© 2001 by Donald F. Robertson.
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This article originally appeared in Satellite Communications.
CAN SATELLITE RADIO SUCCEED WHERE OTHERS HAVE FAILED?
by
Donald F. Robertson
As Americans spend ever more of their day in automobiles, a number of companies are trying to make that time more productive -- or at least more entertaining. Two of them are on the verge of delivering Compact Disk-quality digital radio, via satellite, to the United States' swarms of frustrated drivers. Each company's plan includes one-hundred channels split about evenly between commercial-free music and advertising-supported "talk radio," as well as services like weather reports and radio navigation.
Why satellites? Depending on the local physical environment, all but the most powerful signals from the most well-placed ground transmitters are limited to a few tens of kilometers; satellites can blanket much of the nation with high-quality sound. One-hundred channels delivered nationwide provides enough room to offer niche programming that most local markets outside of the big cities cannot support. Digital radio over satellite may offer more variety and a clearer signal than even the largest local analog broadcasters can offer.
With about two-hundred million registered automobiles in the United States, it is easy to view satellite radio as a cannot-fail market of near-infinite potential. Investors appear to agree, pushing the valuations of the companies planning to offer the service far beyond their initial offerings. But is satellite radio really the market these companies hope? Recall that satellite telephones were also seen as an invincible product -- and far too few customers actually bought one.
This article will look at the two companies planning to offer consumer satellite radio services in the United States and at their business strategies. The companies are the entrepreneurial Sirius Satellite Radio, and XM Satellite Radio. The latter company is backed by Motient (the re-named American Mobile Satellite Corporation, which is soon to combine with its Canadian counterpart, TMI, to create a new company called Mobile Satellite Ventures), Hughes' DirecTV, General Motors, and other deep-pocketed corporations.
Although the technologies being deployed are different, the two company's strategies are remarkably similar. Both will charge about ten dollars per month. Each company has arranged for about half of the nation's high-end new automobiles to feature an installed AM/FM/Satellite receiver, often including a free one-year subscription, beginning in mid-2001. Sirius has Ford, DaimlerChristler, Mercedes, Mazda, Jaguar, Volvo, and BMW in the bag, along with truck manufacturers Freightliner and Sterling. XM is in bed with General Motors, Honda, Saab, Isuzu, Suzuki, and truck makers Peterbuilt, Mack, Kenworth, Freightliner, and International Trucks, according to XM. Both companies are also sponsoring development of "after market" receivers that customers can install in older or low-end vehicles.
Sirius Satellite Radio appears to have a clear lead. The company has raised $1.45 billion to build its satellites and ground network. Sirius has deployed three satellites in "Molniya"-type orbits, named after the Russian communications satellites that first used them. One additional satellite is under construction by Space Systems / Loral to be stored on the ground as a spare.
Molniya orbits are highly eccentric: each satellite soars high above the area being served, then swings down very low over the opposite side of the planet, before climbing slowly back up to its peak altitude over the service region. Since spacecraft move slowly when they are very high above the Earth, a carefully planned orbit can let it spend most of its time over the service region.
By evenly spacing three spacecraft in a Molniya orbit, at least one satellite is well above the service region's horizon at any given time. Since the satellites are placed so that their highest altitude is directly over the region they serve, they look more-or-less straight down into deep valleys and between the towers of urban canyons.
The required high altitude is also one of this orbit's disadvantages: when high above the customers, it takes a lot of broadcast power on the satellite to provide a usable signal to the tiny receivers that can fit inside of automobiles. It also takes all three satellites to provide uninterrupted service. If a satellite is lost, the orbits of the remaining two might be adjusted to partially compensate, but restoring complete service would have to wait some time for the ground spare to be orbited.
XM is many months behind Sirius in the race to launch satellites. On 8th January 2001, XM's first flight, on a Sea Launch Zenit rocket, was aborted eleven seconds before launch by a minor alarm which turned out to be false. Since the problem occurred late in the launch sequence, the Zenit had to be returned to California for refurbishment, and the mission was delayed until late February. If the launch is ultimately successful, the company still plans to have two satellites -- called "Rock" and "Roll" -- deployed by mid-2001.
XM is using a more conventional orbit, and, for satellite radio, a less efficient one: geostationary "Clarke" orbit. One satellite will be located at 115 degrees West Longitude, and the other at 85 degrees. Since the equator lies south of the United States, these satellites must look north. Viewing North America at a substantial angle, they are less likely to have an unobstructed view of every potential listener. This means that XM's network will need 1,500 or more ground-based repeater towers to provide seamless, nationwide service, while Sirius gets by with about ninety. There are plans to place transmitters at the entrances of major tunnels.
XM's satellites are derived from Boeing Space System's most advanced 702-model spacecraft, featuring huge solar arrays generating eighteen-kilowatts of power (fifteen kilowatts at end-of-life). These allow transmissions at more than seven megawatts per channel. XM's high broadcast power will help their signals punch through to small car receivers, even when they are under trees, power lines, and other obstacles. In theory, XM could provide a significant part of their service from a single spacecraft, meaning that the company has an effective on-orbit backup.
XM needs just two expensive spacecraft, while Sirius requires four; this goes some way toward erasing the advantage of Sirius' technically more efficient system which uses fewer ground-based transmitters.
Satellites are only a small part of a successful network to deliver satellite radio to customers. Also needed are a programming studio, satellite control centers, billing and customer support operations, and, the most difficult technology of all, receivers and antennae small enough to fit inside a car. The receivers must also be sensitive enough to listen to faint satellite signals and filter out unwanted noise, and be cheap enough for most consumers to buy.
Giving an indication of how difficult all that is, Sirius says that their receiving antenna must simultaneously look up for a satellite signal and along the horizon for terrestrial repeaters. It picks up all of "the available signals simultaneously, amplifies them, filters out noise and interference, and passes them on to the receiver module. . . . The chipset down-converts the [combined] signals from 2.3 Gigahertz to a lower intermediate frequency, then to the digital base band," while also converting the signals from analog back into digital. The signals are buffered in the receiver, so that even if all the signals are temporarily blocked, there is no break in the service. Reports in the trade press have suggested that Sirius had technical problems with its receivers, but the company insisted that these are now resolved.
With its satellites in orbit, Sirius is testing their complete end-to-end network, from the musician in a studio to the listener in her car -- and demonstrated it at the Consumer Electronics Show. Sirius testers are driving 1.6 million kilometers throughout the United States with satellite radio-equipped automobiles. So far, the company maintains that testing is going well. The introduction of service has been pushed back about six months to early this year, but most high technology ventures would kill to stay that close to an advertised schedule.
XM is producing a great variety of receivers -- "twenty-four different models of XM-ready radios produced by six major manufacturers" were shown at the 2001 Consumer Electronics Show in Las Vegas. The demonstration included a "Plug-n-Play" model that allows listeners to use the same radio both in their automobile and at home.
to experimentally test parts of its network, XM used an already-orbiting Ku-band satellite. XM's space segment broadcast electronics, supplied by Europe's Alcatel, have been proven by WorldSpace's technically successful program to supply satellite-delivered radio to under-served poor nations (See Giovanni Verlini's article, "AsiaStar Shines for WorldSpace" in Earth Space Review, Volume 9, Number 4). XM receiver chipsets are designed by European chip manufacturer STMicroelectronics, while Sirius' receiver circuitry is came from Lucent. The mass produced chipsets for both companies are then distributed to radio manufacturers throughout the world.
Outside analysts have suggested that the companies might achieve a few tens of millions of customers in their first few years of operation. Ten million customers multiplied by ten dollars a month is well over billion dollars a year -- not a bad income, considering that each company's initial investment was a comparable amount.
To generate another income stream, both companies have plans for limited advertising on non-music channels, providing a targeted yet nationwide marketing opportunity that could command very high prices. This may be a risky strategy since one motivation for buying a satellite radio may be to avoid advertising. "Less than half of the advertising of a traditional AM or FM station" may still be more than the audience will tolerate, especially when they have paid cash for the programming.
On-going expenses should be relatively low. For example, Sirius plans to only do "electronic billing." Sirius maintains that it only needs one-percent penetration of the potential market to achieve a positive cash flow. Both companies probably need more cash to maintain operations long enough to become profitable. They must raise this from investors who are increasingly weary of the space industry.
Nonetheless, with these kinds of numbers, the companies insist that there is plenty of room for two players. Four companies participated in the Federal Communications Commission's auction for satellite radio licenses; only two got them. Sirius and XM are a licensed duopoly, with substantial barriers to entry. Barriers to future competitors are both regulatory -- limited available frequency spectrum -- and financial -- that billion dollars or more of up-front infrastructure. Sirius and XM are cooperating on second-generation radios that can receive programming from both networks. "This will allow for reduced subscriber acquisition costs, more satellite radios in the marketplace, and a simplified choice for consumers," according to a joint press release. The agreement serves as a further barrier to entry for future competitors.
If traditional radio in the United States is awful for the occupants of automobiles, it is no better for everyone else. Fixed radios for home and office use can be physically larger than mobile receivers, but they must function indoors. XM appears to be putting more effort in this market, and is promising home stereo satellite radio receivers. Neither company appears to address hand-held radios.
XM also has plans to offer their service to another captive audience -- airline passengers. Sextent and Harris Corporation's Live-TV in-flight entertainment service also will to offer XM's radio content. XM hopes that airline passengers who like what they hear will rush out and buy satellite radios. The company has deals with Avis Rent A Car and Marine Audio for small boats.
And then there is the small matter of filling one hundred channels with sound that people will pay for. Sirius has built their programming studio and satellite control center in New York City, close to the rest of the broadcast industry, in return for tax breaks. It has seventy-five production studios with digital audio workstations, and a music library of two-million titles.
XM spent $65 million converting a one-hundred year old printing factory in Washington, DC, into one of the world's largest and most modern broadcasting centers. It contains eighty-two fiber optically inter-connected digital studios, one of which is large enough to accommodate a full symphony orchestra. The fully suspended studios are so well acoustically isolated that, "We can have classical music in one studio and chain saw rock 'n' roll in the studio next door," according to Tony Masielo, XM's Vice President of Broadcast Operations. Signals are sent up to the satellites via dual seven meter diameter dish antennae. XM also has supplemental digital studios in New York City, Los Angeles, and Nashville. Both companies have opened offices in Detroit to be close to the auto industry.
Impressive infrastructure and facilities are one thing, but how realistic are the business plans? The space industry does not have a good track record at predicting what consumers will pay for. Ten dollars a month sounds cheap, but will people pay it to get something similar to what they already get free of charge? Will listeners who do not get a satellite radio free with their new car spend several hundred dollars for an "after market" receiver? Is the programming innovative enough to attract any of these people?
Both networks do feature high-end global news from the likes of the British Broadcasting Corporation and the United States' National Public Radio and Public Radio International. The companies also plan to offer dedicated channels of classical music, experimental rock, folk music, and jazz -- in addition to the same soft and classic rock, country music, and commercialized "news" that fill America's traditional airwaves.
Yet, both networks' advertised lineups look far too similar and, frankly, rather bland. There is little evidence on their Web pages of outside-the-mainstream arts or politics. Since so much money is at stake, this kind of conservatism is understandable. Nonetheless, it may bode ill, since innovation is precisely what customers willing to pay for their radio may want. Programming can be adjusted after service has begun, and the market may go not to the company with the best technology, but to the one most willing to experiment and take programming risks.
It is tempting to compare satellite radio to satellite television, where tens of millions of consumers pay forty to sixty dollars a month, or more. What they are buying is the choice of a greater variety of programming than that offered by broadcast networks, higher broadcast quality, and in some cases more control over commercial interruptions. Will sufficiently large numbers of people pay ten dollars a month to get one-hundred channels of radio with fewer commercials? More importantly, will they keep paying it year after year?
Only time will tell, but the explosive growth of satellite television is promising.
Note: the author is a small shareholder in the following companies mentioned in this article: XM Satellite Radio and Sirius Satellite Radio.