Page 3 of 4 from Broadcast Bullies
Scott Woolley, 09.06.04
Worst of all the FCC rules made it illegal for the new satellite services to broadcast locally--sports reports on the Lakers in Los Angeles; traffic updates on the Massachusetts Turnpike in Boston. The terrestrial radio operators argued that local programming was the purview of local stations that would be hurt by competition from a national satellite company ignorant of local tastes. Never mind that the radio titans were knitting together nationwide networks to let hundreds of their own stations carry identical programming. The satellite rivals again gave in and assured the FCC they had no local ambitions--a claim that would prove to be dubious.
The FCC restrictions might otherwise have sunk the young industry, but XM and Sirius raised cash in the bubbly late-1990s. Panero joined XM in 1998 and quickly set about raising money to buy satellites and launch the service. In 1999 he borrowed $250 million and raised $114 million more in a public offering. XM launched first, going live with 100 channels in September 2001 and charging $10 a month. Sirius launched its $13-a-month, 100-channel service ten months later. A dozen years had passed since its first filing with the FCC.
Panero knew joining the fledgling industry would be a big gamble, but the cable veteran had a natural faith in the idea. "People were saying no one would pay for radio," he says. "But I had grown up in cable, and had heard the exact same things about television."
XM and Sirius had to finance programming lineups for 100 channels, pay for their satellites and fund the royalties--all before they had any subscribers to speak of. As the stock market crashed, capital dried up. Just months after its service launched, Sirius warned shareholders that bankruptcy was certain without an injection of cash. Eventually private equity funds agreed to put up $1.2 billion, but only after forcing bondholders to take a 20% haircut and virtually wiping out the common stockholders, who were left with 8% of the recapitalized company. The cash situation also grew critical at XM, which was forced to lay off 80 of its 480 employees and raise $210 million, most of it debt convertible into shares at $3, 75% below the price at its initial public offering. A group of AM and FM radio stations began broadcasting attack ads gleefully warning consumers that if the satellite companies go bankrupt, "there are gonna be a lot of folks out there sitting on some expensive equipment they bought."
Today Panero points to rapidly growing subscriber rolls and vows the cash drain will be staunched by next year, with profits soon to follow. Both XM and Sirius have doubled their subscriber counts in the past year, albeit from very low bases (of 1 million and 250,000, respectively). General Motors, one of XM's early backers, now offers XM in its new cars, which has proven a key distribution channel. Satellite has also picked up notable talent. XM just landed NPR veteran Bob Edwards. Sirius has an exclusive deal for NFL football games. XM's stock has rebounded to $26 from a low of $1.75 in 2002 (though it still is 48% below its peak price four years ago). Sirius shares hit a low of 41 cents last March but are back to $2.
In January Panero riled radio yet again, this time by offering local radio content in an effort to accelerate his growth even further. Despite assuring the FCC in 1995 that it would be a national radio service, XM began offering local traffic and weather channels tailored to 20 different markets. It did so by exploiting a loophole. XM and Sirius systems require a network of ground-based antennas in cities with tall buildings to boost satellite signals that otherwise would have trouble seeping in. At the NAB's behest the FCC forbade XM to use those transmitters to originate and broadcast local content.
It never occurred to the NAB lobbyists that XM engineers would figure out a way to squeeze local traffic and weather channels into supersmall streams and simply send 20 new localized feeds via satellite to the entire country. Panero readily admits that flooding the entire nation with a traffic channel that's of interest only to drivers in a single city is a grossly inefficient use of XM's capacity. The FCC rules leave him no choice, he says. Sirius Satellite has launched a similar service.
Even this little bit of cleverness could get tossed out by the NAB's friends in Washington. The FCC is now considering an NAB petition that could result in a ban on the local programming. In Congress, meanwhile, the NAB is plying another argument for halting XM's local push: The traffic and weather channels put national security at risk. The NAB says that by undermining the viability of local radio stations, listeners could lose access to regular radio's emergency broadcasts in a disaster. It worked for the NAB's many fans in Congress. In March a bipartisan group, led by Republican Charles Pickering of Mississippi and Democrat Gene Green of Texas, introduced the Local Emergency Radio Service Preservation Act. It would ban all "locally differentiated" satellite programming outright. The bill, with 43 eager cosponsors, is pending before the House Committee on Energy & Commerce.
If you can't compete, get a bill to outlaw the competition. The NAB may yet win this battle.
AM and FM radio face a plethora of digital threats.