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Satellite Radio: Dead Companies Walking

Over the coming weeks, the Federal Communications Commission (FCC) is expected to pass judgment on the proposed merger of XM Satellite Radio (Nasdaq: XMSR) (XMSR) with rival Sirius Satellite Radio (Nasdaq: SIRI) (SIRI). But the question is: Should anyone really care? (See Sirius Reservations.)

Throughout our history, new technological developments are constantly making existing products and services obsolete. The laundry list is endless, but here’s just a few:

  • Application-specific software coupled with a low-cost general purpose personal computer was the death knell for companies making standalone calculators, word processors, and typesetting and graphic design equipment.

  • The market for Hayes modems appears to have tanked shortly after the 1997 acquisition of US Robotics by 3Com Corp. (Nasdaq: COMS). It seems they didn’t see or didn’t believe DSL, cable modems, and/or WiFi were much of a threat.

  • Music delivery has evolved physically over the years from records to 8-tracks to cassettes to CDs and is now just a bag of bits called an MP3 file.

  • Have you seen a “floppy drive” on a computer lately? The combination of reliable high-speed communications coupled with portable flash drives spelled their death knell.

  • Mosaic and, later, Netscape opened the Internet to the unwashed masses and essentially spelled the end for AOL’s walled-garden online service.

    Those same processes are constantly at work, and today one of the areas most at risk is satellite radio. As has frequently been the case in the recent past, the death blow will be delivered once again by the Internet in combination with high-speed mobile wireless networks.

    Back in the 1990s, when the idea of satellite radio bubbled up, the concept was certainly an attractive one: no advertising; channels dedicated to specific user tastes; and available virtually anywhere. What’s not to like? At that point in time, the Internet was still largely a text-based medium, fixed broadband was still pretty much a dream for most of us, and most wireless technologies were still analog, slow, and expensive.

    Today, XM Satellite Radio and Sirius Satellite Radio are in the process of a well publicized merger that I think is born from the harsh realities of their separate experiences. Over the course of the last 10 years, their proprietary networks have managed to attract only 17 million subscribers. What’s rather ominous from an outlook perspective is that, in reality, this was the easy money, the low-hanging fruit. During that same period they have collectively burned through $3.6 billion in cash and taken on $2.8 billion in debt. It would seem that the allure of the service is neither as hot as some had anticipated nor is the dissatisfaction particularly high with commercial over-the-air alternatives.

    While satellite radio has stumbled through its first decade, what has changed rather dramatically has been the competitive landscape. In this area maybe the single most important change has been the advent of streaming media for almost every taste available via the Internet. Whether it’s listening to broadcasts of my college alma mater’s volleyball games, Gregorian chants all-day-everyday, or the dulcet tones of your favorite politician from the floor of Congress, it’s available. But what’s more important to recognize is that the experience is a completely user-driven/user-controlled process and does not require a service provider to determine what content will and will not be offered. The end-user is in control, not the service provider, and, historically, that has been a huge catalyst for success.

    However, content availability is only one side of the equation. To complete it we need a delivery mechanism, and that’s where mobile wireless comes into play. While it’s already available to some degree today, I think that the game really changes in 2009. Our current 3G cellular networks do have modestly higher data speeds. However, at this point most data subscribers are using the services for their functional aspects, as opposed to “entertainment.” That’s not to say that entertainment is unheard of but just that it is not the bulk of the usage today.

    I think this begins to change with the rollout of Mobile WiMax in volume next year and with LTE (Long-Term Evolution) on the cellular side a couple of years later. Today’s 3G solutions do have limitations on bandwidth due to their voice-centric origins. WiMax and LTE are designed for wireless broadband and will not be forced to constrain bandwidth under normal circumstances. Furthermore, you will see efforts by the interested parties (e.g., Intel Corp. (Nasdaq: INTC), GSM Association (GSMA) , etc.) to incorporate the technology into vehicles, first as after-market add-ons, later as OEM options in the same way as that of today’s satellite radio providers. (See Clearwire: We're Ready for Primetime, AT&T & Verizon to Use 700 MHz for 4G , and Sprint, Clearwire Create $14.5B WiMax Giant.)

    For an example of just how changes like this may well be received, check out this article from the Radio and Internet Newsletter.

    I am certainly not suggesting that satellite radio will disappear from the landscape on a specific date. For the near-term there will always be some who want an advertising-free environment and others who need to hear a shock-jock demonstrate his command of four-letter words. What I am suggesting is that the window has closed on satellite radio. Their proprietary, single-use networks will struggle to compete with an open, multi-purpose network and all that the Internet provides. Along with that struggle, investors have to seriously question the combined companies' ability to ever generate cash, let alone reach profitability as currently constituted.

    The advantages offered by XM and Sirius have been rendered moot by another series of technology changes. The same cycle that has taken place in the past is in process yet again. More importantly, the process will continue to work its magic so long as there are scientists, engineers, and other visionaries who think they may have a better idea. For now, XM and Sirius are little more than dead companies walking.

    — Bob Faulkner, Special to Light Reading

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