April 21, 2003 Satellite Radio Gains Ground With Right Mix of Partners By BARNABY J. FEDER NY Times Hugh Panero built a reputation in cable and pay-per-view television as a manager who could turn new entertainment technologies into successful businesses. For nearly five years now, he has been putting that reputation to a test as the president and chief executive of XM Satellite Radio, one of two start-up companies trying to develop a market for nationwide radio shows beamed to subscribers in their cars and homes. In recent months, growing numbers of investors and analysts have concluded he just might succeed. Mr. Panero, 47, arrived in June 1998 at what was then called American Mobile Satellite Radio, a privately held company with 12 employees and licenses to launch two satellites. It envisioned broadcasting 100 digital channels of music and talk radio to subscribers fed up with the lack of variety, the variable sound quality and the incessant commercials on traditional radio. But XM lacked broadcasting technology, support from automakers, consumer radios that could receive its digital programming and the several billion dollars it needed from investors to deliver on the dream. Last week, XM, based in Washington, announced that it had passed the 500,000-subscriber mark. General Motors and the American Honda Motor Company are now its biggest shareholders and are strongly committed to offering satellite radio as an option in new cars. Drivers looking to retrofit the 200 million cars already on the road have a growing range of receiver choices from major radio manufacturers, which have also begun to make home XM units. Analysts are betting XM will have one million subscribers well before the end of the year. Achieving such momentum has meant overcoming some big obstacles. One of Mr. Panero's most public tests came early in 2001 when XM's first satellite launching was aborted 11 seconds before ignition after a faulty indicator erroneously signaled technical problems. Its competitor, Sirius Satellite Radio, had already launched all three of its satellites successfully. It took several agonizing days to determine what had happened and to reassure investors that both XM satellites, named Rock and Roll, would be in orbit in time for service to begin, as promised, that fall. That incident was a prelude to an even more difficult test. XM's first major marketing campaign to herald the inauguration of service was scheduled for Sept. 12, 2001. That had to be scrapped because of the terrorist attacks of Sept. 11. The company's shares still trade well below their initial offering price of $12 the company went public in October 1999 and prices ranging from $10.19 to $32 for subsequent sales of additional shares. But the share price has rebounded strongly from last November's low of $1.66, to $7.10 at the close of trading Thursday. And growing demand for satellite radio helped XM, which charges subscribers $9.95 a month, stabilize its balance sheet in January by deferring payment of $250 million in debt and raising $225 million in new investments from G.M. and other backers. For the first time, XM is projecting that it will reach the break-even point late next year. And XM's success encouraged Wall Street last month to back a $1.2 billion refinancing package for Sirius, thus allowing XM's New York-based rival to avoid bankruptcy and market itself more aggressively. Jimmy Schaeffler, who follows subscription-based entertainment businesses for the Carmel Group, a consulting firm based in Carmel-by-the-Sea, Calif., predicted 2003 will be `the year that satellite radio answers the question of whether or not it will be successful, and the likelihood the answer will be yes is very high." Even Mr. Panero's rivals say his success at XM has played a major role in convincing Wall Street that satellite radio merits further investment. "Sirius did a good job of raising money and getting satellites launched first," said Joseph P. Clayton, the president and chief executive of Sirius. "Hugh and his team did a better job of commercializing the technology and getting to the marketplace first. We've had to play catch-up since." "He's done a spectacular job," said Gary Parsons, XM's chairman and former chief executive. But most impressive to those who know him, Mr. Panero has carried his load at XM despite the demands of supporting his wife, MaryBeth Durkin, and their two young sons as she battles leukemia. Mr. Parsons said that he makes most of the long-distance trips to visit investors, but that Mr. Panero rarely asks others at the company to accommodate his family needs. Mr. Panero said that his wife's illness has made him more efficient and he underscored the importance of keeping business setbacks in perspective. "I tend to get calmer as the problems get bigger," he said. He has also found time to serve as the chairman of the local chamber of commerce, where his work includes lobbying to bring the Montreal Expos to Washington. Although the outlook for XM has brightened tremendously since late last year, satellite radio's future is still far from secure. With many consumers groaning under the cumulative weight of monthly bills for Internet connections, cable television and phone service, the biggest question is how many Americans are willing to pay $200 or more to get the radio equipment needed to receive XM's or Sirius's services and well over $100 annually to subscribe. The price could climb if the companies followed the lead of cable television in adding premium channels. XM has begun experimenting with that strategy by offering a new channel produced by Playboy for $2.99 a month. XM has estimated it needs about four million subscribers to its services to break even. Sirius, which charges $12.95 a month, aims to break even in 2005, with as few as two million subscribers. Both may soon face tougher competition from traditional radio stations, which only recently received regulatory clearance to broadcast digital signals. Digital broadcasting can extend local radio's reach and allow stations to match satellite radio's sound quality in most of their listening area. About 130 stations have acquired licenses for the technology the Federal Communications Commission approved for digital broadcasts, and 20 have actually begun broadcasting, according to iBiquity Digital, the company that developed the technology. Clear Channel and Viacom are among the broadcasting chains backing the investments. As radios evolve to include screens, digital technology will also allow local radio stations to display text information, as XM radio can do now. But local stations will be able to send messages tailored to a local audience, like traffic reports and shopping ads, that a nationwide satellite network cannot offer. XM executives credit their success so far to three key strategic decisions. First, under the leadership of Lee Abrams, a radio programmer recruited by XM at the same time as Mr. Panero, the company has invested in developing more original live programming than Sirius. That has raised XM's operating costs and led it to run commercials on some of its music channels, which Sirius does not do. But the approach also gave XM a much larger stable of on-air personalities who can help build a base of loyal listeners to talk up the service. Mr. Panero, who grew up in the Bronx, said that XM hopes to cultivate on a national scale the kind of attachment he felt for WNEW-FM in the 1960's when disc jockeys on that pioneering rock station, like Alison Steele, became local icons. Sirius is fighting back in part by introducing more original content of its own, including a channel focused on gay, lesbian and transgender audiences that began broadcasting last Monday. XM also took a technological approach different from that pursued by Sirius. It hired Stell Patsiokas from Motorola and set up a unit in Florida to develop microchip technology for XM radios. XM started with designs developed by WorldSpace, an early investor that is trying to commercialize satellite radio for developing countries, and adapted those designs to the auto market, which early on was considered the best market for satellite radio in the United States. Sirius, by contrast, farmed out chip development to Lucent Technologies, which later spun off the unit doing the work. That unit, now known as Agere Systems, ran into lengthy delays when its initial chip designs proved impractical. But Mr. Panero's most important strategic decision was to align XM with General Motors. In return for an agreement that made G.M. the only car company able to install XM receivers in new cars until this year, XM got both an investor and an enthusiastic partner. Sirius signed agreements with numerous other auto companies, including Ford and DaimlerChrysler, but they were nonexclusive and did not involve major investments in Sirius or aggressive rollout programs. Executives at G.M. say they threw their resources behind XM rather than Sirius largely because XM had agreed to buy satellites and related ground technology from G.M.'s Hughes aerospace and electronics subsidiaries and to work with Hughes's DirecTV satellite television unit. XM and DirecTV officials say it is too soon to tell whether the News Corporation's plan to buy control of DirecTV's parent, Hughes Electronics, will affect their relationship, which includes a joint marketing agreement and Hughes's 7 percent stake in XM. XM already broadcasts the News Corporation's Fox News and Fox Sports channels. XM also developed a close relationship with Delphi, the former G.M. parts subsidiary that became an independent public company in 1999. This spring, Delphi introduced the $229 SkyFi boombox, the first easily portable device that can receive satellite radio, which has helped XM maintain a clear lead over Sirius in the range of radios that can recieve its service. "In my 27 years in the auto business, I've never seen anything quite so complex come together so fast," said Richard M. Lee, who oversees the interaction between G.M. and XM as the executive director for satellite services at OnStar, the G.M. subsidiary that identifies drivers' locations via satellite to provide emergency services. "Hugh has circumnavigated a lot of minefields."