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A satellite radio field of dreams

If you build it, will they buy? That's what the two companies comprising the nascent industry wonder after spending more than $1 billion each to launch satellite broadcast networks.

LAS VEGAS--If you build it, will they buy?

That's the question the nascent satellite radio industry faces, as the two companies that comprise the fledgling market try to attract customers after spending more than $1 billion each to launch complex satellite broadcast networks.

Both XM Satellite Radio and Sirius Satellite Radio are making major pushes at the Consumer Electronics Show here, hoping to convince retailers, car-stereo manufacturers and the world at large that millions of Americans are willing to pay for a superior alternative to broadcast radio.

XM President Hugh Panero, a veteran of the cable television industry, compared the satellite radio market now to the early days of pay television.

"I was there when people were challenging the legitimacy of cable TV, saying, 'Who would pay for TV when they can get it for free over the air?'" he said. "I think the experience there showed that people really will pay for programming they perceive as providing value, and that's what we're seeing in this new market."

Both companies offer similar services: Dozens of stations offering original and repackaged music, news, sports and talk programming are beamed by satellite to repeater stations throughout the country. Car stereos designed for either service and outfitted with special antennas can pick up the signals anywhere in the country.

In addition to having a vastly larger selection of content than broadcast radio-- XM has stations specializing in everything from African music to NASCAR racing--both services promise few or no commercials, almost CD-quality sound, and steady signals wherever you drive.

John Stone, senior satellite analyst for investment bank Landenburg Thalmann, thinks that's enough to give each service the 4 million subscribers it will need to reach break-even status. He predicts both will reach that point in 2005, with a total of 25 million people paying for radio by 2009.

"I think the prospects are very good for satellite radio," he said. "I think it offers meaningful value at the consumer level, which ultimately will drive whether this goes or not. The transmission quality is clearly superior; you get content that you can't get elsewhere...and basically you get rid of the commercials to a very large extent."

Slightly different orbits
Differentiators include price: XM charges $10 a month for each XM-compatible receiver, while Sirius has set its service at $13 a month. Most of XM's channels include a few minutes per hour of commercials, while Sirius pledges to be commercial-free.

Philip Pilla, vice president of marketing for Sirius, maintains that Sirius' commercial-free programming makes it distinct from broadcast radio, as does superior sound quality. Sirius uses a system that can reallocate satellite bandwidth on the fly, so stations demanding better sound can get the resources they need.

"XM is basically terrestrial radio on steroids," he said. "People listen to us and understand right away that we're different from traditional radio."

XM is also taking a more liberal approach to where people want to listen to radio. While both companies are focused on the car market, Sony has a hybrid XM receiver that can be used with home and car stereos. The company is working on other home products, Panero said, and is researching concepts for a portable player.

Panero said initial sales reports for the Sony unit and related accessories show there is clear interest in satellite radio outside the car.

"Many people purchased the Sony unit specifically for the home," he said. "There are a lot of places around the country where you don't get much broadcast radio."

Pilla said there will be a few Sirius-ready devices besides car stereos, including a portable boom box, but those are clearly side projects.

"For us, it's all about improving the car audio experience," he said.

Up and running
For now, though, the main difference between the two companies is availability. XM launched nationwide service last November, has XM-ready radios for sale in hundreds of electronics stores, and announced this week that it signed up 30,000 subscribers in its first two months of operation.

Sirius plans to launch service in four markets--Houston, Phoenix, Denver and Jackson, Miss.--next month, with nationwide service expected in the third quarter of this year.

Panero said XM is building a big head start, particularly with the electronics retailers that will account for the bulk of sales of XM-ready radios over the next few years, as opposed to Sirius' emphasis on automakers equipping cars with compatible receivers.

Pilla said Sirius is building strong relations with retailers and maintained that going nationwide almost a full year after XM could actually help the company, as consumer awareness of satellite radio grows.

"I think being second to market hasn't hurt us at all," he said. "We've had the opportunity to do a lot of learning about a market that's really in its infancy now."

Analysts differ on how XM's lead will affect the market. Stone is confident there's enough potential in the satellite radio market for both to succeed.

"I think some subscribers will be particularly averse to commercials and will pony up the extra three bucks to get rid of them," he said. "I think XM, because of their head start and their lower price point, will have more subscribers. But I expect both of them will succeed."

Wit SoundView analyst Tim O'Neil, however, says XM is building a prohibitive first-mover advantage. Combined with Sirius' higher price and recent management instability--TV veteran Joseph Clayton took over as Sirius' CEO in late November and has since overhauled the marketing and sales departments--Sirius' lag in getting to market consigns it to a distant second place at best.

"We're in wait-and-see mode with Sirius," O'Neil said. "Its management has not met any of the expectations they've set so far."

Show them the money
Both companies face similar cash-flow challenges. After spending nearly $1.5 billion each to launch satellites and build other elements of their broadcast networks, now they have to come up with more money to attract subscribers.

Customer acquisition costs are high, thanks in part to subsidies paid to automakers to get them to put satellite-ready radios in their cars, considered a key element in whether each service will succeed. Sirius has deals with Chrysler, BMW, Ford Motor and Mazda, among others, and XM has locked in General Motors and Honda.

Panero estimated XM's acquisition costs at $125 per customer. Sirius declined to disclose such figures.

At current cash-flow levels, both companies will need additional funding to make it through the end of the year.

"You're in this odd situation where the healthier and better off these companies are, the faster you burn cash," Stone said. "That's what you have to do, because the customer relationship is so valuable. Once you have the subscriber signed up, as long as you take reasonable care of them, you've got a steady revenue source."