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Frank Ahrens Discusses Prospects for the Satellite Radio Industry

March 30, 2005 at 12:00 AM EST

TRANSCRIPT

TERENCE SMITH: This whole notion of satellite radio has sort of burst on the public in a way recently. What do you think of it?

FRANK AHRENS: Well, it is to radio what cable was to television. It’s not free. You have to pay for it, but in paying for it, you get a whole bunch of extra choice. You get a lot more music channels, you get talk, you get sports.

The question is — is it a good value. Are people willing to pay more for it?

I remember when I was covering this in the beginning, people in radio were saying well, who’s going to pay for radio? Well, people said that about TV about 30 years ago.

TERENCE SMITH: Is the answer in on radio? Will people, enough people, pay for radio?

FRANK AHRENS: The financial analysts who cover these two companies, XM and Sirius, say that they will need a combination of about 40 million subscribers to break even.

Now, XM has the lead with about three, 3.5 million subscribers. They’ve been in business for about three years.

TERENCE SMITH: Right.

FRANK AHRENS: And Sirius is second, with a third as many, about a million subscribers. They’ve been in business about two and a half years. So, they have a ways to go.

XM has projected to break even in 2007, 2008, maybe farther. Sirius hasn’t projected a break even year.

TERENCE SMITH: How much money are they losing from what you know?

FRANK AHRENS: They each lose about a $100 million dollars every quarter. So, for instance, Sirius lost about half a billion dollars, $500 million — about $460 million last year. And they’re going to lose about the same this year. XM is not too far behind.

TERENCE SMITH: That’s real money.

FRANK AHRENS: It sure is. For instance, in the third quarter of the past year, XM lost about a $115 million, and its revenue was about $65 million. So, that tells you they’re making about as half as much as they’re losing.

TERENCE SMITH: Do you have (satellite radio)?

FRANK AHRENS: I have XM. I was an early adopter to it. They launched in September of 2001, and I bought it around Christmas of 2001. And it’s a terrific service to have.

TERENCE SMITH: What’s terrific about it? How do you use it and what do you like about it?

FRANK AHRENS: Well, I spent the previous three years to this job covering radio for the Style section of the (Washington) Post, so I had to listen to a lot of radio.

And I started growing a little tired of the lack of choice. I seemed to hear a lot of the same songs. I started hearing less and less localism, and more national programs, more syndicated shows.

And I drive — I take routine five, six-hour trip to West Virginia, and I got tired of losing the stations as I was driving through pretty remote areas of the two states.

And the great thing about satellite radio is you’re never out of range. You can always hear it.

TERENCE SMITH: So, you pony up your own money. Are you getting your money’s worth?

FRANK AHRENS: Oh, I think so. Everyone says about this product — it’s an evangelism product; that once you hear it, you have to hear it.

And that’s why it’s so important for these companies to get people in stores to hear it, and to get them into cars, into new cars and into rental cars, so you’ll actually hear it. And once you hear it, then you notice the difference. And customers aren’t just — they don’t just say, ah, it’s okay. They say, you’ve got to have this.

TERENCE SMITH: And what’s the difference that you notice?

FRANK AHRENS: Between?

TERENCE SMITH: That and terrestrial radio?

FRANK AHRENS: Oh, well. First off, the lack of commercials. It’s really nice to not listen to commercials anymore, and I understand that advertising is the backbone of radio and that radio is essentially an advertising delivery medium. I understand that.

But even the big radio chains understand that people are getting tired of commercials.

Clear Channel, the largest radio company, which owns about 1,200 stations said a couple of months ago, they were going to cut back several minutes per hour of commercials, because they know people are tired of it.

A very popular host like Howard Stern will have back to back to back to back to back commercials, what they call stop sets of five, six, seven, eight minutes during the show. And that’s the first thing you notice about XM or Sirius, either of the two satellite services — no commercials.

TERENCE SMITH: Mm hmm. There seems to be quite a competition going on between the two of them right now; between the talent they can hire; the programming they can line up. For example, Howard Stern, you just mentioned, going for a huge amount of money.

FRANK AHRENS: Yeah. Yeah. A five-year contract — $500 million I think.

TERENCE SMITH: I mean, that sounds astronomical. How can Sirius hope to make that back?

FRANK AHRENS: Well, the two companies are following kind of different business strategies and by different by necessity.

XM is taking more of a kind of slow and steady measured growth approach. And Sirius, because they started late and they have to make up the gap in subscribers, is taking more of a ‘Hail Mary’ approach quite honestly. They spent $250 million to acquire the rights to the NFL (National Football League) about a year or so ago.

And it was a heavy quarter of a billion dollars. They carry a number of the promotional costs and so forth. And then they lured Howard Stern. There’s nobody bigger in radio Howard Stern except maybe Rush Limbaugh. And Sirius is hoping that he will bring half a million, million, two million subscribers because both services really need to pump up their numbers — and by pump up I don’t mean artificially inflate, I mean they need to add subscribers. That’s the key thing. And the way to do that is by content and grabbing stars.

And it was important in the industry when Stern decided to go over from over the air, old radio, to satellite, new radio, because you’re seeing a lot of shifting of content from — I mean, look at the producers who take projects away from the networks and take them to HBO now or Showtime, because it gives them creative freedom.

TERENCE SMITH: What’s the attraction for a Howard Stern beyond the half a billion dollar contract?

FRANK AHRENS: Well, the attraction is he can say anything he wants. Any cable, any satellite broadcaster is outside the jurisdiction of the FCC. None of the decency standards apply. There’s no commercials. He can do what he wants. Or he can bring commercials. He can bring advertisers. People will want to advertise. The talk channels will have advertising. The music channels generally don’t. So, that’s the freedom to do it, essentially the same way as in television.

TERENCE SMITH: The freedom to talk dirty?

FRANK AHRENS: The freedom to talk dirty, if he wants.

TERENCE SMITH: And has that motivated others?

FRANK AHRENS: Well, I’m not sure that’s what motivated Bob Edwards to leave public radio and go, but he went to XM. I think the thing that motivated him was more freedom, being able to craft programs. Obviously, he was motivated because he needed a job. NPR let him go. Same thing with a shock duo called Opie and Anthony that was fired from over the air radio in New York a couple years ago; went to XM. The same thing for Howard Stern — say anything you want.

A number of people have gone. Bob Edward e-mailed me a couple weeks ago, and said this is like the early days of NPR. This is what it feels like.

TERENCE SMITH: When you look at the numbers, and –you said before that they had to have a combined 40 million listeners?

FRANK AHRENS: That’s what the analysts say. Right, between the two of them.

TERENCE SMITH: Between the two of them. And that’s if you do the numbers and figure out what the subscribers would pay, they could make a profit.

FRANK AHRENS: Right. These two companies are burning cash like crazy, because the satellite business is a very expensive front-end business. You have to buy and build satellites, and you have to launch them into space.

TERENCE SMITH: Right.

FRANK AHRENS: And sometimes they blow up. And then you have to build another one. And that’s why it’s so expensive. And Sirius had some serious cash problems early on. They had to refinance; they had to recapitalize. It was unclear if they were going to make it quite honestly.

But XM also had the same overhead costs, and the idea is, over time, those overhead costs tend to diminish as your infrastructure is up.

TERENCE SMITH: Is there room for two?

FRANK AHRENS: Well, that’s what everyone wonders. Right now, there sure looks like there is, because the two have differentiated each other in terms of product sufficiently enough. For instance, (Sirius) has said, okay, we’ll be about — if you really like sports, we’ve got NBA (National Basketball Association); we’ve got NHL (National Hockey League). Now, we’ve got the NFL.

XM has said, okay, we’re going to pass on those things, but we’re going for baseball. And they signed a deal where in opening day of 2005, you’ll be able to hear just about every baseball game. You’ll get the home broadcast of wherever that team is playing that day. And for baseball fans, that’s terrific.

TERENCE SMITH: They’re also going into one of the, I think, most useful things on radio for many people, many commuters especially, and that’s weather and traffic locally.

FRANK AHRENS: Right. They’re rolling out, going city by city, with the largest cities first, essentially going — you get a local traffic report, and you get a local weather report for Boston or Washington or New York.

And that’s the thing that frightens over-the-air broadcasters the most. Because over-the-air broadcasters still have localism. They can still tell you, if they want to, what’s happening around the corner.

TERENCE SMITH: Right.

FRANK AHRENS: And I actually think that Sirius and XM are going to cause over-the-air radio to get more local.

We went through a wave of consolidation in the late ’90s, and a lot of localism died from local stations because they fired local hosts, local program directors, began programming playlists for several stations out of one area, a syndicated host took (over) local hosts. And I think that the competition from satellite will force the over-the-air broadcasters to get back to their local roots.

TERENCE SMITH: I notice that the over-the-air broadcasters also announced recently that they were going to digital radio.

Is that in any way a reaction to satellite radio?

FRANK AHRENS: Only in terms of timing. This has been planned for a long time. It’s kind of like the transition to digital television.

It’s about saving spectrum. Analog spectrum takes up a lot more room than digital spectrum. So, the idea is to get TV and radio off that big piece of real estate, bring them onto a smaller better piece of real estate, and free up the analog for other uses.

But it’s coming at the right time for over-the-air radio. Now, the question is what will they do with better sounding radio, and you’ll have additional streams of programming.

TERENCE SMITH: Mm hmm.

FRANK AHRENS: And suppose XYZ is a hip-hop station. Well, maybe they take a side channel to do all go-go, and another side channel to do all soul — that sort of thing –

TERENCE SMITH: Right.

FRANK AHRENS: — to really get subscribers — to get to niche listeners, because that’s the way that over-the-air radio is going — into niches — just like satellite.

TERENCE SMITH: Is it your impression from talking to them, that over-the-air radio is nervous about this?

FRANK AHRENS: Well, they, like every other medium, took a real hit following 2001. It was a terrible advertising recession. And they’re coming back a little bit. Jeff Smulyan, who’s head of Emmis (Communications), which owns several radio stations, said the other day that they expected mid-single digit growth for ’05, which is up from the lower single digit growth from ’04.

TERENCE SMITH: Mm hmm.

FRANK AHRENS: Now, that’s steady for an older medium, but it’s not blowing anyone’s doors off.

TERENCE SMITH: I also saw him quoted as predicting, or maybe hoping, that the bubble would burst for satellite radio.

FRANK AHRENS: Right. I think probably the latter is more true — I’m sure he’s hoping that.

But he’s a smart radio guy, and the point he’s making is that both of these companies have enjoyed an extraordinary run of the past year of gaining subscribers and seeing their stock price go up.

TERENCE SMITH: Mm hmm.

FRANK AHRENS: And that may, in fact, level off. I mean, that’s the question. Because both of them have signed a number of auto manufacturers to get the big push out there –

TERENCE SMITH: Right.

FRANK AHRENS: So, that gets them out. Wall Street’s response to Howard Stern coming over — there’s been a bunch of boom, boom, boom activities…

TERENCE SMITH: Mm hmm.

FRANK AHRENS: How many more times will that happen? Will this start to mature a little bit where the line will start to flatten a little?

TERENCE SMITH: What does it say to you when a really experienced radio executive, like Mel Karmazin goes in, goes in and joins satellite radio?

FRANK AHRENS: Well, it’s another tipping point. It’s like following — it’s the Howard Stern thing. It’s the Bob Edwards thing. It adds a sort of legitimacy.

It’s like five, 10 years ago, cable television networks, like Discovery and so forth, were clamoring to get network advertising executives and network programming executives to come over, to lure them over, to kind of gain that legitimacy. And now, cable really doesn’t have to do that anymore, because they’re plenty legitimate. But that’s right where satellite is now, and Mel Karmazin is a big dog, and he knows radio. And he knows how to sell radio. That’s very important. People have to remember that Karmazin is a terrific salesman, and he knows how to market the medium, and that’s something that Sirius really needs.

TERENCE SMITH: But clearly, he must think this is the future?

FRANK AHRENS: It’s a future. It’s part of a future.

TERENCE SMITH: Right. If Howard Stern and you were saying they’re outside the aegis of the FCC, is there any serious move to bring satellite radio under regulation by the FCC?

FRANK AHRENS: There are at least a couple of lawmakers upset about indecency who are making noises about introducing legislation.

One tried it this year, and one may try it again next year, to essentially extend the FCC’s decency standards to cable and satellite.

Now, that’s problematic at best, because you’re facing a number of First Amendment hurdles. The idea is that over-the-air broadcast is the uninvited visitor into the house; it’s free, it’s pervasive.

TERENCE SMITH: Right.

FRANK AHRENS: You pay to get cable and satellite, so you’ve made that choice. So, why should they have the same protections?

At the same time, however, over-the-air radio broadcasters and TV broadcasters are upset that they’re under this burden of FCC regulation. They’re losing viewers. They’re losing creative talent to cable and satellite, so they feel unfairly burdened, and there’s a very good chance that they’re going to challenge the — in the Supreme Court — the FCC regulations that fine for decency.

So, maybe you’ll either get more or you’ll get none at all. But it’s all going to play out in the next year or two.

TERENCE SMITH: Right. It might be eliminated. Now, do you have any sense of where people listen to satellite radio? Is it overwhelmingly in their cars?

FRANK AHRENS: Yeah. For now it is, just like radio, because that’s where you spend most of your time listening to radio. It’s in the car, satellite or over-the-air.

But that’s changing. XM just introduced, and I’m sure Sirius will too, a gizmo that’s the size of an iPod or a cigarette pack that’s a mobile satellite radio that you can carry around with you.

And it has got five hours of memory. It’s like a TV for radio. Now, that could be a killer ap. That could be something that people really like, and it makes it portable. You’re not linked to anything anymore.

I think both satellite services get a lot of home listening as well, because you can take the gizmo from the car and plug it into your home stereo. So, there’s mobility to it. But right now, it’s in the car.

TERENCE SMITH: Meanwhile, there’s also great competition, is there not, between the two as to which cars they can get into and how many cars they can get into?

FRANK AHRENS: Right. Right. Sirius just inked a deal with Ford. GM is — I believe XM has GM. I mean, it’s like ‘you get Mercedes; I get Honda.’ And so, the idea is to try and see who can get them in the most. As I said earlier, both of them made the smart move by getting in rental cars. It’s a small way, but as I said because it’s an evangelism product, people rent – ‘you want the car with XM?’ Sure, whatever. And then they hear it, and then maybe they’ll buy it.

TERENCE SMITH: And I believe that General Motors is a substantial investor in XM?

FRANK AHRENS: Correct.

TERENCE SMITH: So, this is, you know, back-scratching here.

FRANK AHRENS: Right.

TERENCE SMITH: Basically financial back-scratching. I also saw the announcement that Sirius is going to offer a satellite television service as well.

FRANK AHRENS: Mm hmm.

TERENCE SMITH: Now, wait a minute. I thought they were radio.

FRANK AHRENS: The great thing about a digital pipeline is it’s big. And one of the first things I thought when I was reporting about satellite radio early on, I thought satellite radio is just a trickle in this satellite pipeline. There’s a lot of stuff you can put in it, because one of the things, the fun things, about satellite radio is that it carries the song names and the album or the artist.

So, it’s funny when I’m in a car that doesn’t have satellite radio now, and I’m listening to the radio, and I hear a song, the first thing I do is compulsively look down at the radio to see who that is, and I’m so disappointed when it’s not there.

TERENCE SMITH: Right.

FRANK AHRENS: Because you get used to it. So, the digital signal can carry text. It can carry audio. And it can carry video. And once it gets to the car, you can split it up if you want. Mom and Dad can be listening to the oldies station in the front seat, and junior can be watching on headphones on his little screen, you know, Barney or whatever in the backseat.

TERENCE SMITH: Is there any danger that the consumer will be swamped by all these choices?

FRANK AHRENS: Well, one thing that I think that we’ve learned is that we seem to have an infinite capacity and appetite for new media.

TERENCE SMITH : Mm hmm.

FRANK AHRENS: Movies didn’t kill the stage. Radio didn’t kill books. Et cetera; et cetera; et cetera.

I think the answer is probably no. But I like gadgets, and I like things like that, so that’s my bias.

TERENCE SMITH: Is there any evidence of a resistance level in terms of adding another monthly charge among consumers?

FRANK AHRENS: Well, that’s a question — both of these companies are really dependent on the general economy, because it’s clearly a luxury item. And XM planned to launch on September 11th or 12th, 2001. And they had to hold up. And Sirius was having all sorts of technical problems. They didn’t launch until half a year later.

And the first year or so, it was slow going because we were coming out of a recession. But once the economy picks up, and you can say, oh, it’s only $10 a month, and the way of getting it in cars, like, you buy a new, you know, Lexus, and they say, okay, it’s $600 bucks a month without XM on your payment or it’s $650 a month with XM or Sirius. Do you want it? Okay. I’ll take it.

But it is a luxury item, and it’s really dependent, as all luxury items, especially high-profit electronics, on the general economy.

TERENCE SMITH: Mm hmm. Is there any stylistic difference that you have noted from listening — I assume you’ve listened to both?

FRANK AHRENS: I’ve listened to XM a lot more than Sirius. When you look at the channel line-ups, and it’s essentially a push, they each have similar channel line ups. You can get old alternative, classic alternative, new alternative, five different kinds of classical — that sort of thing. They both offer a reasonably comparative slate of niches.

It differs on the sports and the talk programming, and each one is also trying to, and has had success in signing up celebrity DJ’s. To say, I think Sirius has a deal with Eminem, where, for one hour a week, or whatever the deal is, you know, Eminem will play you his favorite songs. And XM just countered with Tom Petty. That sort of thing.

So, in terms of that, I see a relative similarity. It’s the non-music channels where I see the big difference.

TERENCE SMITH: So you can’t, then, say that one is pitching to this audience, and the other is pitching to that audience?

FRANK AHRENS: It doesn’t seem like it. It seems like they’re pitching to mostly younger males, mostly males, maybe younger to middle-aged males.

But also they’re both pitching heavily to families, too, because they have family channels and that sort of thing here. Here’s another thing for the car. Here’s a thing for the family in the car.

I don’t necessarily see one as the, you know, going for the men or going for the women or going for the staid or the more risque. It’s hard to see that.

TERENCE SMITH: Or rural or urban audience? Any distinctions like that?

FRANK AHRENS: I don’t see that.

TERENCE SMITH : Mm hmm.

FRANK AHRENS: But maybe I’m missing a genius marketing scheme.

TERENCE SMITH: What about Internet radio. Can you see in a sense, all kinds of radio available over the Internet? And, free over the Internet?

FRANK AHRENS: The first part of your question is correct. The second part not so free, not so much anymore.

Back in the late ’90s — ’97, ’98 — when the Internet started to catch on for a number of things, every radio station said, hey, we can put our stream on the Internet, too. People can listen at work. We can do all sorts of things. And everybody threw up a stream, and then you had a number of small independent guys like you or me who had music and they had the Internet connection, and they said, hey, let’s put it on. I’ll be my own radio station.

TERENCE SMITH: Mm hmm.

FRANK AHRENS: But then the royalty issue hit. And the song writers and the performers said, you know, if you’re going to broadcast us twice as much, we need twice the royalties. And all those streams came down real fast.

And the Library of Congress had to get involved to set royalty rates, and they set them at a level that a number of small broadcasters said I can’t afford to have an Internet radio station anymore. That was a big dip down. Now, it’s starting to come back, but it’s much more a pay option. For instance, I used to be able to listen to Cincinnati Reds broadcasts on the Cincinnati Reds station out of — the home team. Now, for me to listen to baseball games, if I didn’t have XM, I’d have to pay a service. I have to go through a service, through Major League Baseball. They charge you to listen.

TERENCE SMITH: Right.

FRANK AHRENS: So, that’s the new generation.

TERENCE SMITH: Final question here: you started out by saying satellite radio is to broadcast radio, what cable was to television. Well, cable now is the dominant form of delivery of television in this country. Do you think satellite radio will be that?

FRANK AHRENS: It’s hard for me to imagine it being the dominant form. Now, the thing with cable TV is, yes, they have an aggregate larger prime time audience then the major networks do. However, there’s not one cable channel that has as big an audience as CBS or ABC. You still have a lot of people with the networks. And I think that’s how it’s going to stay with radio.