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Satellite Radio: How XM is Remaking Music

September 1, 2005

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Satellite Radio: How XM is Remaking Music

By Garrett M. Graff    

In a District warehouse, lovers of music have gathered to play their favorite songs. Aided by satellites, they are changing the way we listen to radio.

 

Where B.B. King Gets the Blues

Bill Wax, a lifelong blues fanatic, was wrapping up a night listening to blues legend B.B. King at King's club in New York when he saw the musician's manager walk out from backstage. Wax, the programmer of XM Satellite Radio's blues channel, went up to introduce himself. After exchanging greetings, Wax was puzzled when the manager said, "Talk!"

It took only a moment of hearing Wax's voice before the manager interrupted: "Wow! You are him! You're Bill Wax from Bluesville! We have radios in the offices--listen all the time. B has a radio, too. Come," he said, "B'll want to meet you."

Moments later Wax found himself in B.B. King's dressing room. The blues great stood up and grasped Wax's hand. "I really love what you're doing," King said. "I've wanted to meet you for a while."

Wax could only stutter: "I was going to say the exact same thing to you."

Wax walked out of the club on air that night thinking, "There's something about this XM if it moves B.B. King that much."

Bluesville programmer Wax is one of hundreds of music fanatics crowded into a rehabilitated DC warehouse who four years ago launched a crusade to save radio from expanding commercials and shrinking playlists. Now, with nearly 5 million paying subscribers, XM Satellite Radio is one of the nation's hottest media properties. Along with its New York-based competitor, Sirius, which has 1.8 million subscribers, XM is changing the way Americans listen to music.

Since its launch, satellite radio has become a business laden with superlatives: XM has the nation's largest collection of IBM servers, which in turn hold perhaps the world's largest collection of digital music--more terabytes of data than NASA needed to put a man on the moon. Satellite radio was one of the fastest-growing consumer-electronic launches in history--it took cell phones nearly twice as long to reach 4 million customers--and is adding customers at more than 200,000 a month.

In the process, satellite radio has become a refuge for people--both listeners and broadcasters--turned off by the consolidation and homogenization of commercial radio.

Up And Away

Satellite radio was launched in 1997, when the Federal Communications Commission auctioned off two satellite-broadcasting-spectrum licenses to a pair of Washington-based start-ups, CD Radio (now Sirius) and American Mobile Radio Corporation (now XM), which paid $83 million and $90 million respectively.

The two companies competed head-to-head to build market share in a new field. While the core offerings of both companies are similar--for $12.95 a month subscribers receive upwards of 150 channels, primarily music mixed with some channels of talk, news, and entertainment--their approaches have been markedly different.

Even their satellite networks operate differently. XM's three satellites hover along the equator and are backed up by 800 ground repeaters across the nation, while Sirius's three satellites operate at a higher angle in an elliptical constellation and use 140 repeater towers.

In the early days Sirius, named for the Dog Star, had some advantages: It had $300 million in financing before XM raised a penny; it was first to go public and first to launch its satellites. It faltered, though, in execution, which allowed XM and its CEO, Hugh Panero, to seize the advantage. While XM kept its technology development in-house--allowing it to keep a close eye on progress--Sirius outsourced its chip development, and when the contractor fell behind, Sirius had little choice but to wait things out.

XM beat Sirius to the airwaves by nine months, allowing it time to build a lead. It was also the first to market with a boom-box receiver, called the SkyFi, and a portable wearable radio, the MyFi.

The critical moment came, though, when XM's Panero was first to get the satellite receivers into cars--which is where most people listen to the radio.

Radio is a popular medium. In a normal week, 94 percent of Americans over age 12 listen to 20 hours of radio, much of it in the car.

Lots of people haven't liked what they're hearing. The spiral began in the late 1980s with the rise of big broadcast companies that bought up local radio stations and made them part of national conglomerates focused more on profit than on serving their communities. Clear Channel, now the largest radio company, owns more than 1,200 stations.

The industry consolidation has encouraged--or forced--many stations to squeeze content for profit--loading each hour with 20 minutes of commercials, doing away with local DJs, and shrinking playlists to what analysts call "lowest common denominator" radio.

Less-mainstream formats have given way to homogenized Top 40 stations that target young listeners and to Hispanic stations that target the growing Spanish-speaking market. In two of the high-profile format switches, New York City lost its only country station and Chicago its only oldies station. In Washington, WHFS, the iconoclastic rock station, gave way to El Zol, a Spanish-language channel with the motto "Siempre de Fiesta!"

Audiences have been turning to a variety of listening options ranging from iPods and MP3 players to satellite radio to streaming Internet radio stations offered by AOL and Microsoft. Conventional radio broadcasters, says Robert Unmacht, an industry expert at iN3 Partners, thought they had a captive audience. "Surprise! They got into that mindset at the same time the rest of the world came up with gadgets to distract you."

Panero and his Sirius counterparts were ready to go. "The void that we are filling is one left by the current state of the radio industry and music commerce--where radio today is a lowest common denominator, homogenized, mass-market product whose only real goal is to deliver a large audience to an advertiser," Panero says. "That's not how radio started off. Radio started off being a passionate, cultural phenomenon--particularly when FM was born--that really focused on music."

"Satellite radio offers a lot more variety than you can find on your radio dial," Unmacht says. "You can get country in New York, oldies in Chicago; you can get alternative rock, even opera. Formats like opera aren't viable in a single market, but spread across the whole country, they are."

The satellite companies' initial challenge was to get people to listen--and that meant getting into cars. "We want to own the car--satellite radio first has to establish itself in the car before it can get established in the home or on your hip," says Patrick Reilly, vice president of communications for Sirius.

XM's Panero courted General Motors, which as the owner of DirecTV and pioneer of the OnStar navigation system, understood the power of satellite. In 1999, two years before XM went on the air, the two companies agreed on a partnership that would give GM a 5-percent stake in the company. Panero struck partnerships with Honda, Toyota, and others to reach more than half of all the auto sales in the US. XM is now a factory-installed option on more than 120 car, truck, and SUV models.

Sirius made deals with automakers as diverse as DaimlerChrysler and BMW, which together account for about 36 percent of the US market, but XM got its radios into cars first and has signed up subscribers faster, says Sean Butson, an analyst at the Legg Mason investment firm.

The arrival of satellite radio in cars is transforming both broadcasting and the way people listen to music. Subscribers go from listening to terrestrial radio all the time to less than 20 percent of the time. Satellite's "churn" rate--the percentage of subscribers who leave the service--is remarkably low, less than 1.5 percent.

Although satellite radio has only 5 percent of the listening market, Panero hopes to attract 20 million listeners by 2010. "We've only just scratched the surface of how big this market is," he says.

Driven largely by car sales, Butson forecasts that by 2010 XM will have 24.5 million subscribers and Sirius will have about 22 million. "Overall, I'm extremely bullish on the industry," he says.

XM Stays Here

XM and Sirius started in DC to be close to the Federal Communications Commission as the spectrum licenses were worked out. Sirius then left town for a gleaming office suite in New York's Rockefeller Center. XM set out to find more permanent quarters than its basement office in Georgetown, but Panero, who had headed a Denver-based pay-per-view network, gambled that a high-priced location didn't matter.

A team led by Chance Patterson, now XM's vice president for corporate affairs, identified an abandoned warehouse in DC sandwiched between a Wendy's and a FedEx distribution center as a potential home. For nearly a century the building had housed the Judd & Detweiler printing presses first used for National Geographic and later for other publications, including The Washingtonian, but now it was host mainly to homeless people and pigeons. Still, the property was cheap, much less than what a lease in Manhattan would cost.

A Sunday-morning meeting with then-mayor-elect Tony Williams solidified DC's support. And the promise of a new Metro stop nearby (the New York Avenue stop, financed in part by XM, opened last year) and a police agreement to open a command center in XM's basement assuaged safety and transportation concerns.

XM's decision to locate in the underdeveloped area, at New York and Florida avenues, helped launch a neighborhood renaissance--cranes now dot the skyline around the headquarters as high-rise office and condominium buildings go up. Just around the corner, the new headquarters for the Bureau of Alcohol, Tobacco, Firearms, and Explosives is rising.

At a January community meeting concerning New York Avenue traffic, an elderly couple came up and hugged Patterson after he said that he represented XM. "We love you guys," she said. "Thank you for coming to our neighborhood. It's the most important thing that's happened here in a long time."

Now, millions of dollars in renovations later, the warehouse shines. While preserving its industrial feel--photos of the old printing presses line the first-floor hallway--the network reconfigured the space to 21st-century standards. The broadcast-operations center, which monitors XM's $750-million investment in satellites, resembles the bridge of the starship Enterprise from Star Trek.

Glass and light abound, and the air in the building--which has been occupied round-the-clock since it opened five years ago--crackles with the energy of the nearly 500 employees who wend their way through 89 broadcast studios.

Music from dozens of genres flows from all corners. Each studio and programmer's desk is decorated according to the channel's music--often with kitsch purchased on eBay. The '80s channel hosts a line of boxed Michael Jackson dolls. Letters and drawings from young listeners paper the XM Kids studio, and one programmer's work area features life-size cardboard cutouts of the Beatles. Gold-framed records dot the walls.

The dress code reflects the mix of the network's music. Country-music aficionados in cowboy hats and boots eat in the cafeteria alongside hip-hop hosts wearing gold jewelry and alt-rockers with dyed hair. On the corporate side, some staff wear polo shirts and khakis. People wearing ties are recognizable as visitors.

The conference rooms are named for musical acts: The executive conference room is appropriately named for the Chairman of the Board, Frank Sinatra. Promotional materials and photos from events cover the walls, and on many desks, piles of CDs reach dangerous altitudes.

The atmosphere is half dot-com start-up and half insurgent political campaign; many staffers seem to see their jobs less as corporate entertainment than as a personal cause to save music and win fans. "It's us against the world--that world being our direct competitor, the 12,000 radio stations out there, the hundreds of millions of MP3 players, CD players, televisions--anything that competes with XM for your time," Patterson says.

For its crusade, XM has recruited a diverse group of channel programmers. Toward the rear of the colorful room where the programming staff sits, Jessie Scott, who DJ's XM's progressive-country station, X-Country, sits behind a beaded curtain decorated with smiley faces and peace signs. There she picks, previews, and programs the music for her channel and its special shows.

Each channel head can search and instantly access any of the 2.5 million songs in the network's library. Scott compares it to "the world's largest iPod." The network launched with 1.5 million songs in its inventory, roughly every CD available for sale in the country, and has kept adding music at a furious pace. Because copyright law requires that the network have a hard copy on site of each piece of music on its servers, the second floor hosts both a massive collection of computers and one of the largest CD libraries anywhere.

For Scott, who began her radio career in the 1970s as Pittsburgh's first female DJ, XM's approach to expanding the boundaries of commercial radio is a dream come true. "I had to be part of it," she says. "You don't really think of the rainbow being real." Whereas an average radio station might play only a thousand songs--and some Top 40 stations' playlists feature only a few hundred--Scott's regular playlist on X-Country is 13,424 songs.

Satellite radio's giant playlists and scores of channels are giving airtime to both long-lost artists and up-and-comers. XM's approach is summed up by one of its slogans: "Helping you discover your next favorite album." As evidenced by Wax's encounter with B.B. King, musicians are paying attention.

Musicians are beating paths to the doors of both XM and Sirius. Each company hosts live performances and interviews. Along with its 89 DJ studios, XM's building has two performance halls--the larger of which can hold a 30-piece orchestra. Sirius has similar facilities in New York. Both networks have studios in Nashville. Sirius also has LA facilities, and XM just opened a studio at Lincoln Center in New York.

Since his 2003 introduction to Wax in New York, B.B. King has come to play at XM's studios every Martin Luther King Jr. Day, one time sitting for a 21/2-hour interview and another time bringing his orchestra for a jam session.

And winning the affection of music legends isn't the best part. Both networks hear from unknown musicians and groups who say their record sales or tours have gotten boosts from satellite radio.

"If I, in the long run, can help the people who make the music I love, I'll be happy," Wax says.

Star Trek

In his office on the other side of the building from the programming staff, Hugh Panero talks about success in an endeavor that people once doubted. In conversation, his eyes dart around the room, mirroring a brain that jumps from problem to opportunity to solution.

Panero came to XM, then called American Mobile Radio, in 1998 and has remained while Sirius has gone through three management teams. One of his first jobs was to pick a new name. "You had AM, FM, and now you have XM," he says. "It fit."

Born and raised in the Bronx, Panero was a protégé of Richard Aurelio, an ex-Newsday editor and former deputy mayor of New York. Panero worked his way through business school at Baruch College and rose through the ranks at Time Warner Cable, becoming CEO of Request TV, a pay-per-view network owned by Liberty Media and Twentieth Century Fox. After he lost that job in a merger, a headhunter contacted him about heading the new satellite-radio venture.

Panero has a reputation for holding employees to high standards--and, as long as they perform, backing them to the hilt. While he worries about the finances, he trusts his staff to play good music and make fans of the network's subscribers. For setting that tone, Panero is beloved by the staff. When his wife, Mary Beth Durkin, was diagnosed with leukemia in 2001, his colleagues and staff organized a bone-marrow drive.

Panero's neighbors in the Somerset section of Chevy Chase rallied around the family, too. They organized to provide food for Panero, Durkin, and their two children, Sofia and Liam--now 12 and 8--for nearly a year while Durkin underwent treatment. Several volunteered to fly to Seattle, where Durkin received extended treatment, for one-week intervals to assist in her care. "It was a breathtaking outpouring of generosity," Panero says.

Panero begins each day listening to Bob Edwards's show on XM's Public Radio channel, and his assistant knows not to interrupt him until he takes his headphones off at show's end.

Edwards's presence on the network is one of Panero's "gets." When NPR dumped Edwards as host of Morning Edition after nearly 25 years, Panero jumped. As the longtime radio personality fielded calls from academia and other broadcasters, Panero FedExed over a complete proposal, including salary, studio, and show description. In a reference to the head of NPR programming who let Edwards go, Panero scrawled a message across the front: "Jay Kernis may not want to hear you every day, but I do."

Edwards, his sonorous voice instantly recognizable and comforting, now hosts an hourlong news show each weekday featuring more or less whatever he wants to do: interviews, reviews, discussions.

Edwards says he enjoys the energy of the new medium--he likens it to what the start-up of NPR felt like in the early 1970s. But he says there have been some big changes in going from terrestrial to satellite broadcasting. While XM has some private statistics on listeners, it doesn't have a good way yet to tell how many people are tuning in to Edwards, who used to have nearly 13 million listeners a day at NPR.

If Panero is the business brains behind XM, Lee Abrams, the chief programming officer, is the musical brains. Abrams is a music-industry legend--a burly, mustached veteran of the FM radio battles who is often credited with inventing the album-oriented rock format. His office at XM is crammed with gold records and memorabilia from his four-decade career.

Abrams thrives at XM because he has the space to offer music to anyone who wants it--from classical to country, Christian rock to Christina Aguilera.

In a rambling 2003 memo, Abrams explained the challenges of the previous 30 years of FM radio and threw down the gauntlet for his staff. "It's up to us to create brilliance on the speakers," he wrote. "New technology + knowing the pulse of America + delivering a revolutionary new sound that's in sync with the pulse. . . . The revolution will be ours to win."

To wage the revolution, Abrams has rounded up other refugees from terrestrial radio. Billy Zero, once one of WHFS's best-known DJs, heads XM's "unsigned" channel, whose playlist concentrates on bands without major record deals. Martin Goldsmith, for a decade the voice of NPR's Performance Today, has headed up the classical-music offerings ever since NPR removed him in its effort to attract younger listeners.

"In a way, XM is very much a back-to-the-future type situation, in that there is the best of what radio was like 30 or 40 years ago. There's a forward-to-the-future aspect of it, too, since you can speak to the whole country," Goldsmith says. "It's a way to celebrate music in a way that has been given short shrift in America recently."

There are also radio refugees of a different kind--those who find the FCC's "decency" standards for terrestrial radio too confining. XM hired New York-based shock jocks Opie and Anthony (a.k.a. Gregg Hughes and Anthony Cumia) after the two were fired for a stunt that involved broadcasting a couple having sex in St. Patrick's Cathedral.

The same week last October that Opie and Anthony launched on XM, Sirius scored the biggest headline when shock jock Howard Stern, buffeted by indecency fines, announced that he was fleeing to the as-yet-unregulated airwaves of satellite radio, calling it the "future of radio." With a bravado common in the industry, Sirius's then-CEO, Joseph P. Clayton, said, "Signing Howard Stern is, without a doubt, the most exciting and transformational event in the history of radio."

In Stern, Sirius landed one of radio's two biggest names--the other, Rush Limbaugh, has said he will stay on his network of terrestrial stations. But Stern's deal--$100 million annually for five years beginning in 2006--requires the company to sign up a million of Stern's previous 8.5 million listeners to pay for him. XM will not release salary figures for Edwards or Opie and Anthony.

A month after acquiring Stern, Sirius announced that Mel Karmazin, the former head of Viacom, CBS, and radio giant Infinity, would become its CEO. Karmazin had poohpoohed satellite radio for years; his move was indicative of the seismic shift the two start-ups were causing in broadcasting.

Beyond Satellites?

As bright as satellite radio's future may look, success is far from assured. To launch space-based operations, both XM and Sirius have had to spend lots of money. Fast Company magazine this spring estimated that each companies will spend nearly $2 billion before either makes a profit.

Although analysts say there's room for both companies in the market, the bidding war between them can reach staggering proportions. Earlier this year Sirius outbid XM for the broadcast rights to NASCAR beginning in 2007 at a price of $107.5 million for five years--seven times what XM paid for its current five-year deal. Sirius has a seven-year deal to broadcast the NFL for $220 million, and XM's dozen baseball channels will cost it up to $650 million over the next 11 years.

Throw in the cost of adding satellites to a network--$250 million a pop--and,as Everett Dirksen might say, soon you're talking real money. Those numbers give pause to company executives and analysts.

To increase their subscriber bases, both companies are investing in partnerships and marquee content. XM has launched a partnership with Starbucks to stream its music into stores around the country. It also has deals with JetBlue, AirTran, Hyatt Hotels, Zipcar, AOL, and the New York Times to carry content, and it announced a joint partnership with Audible.com, an online audio provider, to develop a receiver that will allow people to play XM and downloaded content as well. This summer XM invested $25 million with WorldSpace, a start-up satellite-radio company based in DC that broadcasts in Asia, Europe, the Middle East, and Africa.

Besides lining up lots of sports events, Sirius has recruited stars like Lance Armstrong, Joan Jett, Bill Bradley, Eminem, and Tony Hawk to be on-air hosts. Jimmy Buffett heads up the Radio Margaritaville channel, and basketball's Bill Walton hosts a Grateful Dead show on Saturdays. Soon Judith Regan will host a show on books, and Martha Stewart has agreed to run a channel.

XM has Tom Petty and Snoop Dogg, among others, and broadcasts the PGA, ACC, Big Ten, and PAC-10 basketball and football games, in addition to baseball and (for now) NASCAR. In July, XM announced that Ron and Fez, the morning hosts on DC's WJFK-FM, would be launching a new show following Opie and Anthony.

Both networks carry a full slate of conservative and progressive talk radio, advice channels, and news channels such as the BBC World Service, and both have launched localized traffic and weather channels for a score of cities. They're also expanding into niche audiences with foreign-language channels; Sirius even carries a Maxim channel "for guys" and a gay-focused channel.

Finances aside, industry analysts say that satellite radio faces an uncertain future. Some experts think satellites may be an interim technology, like cassette tapes or videotapes, waiting for the as-yet-unknown CDs or DVDs to come along. The most likely "killer app" might be wireless broadband, which would allow wireless Internet-based streaming not just from commercial radio stations but also from programs like Radio@AOL and MSN Radio, which are developing online music offerings.

Bob Edwards says he doesn't worry about the uncertainty: "I'm enjoying the ride, whether this is the future of radio or a nice stop along the way."

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