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Rivals, and Friends?

Satellite radio's Sirius and XM indicate they want to end harmful competition, but that may not be possible until one cedes the game

July 10, 2005|Charles Duhigg | Times Staff Writer

To hear the executives at Sirius and XM talk, peace has broken out in the world of satellite radio.

The president of XM Satellite Radio Holdings Inc., Hugh Panero, was the first to make nice.

In November, when Sirius Satellite Radio Inc. hired Mel Karmazin as chief executive, Panero publicly welcomed the former Viacom Inc. executive, saying he brought "a new level of maturity" to the fledgling industry.

Karmazin, whose move into mostly commercial-free, subscriber-based satellite radio capped a career built largely in the traditional AM/FM market, was quick to reciprocate.

"There was a time when both companies thought of each other as the enemy," Karmazin said in a recent interview. "That's not my viewpoint today. Our real competition is terrestrial radio."

Some analysts are heartened by the apparent cease-fire. For more than a decade, media gurus have said satellite radio would revolutionize broadcast music the way cable upended television. But although XM and Sirius have spent hundreds of millions of dollars in the competition for subscribers, satellite radio has failed to lure more than 3% of the nation's 229 million radio listeners.

When trying to persuade people to pay $12.95 a month for a medium they already get for free, a truce makes good business sense.

But is it for real?

"Karmazin and Panero are both very competitive," said Tom Eisenmann, a professor at Harvard Business School, who is watching the outbreak of collegiality with skepticism. "Neither of them want to be in second place."

That competition, say some investors, has been a problem since 1997, when Sirius and XM were the sole winners of Federal Communications Commission satellite radio licenses. Soon after, both rushed to launch satellites capable of nationwide broadcasts to specially designed radios.

New York-based Sirius was first in orbit, launching three satellites by 2000. But then the company stumbled, choosing to outsource development of key components and disappointing investors with repeated delays.

Washington-based XM rushed into the breach, beginning broadcasts in 2001 to almost 30,000 paying listeners. When Sirius finally began transmitting, in 2002, it took the company six months to lure an equal number of subscribers.

Since then, each company has spent billions of dollars building networks that carry more than 120 channels apiece. Each has touted its ability to offer listeners more choice and eclectic channels -- such as all Elvis, all the time -- with no or few advertising interruptions.

And at least until recently, each had readily predicted the other's demise.

In January, XM-friendly hecklers shouted down the Sirius chief at an industry conference, forcing Karmazin to yell at them to shut up. XM executives, meanwhile, have pointed to Sirius' lush Rockefeller Center headquarters as a symbol of what they see as the company's profligate ways.

For their part, Sirius employees have whispered to analysts that the XM headquarters, a former warehouse, is better suited to the dead pigeons and broken glass it once housed, and that its current residents are aging DJs and tone-deaf executives.

Such head-to-head competition has forced each company to stake out its own strategy.

Although XM has made some investments in high-priced content, it has staked its future more on developing technology and forming partnerships with automakers to make its service easier to buy.

The company scored early with an alliance with General Motors Corp. The automaker began factory-installing the company's radios in Cadillacs, Chevrolets and other cars in 2001. The deal was expensive, costing XM $440 million through 2013.

Sirius rushed to catch up, developing exclusive relationships with BMW, Ford Motor Co., Mitsubishi and DaimlerChrysler. But until recently those car companies didn't make it as convenient as General Motors did for customers to purchase satellite radios.

Sirius also has lagged behind its competitor in technology: Last year, XM made it to market with a portable mini-radio receiver, MyFi, that lets users listen while jogging. Sirius has not released a similar product, although the company expects to by the end of this year.

Sirius is banking on a different tack: investing heavily in big-name talent and the publicity that comes with it. First, it hired shock jock Howard Stern, who will make $500 million over five years.

Karmazin has said that if 1 million Stern fans subscribe to the service, it will recoup that investment. Some analysts put the break-even figure at closer to 2 million subscribers.

After signing Stern, the company snapped up major sports franchises, adding the National Basketball Assn. alongside a previous contract with the National Football League. Sirius also signed contracts with singers such as Jimmy Buffett and Eminem to choose playlists for channels titled "Radio Margaritaville" and " Shade 45," respectively.

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