Air
date: February 11, 2005
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Satellite radio
GEOFF COLVIN: It's insane, right? Asking people to pay $10 a month or more to listen to the radio when they've got a whole dial full of stations for free. Well, turns out it isn't insane.
Millions of us are paying those subscription fees, millions more are doing it each year, and two companies, XM and Sirius Satellite Radio, are battling to rule this rich new business. They've been hiring away traditional radio's most popular stars, from notorious shock jock Howard Stern to public radio's Bob Edwards. Which company will pay off for investors? Will old-fashioned radio fade out? And will your favorite radio personalities soon be available only for a fee?
Sean Butson analyzes this industry for Legg Mason. Bob Edwards was host of NPR's Morning Edition for 25 years; last year he moved to XM radio.
Sean, why are 4 million people paying to listen to the radio?
SEAN BUTSON: When you think about the traditional radio broadcasting model, it's very similar to the way TV was about 25 years ago. Back when I was a kid, you got basically four channels: ABC, CBS, NBC and public television, and since then, over the last 25 years, you've gone from four channels to 400 or more. And now you have the types of content that just were not available before, and satellite radio is doing something very similar to that. Now you can listen to Bob Edwards every day. You can listen to 80 music channels. You can listen to CNBC. Any type of content you're interested in is available.
COLVIN: So you've got two competitors, XM and Sirius. Unlikely to be any more I gather, right, because it's very expensive to put up these satellites and so forth. Think we'll see any more competitors?
BUTSON: Well, you may. Right now I think the FCC has enough on their plate to keep them busy, but at some point, if the industry continues to grow the way we think it will, I do think eventually you will see a third license or even a fourth license be offered, but you're probably five to 10 years away from that.
COLVIN: So for now it's XM versus Sirius. Who's winning?
BUTSON: Right now XM is winning. And it's interesting because Sirius actually launched their satellites first, but they had some chip development problems and XM launched the service first. And since then, XM has really taken the lead and they've got about three times as many subscribers right now, a little over three million, and Sirius has a little over one million; but having said that, Sirius is closing the gap. They're growing their subscriber base faster and they're catching up on the technology front.
COLVIN: Bob Edwards, last year NPR announced they were changing your role. You weren't going to be host of Morning Edition anymore. There was a huge surge of popular support for you. And I've got to figure at that moment your phone is ringing with lots of opportunities in radio. What did XM say to you?
BOB EDWARDS: XM said you can do a daily interview program, precisely what I do and enjoy and am best at, and they said it first.
COLVIN: Are you able to do a different program on satellite radio than you were doing on public radio?
EDWARDS: I'm doing an hour interview program. I was doing a news program. There's a big difference there. You could do this program on public radio, yes, but they didn't want me to do that at NPR.
COLVIN: Right. So it's worked out pretty well. I mean I ask that because you hear a lot of people saying, "Well, they're going there because they can do something that they couldn't do." Your issues had nothing to do with Howard Stern's issues, right? He says things on the radio that get you fined millions of dollars if you say them on traditional radio.
EDWARDS: I don't need to be saying those things.
COLVIN: No, you don't need to be saying those things, exactly right. On the subject of Howard Stern, Sean, last year Sirius said they were going to pay him a package of cash and stock worth something like $500 million for five years. This is a company that is losing hundreds of millions of dollars a year. Now is this a deal that could break the company if it doesn't work out?
BUTSON: Well, I don't think it will break the company, because since they announced that deal, they've raised additional capital. And so if you do deals like that that require a significant amount of cash, you just have to make sure that you've got it in the bank and that you can pay for the content, and we think that they do. But having said that, yes, it's a minimum of a half a billion dollars over five years, because there are additional incentives that Howard can earn. Now is that going to end up being a good financial deal for Sirius? Time will tell. In a year from now we'll have a much better picture.
COLVIN: Bob, what if some other traditional radio person called you up and said, well, should I go? Should I go to satellite radio? What should I think about?
EDWARDS: Well, I would highly recommend it. I mean this is very exciting to be at the beginning of a startup, and it's the second time I've done this, because I was at NPR in its early days.
COLVIN: In the very early days, in the '70s, that's right.
EDWARDS: And when that happens, it's just the electricity.
COLVIN: So you feel this is, to quote a song, the start of something big.
EDWARDS: Yes, absolutely, and I get to do it for the second time.
COLVIN: That's pretty fun, but why do you think it's going to be so big?
EDWARDS: I think the potential is unlimited. The service, the product, what are you putting out there to offer listeners?
Commercial radio has stopped serving its listeners, as far as I'm concerned. It's become a, it's been greedy. It's just a big cash register now.
Public radio is doing the right thing. It's offering news and other programming that listeners want to hear, and satellite is doing the same. Eighty commercial-free music channels, you've got major league, we have every major league baseball game for the next 10 years is going to be on XM, CSPAN, Fox, MSNBC, CNN, all available on XM. That's a service. That's a variety of products that people want to hear.
We're serving listeners again, the way commercial radio should have been, and I'm hoping that it will be so competitive and that commercial radio will feel this competition from both public radio and satellite radio that it will finally start serving its listeners again. I believe in commercial radio. I hope that it comes back again.
COLVIN: Sean, what about commercial radio personalities versus satellite? I mean Howard Stern signed up, Bob Edwards has signed up, Opie & Anthony are signed up.
There are still some big personalities out there. There's Imus, there's Tom Joyner, there's Paul Harvey, there's Rush Limbaugh. How long is it going to be before they are available only on satellite radio?
BUTSON: Well, I think for the big personalities, Bob excluded, but the ones that are more focused on what you might consider indecent or obscene content, clearly those are the ones that are going to move to satellite radio because they're being hamstrung now more than ever before on the broadcast airwaves.
For the "decent" content, I think you will continue to see a mix of broadcast in satellite, and a lot of it's going to come down to dollars and cents. I mean Tom Joyner just got signed up for another 10 years with his company Reach Media and Radio One. Rush Limbaugh is still under contract for several years. And so at the end of the day, there are some very unique circumstances like Bob faced, but for a lot of these big-name content players, it comes down to dollars and cents.
COLVIN: Some people think, Sean, that the decisive event in the recent history of this business was Sirius hiring Mel Karmazin to be the CEO, because here's a guy who spent a long career in radio, revolutionizing that industry, became president of Viacom, left that, and now he's running Sirius. He is famous for being monomaniacal about the stock price. Wall Street knows him and likes him, so it's him running Sirius, versus Hugh Panero running XM. Is it a contest, or is it game over?
BUTSON: Well, I think a lot of investors like to look at these two companies as one will be the winner and one will be the loser, and they ask what I consider somewhat moronic questions like, "Is the industry big enough for two players?" As far as I'm aware, there's not a single industry on the planet that only has one player. And so asking the question, "Is it big enough for two players?" is kind of a silly question.
And so clearly I think the industry is plenty big enough for two players, and the reality is there's going to be more than two players. When you think about technology coming down pike, there's a little company right down the street from here named iBiquity that has the patents for all future high definition digital broadcast radio. And so when you get a TiVo-like device in your car where you can pause and fast forward and rewind and store music, you will have other competition whether it's over a satellite or not.
COLVIN: Bob, how does traditional radio fight back?
EDWARDS: Well, they can start doing fewer commercials for one thing.
COLVIN: Well, that's a great idea. I think most people would agree. It's what, 20-22 minutes an hour on a lot of stations?
EDWARDS: Yes, they just got greedy. And listeners forget what program they're listening to they're hearing so many commercials. And it's driving people away, driving them to public radio. All those years I was at public radio, the audience went up, up, up. I'm sure it's going to continue to grow, and that's clearly a response to commercial radio not doing the job and not providing what public radio does. Now they're going to feel it from satellite radio.
COLVIN: One danger, Sean, it seems to me for satellite radio is that somehow there could be other technological advances. I mean we are in a world where these things advance so quickly that you don't, I mean I certainly don't feel that I know what's coming up next. But are there dangers to satellite radio in the basic technological model of what they do?
BUTSON: Well, I think there are and there will continue to be new competition, some of which we've contemplated today and some of which we haven't, and that's one of my primary jobs is staying on top of that. I just came back from the Consumer Electronics Show in Vegas a month ago, and there's some interesting things that are coming out of there.
And so when you think about the satellite radio product and the barriers to entry, I really separate it between the car and the portable market. If you buy a new car and it has an XM radio already built into the dashboard, you're going to be a lot less likely to churn by paying to rip that radio out and put a new one in. But in the portable market, you can go right now to the store and find any number of products.
COLVIN: You have one. Let's see what it looks like.
BUTSON: I do. Actually I have a couple here. Now this is my BlackBerry phone I use, which gets me around on data and voice. And what I would love to happen is to take XM's new MyFi portable device, and XM just came out with a new chip that they can put into other consumer electronics devices, so you take these two and you put them together, and now I don't have to carry around two devices, two batteries, and two chargers.
COLVIN: That would be nice.
EDWARDS: Stay tuned.
COLVIN: Stay tuned, as we've all learned to say. Bob, 10 years from now, what's the role of satellite radio versus the role of traditional radio in American media?
EDWARDS: We'll see if there is traditional radio. The other thing about traditional radio is the short play lists on the music stations. And there's no imagination there. There's no introduction to, no exposure to new music.
And with the 80 channels, you're getting a lot of that, the cutting edge of each musical genre. So that's something commercial radio needs to do, too, to stay competitive. Broader play lists, more artists heard, and they're going to feel that heat from satellite radio, as they are now. But the competition is in many areas. Sirius has Pro football and basketball. We've got Major League baseball. So it will be in all areas of programming, sports, music, news, talk, and all of that.
COLVIN: So as usual in these technological advances, the winners for sure will be the consumers, right? The listeners.
EDWARDS: I think it's going to be whoever has the best programming that's going to prevail. Listeners are going to determine that, and I think it's less the gear and the technology than it is the programming. You've got to have a product.
COLVIN: Eternal advice I think, and we're going to see it played out in a brand new industry. Bob Edwards and Sean Butson, thanks for your views.
New product mania, Hewlett-Packard
KAREN GIBBS: Despite the euphoria that usually accompanies the beginning of a new year, and a successful turn towards democracy in the Middle East, there are ominous signs that the economy is not sharing in that glee. The expected surge in new jobs just hasn't happened, consumers are drowning in debt, and interest rates continue a slow creep upwards. All signs that the once mighty consumer may now be running for cover! This scenario has not gone unnoticed in the executive suite where innovative companies are rolling out scores of new products in the hope of capturing some piece of your shrinking wallet.
Money manager and contributor Michael Farr and marketing guru Fern Reiss have been tasting, testing and assessing what's new for us.
Well, Michael, what's new for us?
MICHAEL FARR: Well, what's new, Karen, I think is that the consumer is a bit long in the tooth. They've been supporting the economy for the past four, five, six years. They've been spending and spending. We bought new cars with zero percent financing. We've maxed out the equity in our homes, and as home prices have gone up, we refinance, we take more money out, we spend and we spend. And with that sensitivity to interest rates, as they start to creep up, the consumer could get in trouble, and that's new. So consumer companies, companies that sell to the consumer, which represent 60 percent of the economy, are really getting a little more sensitive about trying to make sure that they're getting as many of those consumer dollars as they can.
GIBBS: Well, what are they doing new and different to try and get more of our consumer dollars?
FARR: They do a bunch of different things. I mean we're seeing a sort of a normal product rollout cycle, but it's so much more important this year as this consumer comes under pressure. We get new products like caffeinated beer. We get - and we have caffeinated beer.
GIBBS: We certainly do. It's called B-to-the-E by Anheuser-Busch, and I think it must be targeted to younger drinkers, the 20 or so group. Caffeinated beer?
FARR: I don't get it. I mean I keep trying to think about why you want to be wide awake, you know, buzzed…
GIBBS: Oh, so you can drink more and more and more.
FARR: So you don't fall asleep while you're pounding them back. I mean maybe if you're the college student…
GIBBS: Fern, what do you think? Will B-to-the-E be a blockbuster hit for Anheuser-Busch?
REISS: I think it's the Starbucks crossover product. I think they're trying to move into Starbucks' space.
GIBBS: Will they be able to beat Starbucks, the 800-pound gorilla, in terms of caffeinated drinks?
REISS: I can't imagine, unless they're going to open little Anheuser-Busch cafés all over the country.
FARR: I like that idea, by the way. That sounds good to me.
GIBBS: Well, it's interesting, Fern, because we haven't seen many new products come out. Why do you think we're seeing these new and improved products like the beer with caffeine?
REISS: I think it's the company's trying to retrench and figure out how to get those consumer shrinking dollars. But I think what we're going to see more and more besides the new products is companies trying to reposition the old products so that they are able to get more market share for those old products.
GIBBS: Do you have an example of that for us, Fern?
REISS: One that is working is prunes, believe it or not. Has anybody bought prunes recently?
GIBBS: I like prunes actually.
REISS: Prunes is, you know, a digestive aid for grandparents, or it has been in the past. Now prunes has been recast, and they are calling themselves dried plums. I think this is brilliant marketing, and I would have gone one step further and called them sun-dried plumbs to get them in the same cachet group as sun-dried tomatoes. But I think dried plumbs is brilliant positioning, and I think they're recasting what was an old, dried-up product in a new light, and they're going to get a lot of attention for that.
GIBBS: My mother used to always have a pot of prunes cooking on the stove, so you had prune juice, you had all sorts of things. Another thing that I had from my childhood was a Barbie doll, and now we've got a new Barbie doll. It's called My Scene Barbie. Now how are they repositioning this product, Fern?
REISS: I think they're trying to cut into some other toy manufacturers' space and give you different kinds of Barbies now, which hasn't been true in the past, and I'm not sure whether that's going to be successful or not.
GIBBS: Do you have any feeling about trying, these companies, Mike, that have a product and they're trying to reposition it?
FARR: They almost have to in order to stay in front of that consumer. I mean the kiss of death for most any manufacturer is to have the consumer get bored with your product and have somebody else come out with something new. You know, Mr. Clean has a Mr. Clean new toilet bowl brush that has a disposable.
GIBBS: Right here.
FARR: Oh, we have one of these things, a Magic Reach?
GIBBS: Right here, Magic Reach.
FARR: This is the razor-razorblade concept for your toilet bowl, Karen. And I don't know how excited anybody's supposed to get about their toilet bowl, but this thing has whatever goes on the end of it that actually goes in your toilet bowl is supposed to come off, and you flush it away and you have to go buy new ones. Well, that's a lot more expensive than the $2.99 bottle of Mr. Clean with the old brush. They're going to try and stay in front of you and make your life easier.
They did that with that Swiffer mop that has the heads that change. That was a great success for Procter & Gamble. Gillette has not only given you the new razor blades with four or five blades now. I mean these things look like tractors that you're supposed to pull across, I mean everything is supposed to turn. Now they've got one through their merger with Braun that vibrates. It's enormously expanded their market share in that business. So whatever they can do to stay in front of you, they need to do.
GIBBS: But Fran, Procter & Gamble, or we could call it Procter & Gadget right now, is really pushing out these things, but what about the appetite, the demand by consumers? Are they going to stick with this product for the long term, particularly when you look at the replacement costs?
REISS: I think that remains to be seen, and I think the replacement cost is important. Somebody talked about HP printers a while back, and HP is in the news for more reasons than one today. HP printers aren't expensive, but they come out with a new printer every year, and the cartridges are really expensive. So it's that constant replenishment that's going to be the cost, and I think that remains to be seen whether customers are going to go for that.
I also think there are a lot of industries that haven't yet figured out that even though they're coming out with products every new year, they're not building on the successes of their past products, and one that comes to mind is the publishing industry. And Random House has been in the news this week talking about this Jane Friedman, that publishing houses don't know how to brand their books. So except for a very few niches, such as maybe children's books and romance books, the publishing industry really doesn't brand its books. So every year they're coming out with lots of new books, but they're not building on those successes because they're not branded. So you can ask the average person on the street what their favorite book is, and they know that. You can ask what their favorite author is, and they know that. But if you then ask who published that book, most of them do not know.
GIBBS: Michael, Fern just mentioned HP. The CEO, Carly Fiorina, was ousted from Hewlett-Packard this week. Was it a failure to innovate?
FARR: I think that was certainly part of the failure. She tried to be innovative with this Compaq merger, and it just never came together. And I don't think that the parts and the pieces were ever in line for it to be successful from the very beginning.
REISS: And their core, I think if they're sticking to their core values they have a better chance of making it. I mean their printer division is actually up 85 percent in profits. It's the rest of the company that hasn't been doing so well.
GIBBS: We also have some other things that are coming out in terms of new products. Coca-Cola is coming out with a new lime-flavored Coke soda. Coca-Cola itself, Michael, is too big really to be affected by one product, although in some cases one product can make a business. Is there any way investors can play these new products by looking at companies that are maybe providing parts or services to the bigger whole?
FARR: If you're an investor, you have to take a look at those companies that are really going to stay out there, be selling to that consumer, and doing so in a profitable way, particularly those companies that aren't going to lose market share. So I think you need to focus on stocks that are going to stay in front of that consumer and be very careful of those that lose the consumer's attention.
I like Procter & Gamble. I like this merger with Gillette. Gillette has not been selling into Asia. Procter & Gamble has, so that suddenly Procter & Gamble can now sell razors and razor blades over in Asia and in China, and that's going to be great product distribution. Also I think there are a bunch of different complementary products that are going to make them a much more powerful company. I would stay away from the sort of mid-level electronic retailers, the Circuit City's and Best Buys. Those guys could really struggle.
Wal-Mart is such a tough call. I almost decided that I can't afford not to own Wal-Mart. Okay, the consumer's 20 percent of the economy. Of all the retail dollars spent in this country, 20 cents of every consumer dollar is spent at a Wal-Mart store. They're the number one ladies apparel retailer, the number one toy store, number one auto parts, number one sporting goods. They're the largest grocery store in the country. So I have a hard time not owning them, but again, they cater more to the lower end.
I think you still have to focus on technology. I think it still looks powerful. You still have leverage. I think money will continue to be spent on technology, because it adds hours to our days and it continues to add incremental hours to our days, and there's some leverage there.
Also the banking sector typically do well as interest rates are rising, particularly in an environment were short rates are rising and long rates aren't. So they have an advantage in here now, too. But by all means, play defense. Don't get cute here. You want to make money the old fashioned way, and if you're one of those 57-year-old baby boomers, you need to be careful.
GIBBS: Michael Farr, Fern Reiss, thank you very much for joining us.
Investor education
GEOFF COLVIN voiceover: It's the first rule of investing, and you've heard it a thousand times - diversify. But what if it isn't always true? Recent research reveals that households holding only a few stocks outperform those with more diversified portfolios. Apparently the winning households are buying just those companies they know a lot about. Make sense? Well certain mutual funds operate on the same principal. They're called concentrated funds, and Russel Kinnel of Morningstar explains their rationale.
KINNEL: Concentrated funds can really get to know their companies. They can meet with management time and time again, really build a wide network of contacts with the company and with its competitors so that they can really do a complete analysis of the company. That's much more difficult if you've got 200 or 300 names in your portfolio.
COLVIN voiceover: So which concentrated funds are worth concentrating on?
KINNEL: Marsico Focus is a really great concentrated fund, because you have a very experienced manager in Tom Marsico, who's got about a 15-year track record, who's proven he can do it. he focuses on growth stocks, looks for good macro economic stories as well as company specifics, brings it all together in a portfolio that has really worked over time. I like Vanguard Selected Value a lot. This is a very different fund from Marsico Focus. It's run by Jim Barrow in a deep value style, mainly focused on mid-cap stocks.
COLVIN voiceover: The thing to remember about concentrated funds is that undiversified means much more volatile - so choose carefully.
KINNEL: Concentrated funds really magnify the manager's skill, so you'll typically see concentrated funds are at the bottom of the fund rankings and at the top, because those bets really take them to extremes. So you have to recognize that you don't just want to simply find a concentrated fund. You want to find one with low costs, a great manager, and a good strategy.
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