The Spirit of Satellite Radio

The space race now has a soundtrack. Two satellite radio upstarts are looking to cash in on digital quality cross-country music subscriptions. Huge investments have already been made and impressive partnerships have been penned. With both services ready to be rolled out later this year, the only melody more alluring than banking on one may be banking on both.

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By Rick Aristotle Munarriz (TMF Edible)
May 18, 2001

"Here in my car/I can only receive/I can listen to you/It keeps me stable for days in cars."
  -- Gary Numan, Cars

Imagine a drive where the radio dial never ends. With nearly a hundred digital crisp stations at your disposal following you everywhere, would you ever want to make it to your final destination? XM Satellite (Nasdaq: XMSR) is banking $1.5 billion that satellite radio will be music to your ears.

This is no pie-in-the-sky pipe dream. Two months ago, the company launched its first Boeing (NYSE: BA) satellite, "Rock," into space, with "Roll" getting shot into orbit earlier this month. The transmissions have already begun and the only thing the company needs now is subscribers. In short, XM Radio is ready to Rock & Roll.

The company will begin signing up audio buffs come September. For $9.95 a month, XM will offer music, news, comedy, and children's programming -- often commercial-free. Like any satellite offering, subscribers will also have to pay up for a receiver. In this case, the necessary three-band radio systems (AM, FM, and Satellite) will retail for at least $250.

And if you thought the airwaves were crowded, they've got nothing on airspace. XM isn't alone out there. Sirius Satellite Radio (Nasdaq: SIRI) has completed the launch of its Sirius-3 and will offer a competing service later this year. Is there room on stage for a duet?

The Day The Music Flied
Both companies command similar market caps, each valued just shy of a billion dollars. That's pretty reasonable considering the huge investment each company has had to make. As an added comfort, that will make it very difficult for newcomers to enter the satellite radio space. To paraphrase a little Jim Morrison, the barriers to entry couldn't get much higher.

As a matter of fact, XM will burn through its entire $1.5 billion war chest by the end of next year. At a presentation at a Bank or America Securities investor conference yesterday, CFO Heinz Stubblefield said the company would need to raise an additional $350 million to get through 2004.

Earlier in the week, Sirius had to up its projected $9.95 monthly service fee to $12.95. The companies seem to be bracing for a "razors and blades" reality: As has been the case with satellite television, it's a possibility that the companies might eventually have to eat the cost of the receivers in order to build up a sustainable subscriber base.

The Song Remains The Same
The one burning question is whether or not the consumer will embrace satellite radio. On the tube, satellite companies were merely out to supplant cable operators. The public has not yet set a mainstream precedent for paying for audio broadcasts.

There is also the time factor. While the average consumer will spend hours in front of a television set, only long-distance commuters or home system aficionados may log sufficient radio time to justify paying up for the premium satellite offerings.

That is where XM and Sirius are hoping their-high revving partnerships will help market the service for them. XM has teamed up with General Motors (NYSE: GM) and Honda (NYSE: HMC), while Ford (NYSE: F), Daimler Chrysler (NYSE: DCX) and BMW cars will be sold Sirius-ready domestically. While that might make Sirius the king of the showroom, XM does have notable strategic investors like Clear Channel Communications (NYSE: CCU) and Hughes Electronics' (NYSE: GMH) DirecTV.

All this begs the merit of owning the "basket" over picking a winner this early into the space race. After all, while Hughes commands a $20 billion price tag for its lead in satellite television, you can pick up both XM and Sirius for less than a tenth of Hughes' sticker price. Granted, no one is expecting satellite radio signups to number anywhere near DirecTV's 10 million subscribers. There's also the reality that launching a satellite in of itself does not constitute a viable business model: Anyone remember Iridium?

Still, you're going to be hearing plenty about both of these companies in the months to come. Count on it. And it's easy to see where continued exposure and autumn's car show excitement might fuel these stocks further from the teens where they trade today. There are clearly real risks here, as neither company has booked even a penny in revenue and demand for the service is uncertain. Still, there are reasons to be tempted by the opportunity to board the sector before it takes off. 

Rick Aristotle Munarriz goes to 11. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.