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XM Reaches Market First With Satellite Radio Service

10/08/2001 02:00:00 AM Eastern

XM Satellite Radio came from behind to inaugurate the nation's first commercial satellite-radio service, teaming up with such retailers as Best Buy, Good Guys and Tweeter to offer XM tuners in Dallas/Forth Worth and San Diego.

"We were considered a year-and-a-half behind [rival Sirius Satellite Radio] three to four years ago when I got here," said president Hugh Panero during the XM's launch event at the company's 80-studio Broadcast Center only a few miles from Capitol Hill. Despite its slow start, XM edged out rival Sirius Satellite Radio to become first to market with a 100-channel, around-the-clock national service. XM service will roll out to the Southwest and Southeast in less than 30 days from the Sept. 25 launch and then to the rest of the country 30 days later.

Sirius still expects to launch service nationwide during the fourth quarter. In mid-October, it hopes to announce a specific launch date.

Panero expressed confidence in the appeal and eventual profitability of XM service. He projected a subscriber base of 4 million in 2004, each paying $9.99/month and enabling the company to "break even" on an EBIDA (earnings before interest, depreciation, and amortization) basis.

XM, however, has a long way to go in reaching its subscriber goals. In the week preceding the formal launch, XM dealers signed up about 400 subscribers in Dallas/Fort Worth and San Diego, and by the end of the year, the potential subscriber base could hit about 100,000. That number reflects the 100,000 XM aftermarket tuners that will have been shipped to more than 6,000 retail stores nationwide through December. Additional tuners will be available as factory-installed items available from GM on the Cadillac Seville and Deville beginning in November.

Purchasers will be attracted to programming diversity lacking in terrestrial radio and seamless nationwide service. The channels hope to bring "the programming of radio back to artists," Panero told an audience in the company's that included its key investors: GM, DirecTV, Honda, and Clear Channel, operator of a nationwide network of local radio stations. The service will offer 71 music channels, more than 30 of them commercial-free, and 29 news, information and entertainment channels, including 24-hour news services like those available only through cable TV and DirecTV, he said.

Based on initial customer response in the two launch markets, "there is a good potential that we will exceed our expectations" in the fourth quarter despite the nation's economic uncertainty, said Dan Murphy, VP of retail markets and OEM distribution. "Christmas will be challenging for certain product categories," he said. "With portable MP3 players at $229 and with their limited entertainment value, we're very well positioned from a price point standpoint starting at $299," he said. "We offer the benefits of CD and DirecTV combined, so you'll see very strong demand."

Murphy advised retailers to "sell the service first." In the weeks preceding the formal launch, XM staged demo events at local stores and other venues and found that "consumers are more interested in understanding the breadth of programming first and the hardware requirements second."

"There's a golden opportunity to sell a hot product that can deliver unprecedented news programs and more genres of music [than terrestrial radio]," he added.

Car tuners from Pioneer and Alpine were available for the launch, with Sony's combination home/car tuner due about a week later, XM said. Also available at launch were rooftop adhesive-mount antennas and a Terk on-glass model, which has generated the most demand, dealers said. The antennas are priced separately from the tuners at a suggested $79-$99.

To promote service in the weeks before the two-market launch, XM sent a pair of Saab convertibles and a van with a foldout tent to retail stores for demos, dealers said. XM also sent demo vehicles to a San Diego music festival that it co-sponsored, a trade show for independent truckers, and NASCAR races, where the demo vehicle was an 18-wheeler that turns into a display area, Murphy said. The vehicles will show up at future retail and consumer events.

XM's launch didn't come without last-minute challenges. Because of the Sept. 11 terrorist attacks, XM had to delay its original Sept. 12 launch. The attack interrupted FCC deliberations on giving XM and Sirius temporary 180-day authority to fire up their repeaters, and it grounded planes carrying the quantity of tuners needed to support the two-market launch. Nonetheless, a small quantity of tuners was available to consumers who showed up at stores on Sept. 12.

If that wasn't enough to complicate XM's plans, the company decided after the attack to pull spot-TV ads in the two markets because they depicted people and objects, such as music instruments, falling from the sky. The ads were originally intended to run through September. Radio, print and billboard ads continued to appear after the attack.

XM has been shooting new TV spots and is directing its content away from promoting XM brand awareness and toward directing people to stores, just as in the radio and print ads, Murphy said. The new TV campaign will explain what satellite radio is and where to find it "versus just promoting the XM name," which was the focus of a month long campaign of 60-second spots in movie theaters nationwide.

"We feel the new TV ads will be more effective," Murphy said. "In Dallas, we found that because of public relations, the movie campaign, and retail word-of-mouth, XM was a brand easy to remember."

In another development, XM said it has not experienced any problems so far with its satellites' solar-array systems, even though same-model Boeing satellites in orbit "have exhibited a faster than expected performance degradation during early operational life."

Based on Boeing's projections, the satellites' solar arrays won't fall below spec "before the latter half of the decade," XM said. XM previously estimated the satellites' lifespan at 12 to 13 years and said the replacement cost would be covered by insurance.

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