Satellite Radio – Accomplishments, Opportunities and Risks

Bruce Elbert

President, Application Technology Strategy, Inc.

As appeared in March, 2005, issue of SatMagazine.com

XM Satellite Radio, the first US Satellite Digital Audio Radio Service (SDARS), just announced that it has exceeded 3 million paying subscribers. Will XM then be crowned X-Rex? What about up-and-comer Sirius Satellite Radio, or others outside the US like Worldspace and MBC of Japan and Korea? From my perspective, Satellite Digital Radio Service (SDARS) is a winner and I am definitely one of the most satisfied customers. But the big players in SDARS are faced with a modern Riddle of the Sphinx. That’s because there remain questions about the future growth and financial success of SDARS.

SDARS Conquers the Winds of Change

Many of us were skeptical that enough radio listeners would actually pay money for what is otherwise free-to-air. Proponents argued that subscription SDARS would succeed like cable TV did before it – by offering more programming options from a high-quality delivery mechanism. SDARS has shown itself to be the DBS for your car. XM Satellite Radio was first on the air in the continental US, and Sirius Satellite Radio is growing above one million subscribers. Each offer in excess of 100 different audio channels, combining ad-free music in dozens of formats as well as nationally-known talk radio and 24 hour news channels from cable. Local traffic and weather were added recently and syndicated shows like Howard Stern and Dr. Laura only “appear” on SDARS. In Japan and Korea, MBC will combine audio with video to provide real-time TV to mobile audiences.

An accompanying SatMagazine article by Howard Greenfield outlines the industry structure in the US and the current status of the business. The architecture and technical characteristics of current systems are detailed in the Satellite Communication Applications Handbook, second edition (Artech House, 2004).

From a grass roots perspective, I recently had a very interesting conversation about satellite radio with C. Calloway (VC) Brooks, grandson of the famous jazz composer and orchestra leader Cab Calloway; VC is also a jazz musician and continues to direct the Cab Calloway Orchestra. According to VC, “SDARS gives the audience a lot more diversity, a lot more clarity, and a lot more control. What they could do[to grow] is add more options and improve the continuity of signal as you pass through tunnels, underpasses, in parking structures (where you may have to sit waiting for someone to show up). Of course, you always have the normal radio for backup.”

It’s interesting to note that SDARS is not available in Europe, other than the few channels offered on Worldspace’s Afristar satellite. I was discussing this with a British journalist and the one point that we agreed on was that Europe, with many individual countries and associated individual languages, presents a large challenge to a fledgling SDARS operator. Unlike SES Astra, who operates eight satellites in one orbit position with more than 100 transponders that deliver over 1000 television channels, an SDARS system may not be able to achieve a similar level of expansion. This is mainly due to the limited spectrum allocated in the most appropriate L and S bands (discussed below in the US context).

Concentrating on the developed US market, operators XM and Sirius face some really serious challenges in coming years. These fall into two categories – (1) those that are tied to the fact that geostationary or near-geostationary satellites are used to deliver signals via a line-of-sight path to compact antennas and receivers, and (2) those that relate to the fact that the service is composed of multiple entertainment channels that must appeal across a broad (at least in aggregate) paying audience. These are discussed in the following paragraphs.

Gaining more spectrum and/or finding more orbit slots

The biggest challenge facing SDARS, in my view, is that of obtaining adequate orbit-spectrum resources for growth necessary to remain competitive and increase revenues. The L and S band spectrum allocations by the ITU provided a nice opportunity for innovators, particularly Worldspace. However, now that we have a real business, the current situation may not be workable in the long term unless action is taken. Getting more spectrum will not be particularly easy – or as cheap as what XM and Sirius originally paid in the first auction (e.g., under $80 million each). Unlike the standard two-degree spacing at C and Ku that allows more than 200 orbit slots to co-exist worldwide, SDARS satellites must be spaced much further apart. With current vehicular antennas, which are omni-directional, it is not possible to have two current-design satellites visible in the sky that are transmitting on the same frequency. Techniques such as multiple beams from the satellite and on the vehicle, and potentially using advanced spread spectrum technology, would multiply his bandwidth. But the current operating SDARS receivers would be incompatible and therefore subject to unacceptable interference.

Acquiring new programming formats

You might think that every kind of audio programming has been thought of. Back in the 1980s, we kind of thought the same way about cable TV. Then, suddenly, we had startup formats like Comedy, Food, Home and Garden, and finally local channels. SDARS appears to be following the same kind of progression. Having two operators in the US insures that there are options – both between operators and in terms of the programming choices. This fact-of-life will likely continue, limited only by technology and spectrum.

Locating additional revenue sources

With nearly five million total subscribers in the US, SDARS is a success in terms of penetration and mind-share. However, like its DBS counterpart, profits are illusive. It is generally a good strategy to seek additional revenue sources from the same infrastructure. Simply charging for what, previously, was free within a single subscription is not likely to be very popular. On the other hand, people will pay a little extra for value received. While I cannot possibly guess what creative minds will invent for programming of this sort, it is clear that electronic media such as SDARS are now capable of producing literally anything imaginable.

Holding onto customers by keeping them happy

I believe it can be summed up by saying - - that which keeps current customers happy will, eventually, attract more (e.g., VC’s suggestions, above). An important feature of SDARS is the perceived better audio quality that digital provides. It would not make sense to attract customers with a good service, then allow it to go down hill simply to add more content (e.g., stealing bits from the existing 100 channels with their respective loyal listeners).

Making the service readily available to new customer segments

My final point relates to how the current subscriber base might be expanded by removing barriers rather than expanding the service (which should also be done). Both Sirius and XM have worked hard to get the automobile manufacturers on board. As the largest single investor in XM, General Motors saw an opportunity not unlike that of On-Star. Putting XM together with GM was a marriage made in heaven. Sirius did not have a similar pedigree, so has had to work harder to develop the right relationships with manufacturers. The close tie between XM and GM is enough to encourage Ford to go another way, and Sirius was there for them. I, personally, have been frustrated by the approach taken by Toyota, the company I keep, so to speak, with respect to vehicles. Only now has Toyota agreed to offer XM in some of their vehicles, beginning next year. Without such pre-installation, I am left with two options: (1) using a “portable” system in the form of SkyFi (which I can conveniently take in-doors to use in my XM Boombox) and (2) have a car stereo place install an after-market system (which I did, but have to suffer a lack of proper integration with the AM/FM radio). What we want to happen is that new customers find SDARS right their in front of them without having any hassle to deal with. A valuable suggestion came from Drew Kaplan, CEO of IS-West. He suggests that Sirius, which he uses and appreciates greatly, could appear in a variety of unusual places, such as Apple’s iPod and possibly even wrist watches.

Back to the Sphinx

According to the Greek playwright, Sophocles, Oedipus beat the Riddling Sphinx at her game to gain notoriety and eventually the throne. For SDARS, getting more spectrum will require the kind of determination and intelligence shown by Oedipus. To grasp the complexity of the riddle, you only have to look at the large spectrum chart available on the Internet from the National Telecommunications and Information Agency (NTIA) – at http://www.ntia.doc.gov/osmhome/allochrt.html. This presents all of the frequency assignments within the US in terms of what is available to the civilian and government sectors. DBS systems have the luxury of lots of spectrum and the fixed dish at the user, with the ability to view multiple orbit slots (as many as three with DIRECTV’s “Triple LNB” design). Such an arrangement is not as feasible for L and S band, for which user antennas must be small in size and wide in orbital coverage.

Getting more spectrum for SDARS expansion probably requires changing the ITU allocations to increase that available for BSS (which encompasses both TV and radio). Others in terrestrial wireless are likewise making this move. The process we all must follow takes many years since it requires getting on the World Radiocommunication Conference (WRC) agenda and developing the necessary consensus among ITU members. The next WRC is scheduled for October 8 to November 2, 2007, in Geneva, Switzerland, which means that proposals are already being advanced at preparatory meetings now underway. Whichever SDARS operator can solve this modern Riddle of the Sphinx will have more than an upper hand in capturing the true throne of radio broadcasting.