IS HE SIRIUS?

By Published on .

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.

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. An edited transcript 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 United States. 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 eight-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 is a great product; it will be ubiquitous. But it will coexist 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 the rest 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 also will have a new-generation chip set for the holidays that will put a sort of PVR device in the satellite radio for 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 cellphone 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 Howard Stern will run but they will be materially 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 ads, but you want to 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 ads on music channels. Why not try other things there, like have a company sponsor a certain hour?

Mr. Karmazin: It's such a 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 commercials.

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 very focused. We have a gay-lifestyle channel, and advertisers who want to reach that market are on with us. When advertisers need to have 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. That's about where it becomes profitable. Then, the satellites are up, you've paid for programming, so once you've exceeded fixed costs an extraordinary amount of the incremental drops 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 newspapers, very similar to television 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.

AA: There are questions about whether this market can sustain two players. What happens there?

Mr. Karmazin: 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 is a duopoly. 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 preclude the companies from having interoperable radio or shared content. It's not the current business plan, but nothing would stop that.

AA: Are there talks on those lines?

Mr. Karmazin: No. The only talks that are going on is we committed to the FCC that we would develop an interoperable radio. In about a year there will be such a device. What you do with it 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 DirecTV were talking, the government thought there was an interest in having two companies. But we haven't had any discussions.

AA: You're not opposed to it?

Mr. Karmazin: The business model we are following is that we are an independent company. We don't need to combine with anybody.

AA: XM focused more on distribution while Sirius has played up content.

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

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 is protected speech. 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 TV and satellite radio, you can restrict it. So the idea of the government regulating HBO or any of the cable channels or satellite radio channels, I don't see the legal basis.

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

Mr. Karmazin: The growth areas in media today are Internet and satellite radio. This is huge growth that continues for many years. Cable advertising is still growing in double digits. Terrestrial radio and 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. When P&G and Gillette are combined, when there's more consolidation on the advertising side ... when you have to negotiate with those people and they are so much bigger, 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.

Read the full interview with Mel Karmazin at AdAge.com

Sirius Satellite Radio

2004 revenue: $67 million

2004 ad revenue: $1 million

2004 loss: $456 million

Subscribers: 1.24 million, as of Jan. 24

Number of channels: 120, 65 of them music

Top programming talent/partners: Howard Stern (2006); Tony Hawk; Lance Armstrong; Eminem; 50 Cent; NFL; Nascar

Monthly subscription fee: $12.95

In this article:
Most Popular