Unsound Ambitions

Would you pay $12.95 per month for the functional equivalent of having Muzak pumped into your car every time you back out of the driveway and flip on the radio?

Though the answer seems obvious, some presumably smart fellows on Wall Street have already invested - and lost - more than $4 billion to find out for themselves, the hard way, that consumers are rarely so foolish as investors wish them to be at the peaks of runaway bull markets.

This week we take a look at some particularly compelling evidence of same, as one of the two leading rivals for dominance in the doubtful business known as satellite subscription radio goes through what amounts to a crypto-bankruptcy proceeding.

The company in question is Sirius Satellite Radio Inc. (SIRI) of New York, and it perfectly embodies both the hope and the delusion of the Digital Age, with its dogmatic belief that technology itself can define human need.

"Build it," we were told, "and they will come." But no one did. And in the case of Sirius - and its only rival, XM Satellite Radio Inc. of Washington, D.C. - it's not hard to see why.

Conventional radio programming uses analog wave technology, but satellite radio is based on digital technology. And though the sound quality of digital radio is undeniably better, listeners need special "digital radios" to receive and decode the signals.

Those radios add roughly $300 to the price of any new car that comes equipped with them, and they're equally expensive to install as an after-market item. What's more, the output quality is only as good as the amplifiers and speaker systems that reproduce the sounds.

So with even medium-good systems now selling for $1,000 and up, the ticket of admission to the digital listening experience is really much higher than the subscription charges of $9.99 per month (for XM) and $12.95 for Sirius suggest.

What do you get for the money, besides the elimination of static and fading reception? Not a lot that people may really want.

Both Sirius and XM are offering 100 channels of programming - about half original programming developed by the companies, and half programming already being aired by existing stations.

One big plus, or so it is hoped: Being able to listen to your favorite radio station not just around town, but nationwide. Yet how many people drive from New York to Los Angeles or Miami, anyway - and how many would want to have a service like Sirius or XM at the ready for those rare moments when one takes such a trip?

Not only is most driving done within 10 miles of one's own front door, but numerous studies show that listeners derive the most pleasure from hearing songs with which they are already familiar, which is why CD players on radios all come with "replay" buttons - something a third-party programming service cannot offer.

In spite of such obstacles, Sirius itself has already spent more than $1.5 billion in direct capital investment on constructing an elaborate digital programming infrastructure that stretches coast to coast and 25,000 miles into outer space.

Unfortunately, a task that began in the boom days of Wall Street's bull market has finally reached fruition in the darkening economic climate of 2002, generating revenues to date of barely $75,000. The company insists that its audience numbers are set to ramp up sharply in the coming year, as its two main automaker partners - Daimler/Chrysler and Ford - begin equipping their new models with Sirius-ready radios.

But in a tight-money climate, it's easy to imagine many cost-conscious shoppers eliminating the radios as a way to cut the sticker price on the showroom floor.

Sirius says it expects to have 400,000 subscribers by the end of next year (up from fewer than 40,000 now), and to reach a cash-flow break-even point with two million subscribers by the first quarter of 2005. But skeptical investors aren't buying it, and they've sent the company's stock price careening from a high of $63 two years ago to a current price of 75 cents.

That in turn makes it make-or-break time for the company's new president and CEO, Joseph P. Clayton, 52, who took over as head of Sirius a year ago with much tub-thumping enthusiasm about the future of the industry.

If things don't go right for him - and at the moment the odds clearly seem stacked against success - Clayton will earn for himself the awkward distinction of presiding over two ultra-extravagant high-tech failures in a row.

What's more, both will have flopped for exactly the same reason: No market demand for the product. Prior to taking over at Sirius, Clayton held the job of vice chairman and president of North American operations at scandal-drenched Global Crossing Ltd., escaping last November as the company was hurtling toward bankruptcy.

Sirius itself began life at the start of the 1990s as CD Radio, Inc., the brainchild of a Canadian college dropout named David Margolese, who is said to have been stunned when he figured out how much money could be made if even 1 percent of America's radio audience could somehow be persuaded to pay for the privilege of listening to the radio.

Exactly why anyone would be willing to do so when radio was already free seems to have been something that never got critically examined. Instead, entrepreneurs simply piled into the game, reassuring each other that if consumers would "pay" for free broadcast TV (and what else was cable television?), then why should "subscription radio" be any different?

By mid-decade, Margolese's company had gone public, raising about $7 million through the U.S. arm of a Canadian stock-and-warrants outfit named First Marathon Securities, and CD Radio - soon to be renamed Sirius Satellite Radio - was ready to roll.

Since then, the company has devoted itself nonstop to the task of raising money and spending it, to create what amounts almost to a private enterprise version of the Space Program. Three Sirius-owned satellites now orbit 25,000 miles above the earth, beaming back the digital signals of radio programming across the whole of the North American continent.

Back on earth, some 92 so-called "repeater" towers have been constructed around the country as well. Their purpose: to fill in dead zones that the satellite signals for one reason or another can't reach. A fleet of trucks has been assembled to patrol the nation's highways to monitor the signals 24/7.

And that's not the half of it. By spring 1998, Wall Street was stampeding, and with Sirius's share price having soared from $4 to nearly $40, the company signed a $4.5 million-a-year, 15-year lease on two entire floors of high-rise office space overlooking midtown Manhattan. Next, the company poured more than $46 million in capital improvements into the premises, constructing everything from a visually stunning satellite control room to actual concert studios, a digital music library, and who knows what else. And all this was done before a single customer had been signed up.

In the spring of 2000, as Wall Street's swooning enthusiasm over this long-shot business was peaking, the company carried a market value of nearly $2.5 billion. Today the whole shebang is priced at less than $58 million.

To buy itself some desperately needed time, the company last week announced a recapitalization plan through which holders of $1.2 billion worth of its junk bonds and preferred stock agreed to swap the paper for $40 million worth of new common stock, making the company 92 percent owned by a group of institutions led by the Oppenheimer Funds, the Blackstone Group, and Apollo Management.

The deal gets rid of $110 million in interest charges, and gives the company the cash to hang on until the second quarter of 2004, by which time it is hoped that a market for subscription radio will have finally begun to emerge.

My own guess, however, is that it won't, and that the first broadcaster who turns up bearing anything more liquid than a bag of Malawian kwachas can walk off with this company for $150 million before lunch. Enough said.