Satellite Companies Threaten Radio Industry Longevity

Not since FM stations appeared on the dial has the radio industry faced such a threat. Video didn't kill the radio star, but a couple of satellite upstarts might. Barron's and Forbes relate this modern-day David-and-Goliath tale.

In "Losing the Signal" -- the cover story of the August 30 issue of Barron's -- writer Sandra Ward conjectures that the radio industry -- as we know it -- may be in a long-term decline

It all started in 1996, Ward says, when new legislation triggered major consolidation in the telecommunications industry -- leaving "the airwaves cluttered with commercials and investors set up for disappointment down the road." Although many radio stocks delivered outstanding performance during the merger boom, the stellar returns didn't last long. The industry has now reverted from heady to steady -- and new technologies threaten the group's future.

"Younger adults -- the key targets of radio advertising -- have clearly been losing their ardor for the medium. By one key measure, the number of listeners ages 18 to 34 has declined by about 8% in the past five years, as portable digital-music players, Internet radio programming and other innovations have started to take hold," Ward writes. "And while the dollars spent on radio advertising have been essentially flat for the past few years, competing media like cable TV, the Internet and outdoor advertising have been gaining steadily."

Ward argues radio execs aren't dealing with the challenges. "Radio titan Mel Karmazin lost his job as president and chief operating officer at Viacom this year not simply because of personality clashes with Chief Executive Sumner Redstone. It was also because he failed to realize the ground was shifting, and continued to cheerlead a strategy that was no longer working for Viacom's Infinity Broadcasting, the No. 2 radio operator behind Clear Channel."

More people drive to work -- and drive further distances -- than ever before. But rather than remain captive to endless rounds of commercials, commuters are tuning out. And advertisers aren't happy their promotions are lost on listeners. So much for industry consolidation leading to higher pricing.

So what are people listening to? MP3 players, such as the popular iPod, for one. Satellite radio for another. With the radio giant weakened, are the two leaders in the tiny satellite space -- XM Radio and Sirius Satellite -- capable of delivering the final blow?

Yes, says Scott Woolley, in "Broadcast Bullies," the cover story of the September 6 issue of Forbes. If David didn't have one arm tied behind his back.

"In a fair fight, XM Satellite Radio would capture a good share of the U.S. audience," Woolley writes. "Unfortunately, competition in the broadcast industry is anything but fair."

XM Satellite Radio has two satellites that broadcast 130 digital channels -- everything from heavy metal to country to BBC news -- to the entire continental U.S. But XM has only 2 million subscribers and is set to post a loss of $470 million on revenue of $260 million this year. Sirius Satellite Radio has one-fourth of XM's subscriber base -- and even worse finances.

Satellite radio offers greater variety, clearer sound, better coverage, and -- best of all -- no advertising. So why isn't satellite radio taking over the airwaves?

"For decades the radio industry has crushed incipient competitors by wielding raw political muscle and arguments that are at once apocalyptic and apocryphal," Woolley writes. "Radio station owners, who formed the National Association of Broadcasters in 1923, have won laws and regulations that have banned, crippled or massively delayed every major new competitive technology since the first threat emerged in 1934: FM radio. Fifty years later radio's old guard has been as effective at thwarting the digital threat."

The National Association of Broadcasters convinced regulators to delay the launch of satellite radio for almost a decade. Once XM and Sirius got FCC approval in 1995, they faced daunting restraints on their businesses. Traditional radio stations get free use of the airwaves while XM and Sirius had to pay nearly $200 million combined for their spectrum. Traditional radio stations are also exempt from paying royalties to musicians. The Digital Performance Right in Sound Recordings Act of 1995 barred satellite radio from enjoying the same break. The FCC license also required the firms to only broadcast to paid subscribers, instead of offering free, advertising-supported stations. Finally, the FCC rules prohibited the new satellite services from broadcasting local sports reports and traffic updates.

Still, the companies were able to raise capital in the late 1990s and launch their services. After years of struggling, subscriber counts have doubled at both companies in the past year. General Motors now offers XM in its new cars and Sirius recently picked up an exclusive deal for NFL football games. The satellite radio companies might finally be putting up a real fight.

Copyright © 2008 Donald W. Reynolds National Center for Business Journalism