As Satellite Radio Takes Off, It Is Altering the Airwaves

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From the New York Times:

As Satellite Radio Takes Off, It Is Altering the Airwaves

By LORNE MANLY

Just a blink after the newly emergent titans of radio - Clear Channel Communications, Infinity Broadcasting and the like - were being accused of scrubbing diversity from radio and drowning listeners in wall-to-wall commercials, the new medium of satellite radio is fast emerging as an alternative. And broadcasters are fighting back.

The announcement on Friday by XM Satellite Radio - the bigger of the two satellite radio companies - that it added more than 540,000 subscribers from January through March pushed the industry's customer total past five million after fewer than three and a half years of operation. Analysts call that remarkable growth for companies charging more than $100 annually for a product that has been free for 80 years.

Total subscribers at XM and its competitor, Sirius Satellite Radio, will probably surpass eight million by the end of year, making satellite radio one of the fastest-growing technologies ever - faster, for example, than cellphones.

To keep that growth soaring, XM and Sirius are furiously signing up carmakers to offer satellite radio as a factory-installed option and are paying tens of millions of dollars for exclusive programming. On Sunday, XM began offering every locally broadcast regular-season and playoff Major League Baseball game to a national audience, having acquired the rights in a deal that could be worth up to $650 million over 11 years. And Howard Stern is getting $500 million over five years to leave Infinity and join Sirius next January. Each company offers 120 or more channels of music, news, sports and talk.

Though satellite radio is still an unprofitable blip in the radio universe, it is pushing commercial radio to change its sound. Broadcasters are cutting commercials, adding hundreds of songs to once-rigid playlists, introducing new formats and beefing up their Internet offerings. A long-awaited move to digital radio could give existing stations as many as five signals each, with which they could introduce their own subscription services - but with a local flavor that satellite is hard pressed to match.

"At the end of the day, people want to hear what's going on in their local market," said Joel Hollander, chairman and chief executive of Infinity Broadcasting, owned by Viacom and the country's second-largest broadcaster behind Clear Channel. "People are emotionally involved with local radio."

That emotional connection - to music, personalities, information - has always translated into strong feelings about radio. Twenty-seven years ago, in "Radio, Radio," the singer Elvis Costello ranted about the medium's programming choices, singing that "the radio is in the hands of such a lot of fools, tryin' to anesthetize the way that you feel."

But such criticism pales beside the complaining unleashed by Washington's deregulation of radio, beginning in 1996. The loosening of ownership restrictions set off a frenzy of acquisitions, transforming what was essentially a mom-and-pop business into an industry dominated by a handful of giant broadcasters.

To satisfy Wall Street, station owners cut costs by combining station operations in a given market and pumping up the number of advertisements per hour; meanwhile, programming formats became narrower and more uniform. All these moves nearly doubled the industry's revenue in five years, but they also gave satellite radio its opening.

"In many cases, radio almost killed the golden goose by getting it to lay too many eggs," said Sean Butson, an analyst with Legg Mason. "If you're going to have a third of an hour of commercials, you're going to turn a lot of people off, and they're going to look for an alternative." (Legg Mason owns stock in XM.)

Founded in the early 1990's, XM and Sirius endured tough financial times while waiting for the Federal Communications Commission to divide up the satellite bandwidth and while preparing to launch their satellites. XM finally began offering its subscription service in late 2001, Sirius in mid-2002.

Car owners - the companies' prime targets - have clamored for the service once they have been introduced to it.

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Continued:

Joseph O'Neal of Royal Palm Beach, Fla., is a self-proclaimed Elvishead who laments that his local stations do not play enough of the King. So Mr. O'Neal, a 44-year-old drywall contractor, is a zealous convert to Sirius, the home of Elvis Radio.

Mr. O'Neal installed the service in his truck in January. Between Elvis, blues and Sirius's six country music channels, he said, "I haven't listened to regular radio since - not once."

That kind of devotion was eye-opening for Mel Karmazin, a longtime radio executive hired last year as chief executive of Sirius after he stepped down as president and chief operating officer of Viacom. "The thing that surprised me the most was the passion the subscribers had for the product," Mr. Karmazin said.

Both companies offer stations devoted to the most popular songs, but it is their national reach and dual revenue streams - subscriptions and advertising sales on nonmusic channels - that allow them to offer niche programming. Genres that receive little exposure on commercial radio, like bluegrass, reggae or talk devoted to African-American affairs, get their own channels on satellite services. Individual ratings matter little; listener satisfaction counts for much more, because it determines how long subscribers will keep paying $12.95 a month.

Indeed, formats ignored by commercial radio or relegated to its wee hours have emerged as some of the most popular.

For instance, XM Comedy, a channel that features the often raunchy stylings of Chris Rock and others, is among the company's 10 most-listened-to.

"Comedy - who knew?" said Hugh Panero, XM's chief executive.

A glimpse of how these channels are programmed highlights the differences between satellite and commercial radio. Even satellite radio executives say that tales of corporate automatons determining every record played on local radio are overblown, but a level of autonomy exists at XM and Sirius that would rarely be tolerated by broadcasters.

Michael Marrone, who programs the Loft, XM's channel focusing on singer-songwriters, finds it difficult to define precisely why Elton John's "Your Song" makes the cut while Jimmy Buffett's "Margaritaville" does not. "I'd rather lose an arm than play it again," he said of "Margaritaville," chatting in a control room in the company's Washington headquarters. (He quickly added that he likes and plays many other tracks by Mr. Buffett.)

Ultimately, Mr. Marrone's tastes determine his selections. He also enjoys inserting connective tissue between songs. Don Henley's "Boys of Summer" segues into a Grateful Dead song because Mr. Henley sings about "a Deadhead sticker on a Cadillac."

"Ninety-five percent of the audience won't get it," Mr. Marrone said. "The other 5 percent will never change the channel."

Steven Van Zandt, who plays in Bruce Springsteen's E Street Band and is in the cast of "The Sopranos," programs two music channels for Sirius. He supplies a slightly more detailed explanation of his programming philosophy. On "Underground Garage," which borrows the name and concept of Mr. Van Zandt's syndicated show on commercial radio, the idea is to juxtapose tracks and styles from 50 years of guitar-driven rock 'n' roll, never playing two songs of the same genre (like punk) in a row. A recent morning, Iggy Pop coexisted nicely with the Monkees, the Mooney Suzuki and the Byrds.

"In the end, I don't pretend," Mr. Van Zandt said. "It's my opinion. And it's good to be the king."

Satellite radio has ridden that unconventional thinking to its current size, and both XM and Sirius expect to begin making money in the next two years. How big the market can become remains debatable. By 2010, analysts estimate, subscriber levels will hover anywhere from 30 million to 45 million. Some think the totals could eventually rival or surpass the 90 million people who pay for cable and satellite television.

Still, satellite radio is also unlikely to inflict fatal damage on commercial radio, which has about 230 million listeners, according to Arbitron, the radio ratings provider. Profit margins for stations in big markets can surpass 50 percent.

But commercial radio has begun to change. Radio stations in the Top 10 markets played, on average, 11 minutes of commercials an hour during daytime broadcasts in February, down from 11.7 in October, when Leland Westerfield, a media analyst at Harris Nesbitt, began tracking spots.

Strict formats have also loosened a bit. Infinity, like a number of radio chains, has changed some of its stations to the "Jack" format, a Canadian import that broadens the play list across rock genres. Instead of 300 or so songs, these stations' program directors are allowed more leeway in choosing from more than 1,200 songs.

Commercial radio, which also is combating the growth of digital music players like iPods, is making investments in technologies like Internet and digital radio as well as podcasts, audio programs that can be downloaded to computers or portable devices.

But satellite radio is rushing to innovate, too. It is planning, for example, video services that would beam cartoons and music videos to children and teenagers watching television in the back seats of cars.

All this technological and corporate ferment promises that the battle between commercial and satellite radio will only intensify.

"This book won't be written for another 10 years," Mr. Hollander of Infinity said.