: TV, newspapers, radio when the stations aren’t paranoid to not want us there.

AA: Hyundai is going to make XM standard next year. Ford is adding Sirius as a factory-installed option. How important are those steps?

Mr. Karmazin: The fact for satellite radio that a company has committed already to make it standard is a big deal and that sends a message to the entire automotive industry.

AA: What do you think are the odds that Congress and the FCC will move to regulate satellite radio when it comes to decency standards?

Mr. Karmazin: I can’t deal with the politics of it. Indecent speech, and Howard’s show is not indecent, is protected speech under the Constitution. The interest that the government had in indecency was protecting children. In free, over-the-air broadcasting, you can’t restrict the program from coming into your home. In the case of cable and satellite television and satellite radio, you can restrict it. So the idea of the government regulating HBO or regulating any of the cable TV channels or satellite radio channels, I don’t see what the legal basis of it is.

AA: What does the potential deconsolidation of Viacom say about the growth prospects for traditional media?

Mr. Karmazin: The two growth areas in media today are Internet and satellite radio. This is huge growth that continues for many years. Whether or not you look at a company that’s together or separate or broken up, you look at the categories of advertising that are growing. Cable advertising is still growing in double digits. Terrestrial radio, terrestrial TV, newspapers, magazines are growing modestly.

AA: Is it a death knell for cross-platform ad deals?

Mr. Karmazin: No. Generally speaking, it’s better to be bigger than smaller. When P&G and Gillette are combined, at a time when there’s going to be even more consolidation on the advertising agency side ... at the time when you have to negotiate with those people and they are so much bigger and have leverage, the bigger you are, the stronger you are. I’m not in a big company that has that diversified asset base, but if I was, I would capitalize on the strength of all of those assets.

AA: What impact do you think consumer-empowering technologies such as Tivo, iPod and Sirius will have on traditional advertising?

Mr. Karmazin: There are just going to be more choices. If you think about the big media, where advertisers are spending a lot of money, they are going to be less valuable. Everything that’s going on is great for the consumer, it’s not so great for the big media companies.

AA: And for advertisers?

Mr. Karmazin: There are challenges, there are difficulties, but I also think there are opportunities.

AA: What’s your favorite Sirius channel?

Mr. Karmazin: CNBC.

AA: Which of your competitor’s programs do you most wish you had?

Mr. Karmazin: I would like to have had baseball, but XM paid about $60 million dollars a year for the contract, and that’s more than we paid for all of our sports.

AA: Which show or format is not in satellite radio now that you want?

Mr. Karmazin: We are pretty well strategically complete, although you’ll see a lot more content things, such as more Asian programming. Once Howard started, the switchboard lit up. Not just sales people calling who would like to be part of a growth company again, but a lot of talent that would like to migrate from terrestrial radio to satellite radio.

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