Xm Satellite Radio Holdings, Inc. Business Information, Profile, and History

Company Perspectives:

One big idea can change everything. And XM Satellite Radio is one big idea. Radio to the Power of X. America's most popular satellite radio service gives you the power to choose what you want to hear--wherever and whenever you want it.

History of Xm Satellite Radio Holdings, Inc.

XM Satellite Radio Holdings, Inc. broadcasts more than 120 channels of digital radio via satellite to subscribers throughout the United States. The company's programming includes nearly 70 channels of commercial-free music and more than 50 of news, sports, and talk. Its offerings range from broadcasts of Major League Baseball and NASCAR events to channels featuring content from CNN, Playboy, MTV, ABC News, Disney, Sesame Street, and Discovery. XM's's broadcasts are beamed from two satellites to more than three million subscribers who pay a monthly fee of $9.95. Automakers including General Motors, Honda, and Toyota offer XM-ready radios as options, and the company has gained half of its subscribers through installations in vehicles. Others listen via XM-ready boomboxes or personal stereos, and over the Internet. XM has also created a radio channel for the Starbucks coffee shop chain, and provides data services such as traffic information for Cadillac and Acura owners.

Beginnings

The origins of XM Satellite Radio date to 1988, when a consortium was formed to buy a license for satellite broadcasting of telephone, fax, and data signals. It was made up of eight organizations including Hughes Aircraft Co., McCaw Communications, Inc., and Mobile Telecommunications Technologies Corp. The U.S. Federal Communications Commission (FCC) had ruled that sufficient bandwidth existed for only one license to be issued for such broadcasting, which forced the competing firms to form the joint venture. It was named American Mobile Satellite Corporation (AMSC).

In 1990 AMSC announced that a $100 million satellite would be built for it by Hughes and launched by the mid-1990s. Before that took place, the firm would lease space on other satellites for its data transmission services. The company was also looking into offering other satellite-based services, and in June 1992 formed a unit called American Mobile Radio Corporation to develop a satellite-based digital radio broadcasting service. In December 1993 AMSC went public on the NASDAQ.

AMSC's first satellite was launched in April 1995 from Cape Canaveral. The company was now planning to offer a bulky $2,000 satellite telephone to customers which would work anywhere in the United States. The growth of cellular telephone networks was mushrooming at this time, however, and the usefulness of AMSC's phone service was decreasing almost daily. As a result, the firm signed up far fewer customers than expected, primarily trucking companies, boaters, and airplane owners.

In April 1996 AMSC reported that it was close to bankruptcy, but it was bailed out when Hughes and several other firms granted it a $225 million line of credit. In the spring and summer there were a number of management changes, with new board members, a new chief financial officer, a new chairman, and a new CEO in Gary Parsons, who had been recruited from MCI Communications Corp.

In 1997 AMSC's radio unit spent $89.9 million to buy an FCC license to broadcast digital radio by satellite. It was one of just two licenses the agency granted, the other going to a firm called CD Radio, Inc., which had been working since 1990 on developing the digital radio concept.

In 1998 AMSC hired former journalist, Time Warner Cable executive, and Request TV head Hugh Panero to run its radio unit, with Gary Parsons serving as its chairman. Shortly after being hired, Panero renamed the operation XM Satellite Radio. In June 1999 XM received a $250 million investment in the form of convertible debt from General Motors, DirecTV, Inc., Clear Channel Communications, Inc., and three investment firms. The company was now planning to launch two stationary satellites which would beam down signals to listeners across the United States. In large cities, where the signal would be impaired by tall buildings, XM planned a network of 1,700 repeating towers to ensure uninterrupted coverage.

Going Public: Fall 1999

In October 1999 AMSC spun off XM Satellite Radio Holdings, Inc. via an initial public offering of stock on the NASDAQ. The sale raised nearly $110 million of the $1 billion it anticipated spending to build a satellite network. AMSC would retain 17 million shares of its stock and controlling interest in the firm. XM hoped to begin broadcasting in 2001, following the anticipated start of rival Sirius (formerly known as CD Radio), which was planning to launch its satellites during 2000.

XM soon leased an old, unused printing plant building in Washington, D.C., and spent $62 million to renovate it. The company's new headquarters would house 82 digital studios, one of which was large enough to record a full orchestra, as well as providing space for the 400 employees the firm was planning to hire.

To put together the 100-plus channels it would offer, XM hired well-known FM radio consultant Lee Abrams. Famed for developing the research-based approach to radio programming which had helped make FM radio both immensely popular and highly profitable (but also increasingly homogenous and stale, according to critics), Abrams had recently quit the business out of his own frustration over the industry's focus on the bottom line at the expense of creativity and quality. Asked to recommend someone to head XM's programming department, he became excited by the opportunity it offered, and took the job himself.

Abrams soon began working to create a diverse range of programming that would enable it to entice listeners to pay a $9.99 monthly fee, as well as $300 for a digital radio. To CEO Panero, it was important that the channel lineup consist of more than just a library of CDs set to shuffle play mode. He told the Washington Post, "We have to make this real and authentic, so that on the blues channel you feel like you're in a blues club drinking whiskey, and on a classical channel you feel like you're in a symphony hall."

For XM's music stations, Abrams hired experienced hands like Bobby "The Mighty Burner" Bennett, a popular rhythm and blues disc jockey of the 1960s, who would program soul music for an XM channel devoted to that genre, as well as doing a show of his own. Other channels were devoted to the music of each decade between the 1940s and 1990s, as well as various forms of rock, country, jazz, and classical music. The firm was also starting to sign up outside providers such as Discovery Communications, Inc., the Associated Press, and Bloomberg to provide content for its talk channels.

In the fall of 2000 the company began preparing for the launch of its two satellites, which had been christened "Rock" and "Roll." The first was scheduled to take off on Elvis Presley's 66th birthday, January 8, 2001, but its countdown was halted just 11 seconds before liftoff when a minor technical glitch was discovered. On March 18 it successfully reached a stationary orbit 22,236 miles above Texas, and the second satellite was launched in May. XM was now seeking additional funding, and sold $201 million in stock and notes to pay for operational expenses until broadcasting could begin.

Deals continued to be signed for content, and the company reached agreements with ABC Radio Networks and affiliate Disney, MTV Networks, CNN, and USA Today. Some of the informational channels would be heard on both XM and rival Sirius, while others were exclusive to XM. The company was also working with retailers including Best Buy, Circuit City, and Sears to sell its radios.

Broadcasting Beginning in Fall of 2001

The company was now planning to begin broadcasting on September 12, 2001, to Dallas and San Diego. A $100 million advertising campaign was launched in August with movie trailer spots depicting David Bowie, B.B King, and rapper Snoop Dogg falling from the sky along with piles of musical instruments.

On September 11, 2001, as company officials flew to the firm's first two broadcast cities, terrorists crashed planes into buildings in New York City and Washington, D.C. In the aftermath of the attacks, in which numerous people had fallen to their deaths at the World Trade Center, XM's ads were pulled and re-edited, and the company's broadcast launch was put on hold for two weeks. It officially debuted on September 25, and by October XM's signal extended to the entire Southwest. On November 12, it was available from coast to coast.

In late September the firm had discovered that, due to a manufacturing defect, its satellites would have shorter lifespans than the 12 to 15 years originally anticipated. The company soon announced that it would need to raise an additional $250 million to $300 million to continue operating, and it scaled back its ad campaign and cut other costs. XM subsequently restructured $31 million in debt, got a loan for $35 million, and raised $129 million through a new offering of stock. It was the fifth time the company had issued stock.

By the end of 2001, XM had signed up close to 30,000 subscribers. Though it had been perceived as the "Johnny Come Lately" of digital satellite radio, competitor Sirius was still not on the air because of problems with the microchip sets in its radios, and XM was winning major kudos in the media, with Fortune magazine calling its radio service the product of the year and Time honoring it as the invention of the year. The total amount invested in XM now stood at $1.4 billion.

XM's radios were initially sold as aftermarket items for cars, built by Sanyo, Pioneer, and others, but they were soon offered as options on 2002 Cadillac Seville and Deville models. Though Cadillac maker GM was a major shareholder in the firm, XM paid part of the cost of each radio it installed, as well as for the associated advertising. In February 2002 XM reached an agreement with satellite television broadcaster and 10 percent stakeholder DirecTV to offer the radio service to its viewers.

By June 2002 XM had signed up 135,000 subscribers. The firm was still recording heavy losses, however, and in November laid off 80 of its workforce of 480. It also adjusted its programming lineup, dropping teen talk channel BabbleOn and USA Today News, and adding an audio feed of CNN's television broadcast and XM Live, which featured concert recordings, some done in the company's studios. The firm was also preparing to offer a premium-priced service for an additional $2.99 per month that was programmed by Playboy and featured sexually explicit talk.

New Funding Arrangement: December 2002

In late December 2002 XM cut a deal with its major stakeholders including GM, American Honda Motor Co., and Hughes Electronics Corporation for $475 million in new funding from debt deferral and the sale of stock. The stake owned by GM and affiliates Hughes and DirecTV would rise to 19.6 percent, while Honda would own 8.3 percent.

Aftermarket XM radios now cost $200, and Wal-Mart had made a commitment to begin selling them in 2003, while car rental firm Avis was offering XM in its cars for $3 per day. The radios were available in three-quarters of GM vehicles as factory-installed options, for a price of $150 to $300. For fiscal 2002 the firm reported sales of $20.2 million and a loss of $495 million.

In April 2003 XM signed up its 500,000th subscriber, while announcing new deals to put its radios in Toyota and Audi cars. In August the company reported that a $400 million insurance claim for the defects in its satellites had been denied, though it continued to seek restitution. Following this setback, the firm raised an additional $150 million from the sale of 11 million new shares of stock. The money would be used to build a new $130 million spare satellite, as the existing spare would have to be launched in 2004 at a cost of some $190 million.

The end of 2003 saw XM's subscriber base grow to 1.36 million, five times that of rival Sirius. In early 2004 the company announced that it would begin broadcasting local traffic and weather information in 21 U.S. cities. The move was protested by the National Association of Broadcasters (NAB), who contended it violated the company's license to provide only a national radio service. The FCC did not interfere, however, as the channels were broadcast to the entire country.

The NAB was one of the most powerful lobbying groups in Washington, and had managed to place numerous restrictions on satellite broadcasters, including forcing them to pay performer royalties in addition to songwriter royalties. As a result, XM was spending an estimated $10 million per year on the former, in addition to the hefty amount it paid songwriter agencies BMI and ASCAP. Though AM and FM radio operators had for many years paid songwriters, they were not required to pay performers.

The first quarter of 2004 saw XM's revenues exceed fixed costs for the first time, though the company continued to lose money overall. The cost of adding a subscriber had dropped to $106 from $156 a year earlier, much less than what Sirius was spending. In May, new TV ads were launched to coincide with the annual surge in electronics sales tied to Father's Day and high school and college graduation.

In the summer, XM signed popular National Public Radio host Bob Edwards, who had been let go after nearly 25 years as anchor of the network's Morning Edition program. Many listeners had been angered by the move including CEO Panero, who made Edwards an offer to work for XM. Although rival Sirius had an exclusive contract to broadcast the programs of National Public Radio, XM was licensing content from other educational radio firms including Public Radio International, WBUR in Boston, and American Public Media. In the fall, a new "shock jock" morning talk team, Opie and Anthony, were added to the company's offerings, at the same time that rival Sirius signed controversial talk-show host Howard Stern to a five-year, $500 million deal which would start in January 2006.

In October 2004 XM signed a $650 million, 11-year agreement with Major League Baseball. The company would broadcast all of the games played during the season, devoting as many as 15 of its channels to them when all 30 teams played on a given day, with an additional baseball channel featuring archival and Spanish-language games. The broadcasts would use the established radio voices of each home team, who would continue to be heard on regular radio.

October also saw the introduction of the $350 Delphi XM MyFi. A small, personal-sized unit akin to a Walkman, it could pick up XM's signal and also record up to five hours of programs. Television ads featuring rock star Elton John hawked the new item. Competitor Sirius was reportedly still months away from offering such a product.

XM's receivers had always included a small information screen that showed the artist and song being played, and the firm was now experimenting with new ways to use this function, such as displaying the stock market ticker. XM's service also enabled listeners to select favorite artists or songs, and when one of its channels broadcast them the radio would automatically switch to that station. XM was readying another service called NavTraffic, a continuously updated mapping system that showed traffic problems and suggested alternate routes, initially available for owners of certain Cadillac and Acura models.

The firm was also preparing a dedicated music channel for Starbucks coffee shops, and had begun to offer its programming via the Internet. By the end of 2004, XM boasted more than three million subscribers, triple the count of Sirius. Revenues for the year would hit $244 million. Losses, however, would exceed $642 million. The company's stock price, often volatile, now was in the mid-$30 range, after having reached a low of $1.66 in 2002. During the 2004 model year, GM had installed more than one million XM radios in cars, while Honda had put them in 200,000.

In just over a decade, XM Satellite Radio Holdings, Inc. had spent more than $2 billion putting together a satellite radio service that offered more than 120 channels of music and informational programming. The firm had gotten the jump on rival Sirius Satellite Radio by going on the air first and had built up a sizable subscriber base, but the industry was not yet profitable, and it would take time to see whether XM's business plan was truly viable.

Principal Subsidiaries: XM Satellite Radio Inc.; XM Equipment Leasing LLC.

Principal Competitors: Sirius Satellite Radio, Inc.; Clear Channel Communications, Inc.; Infinity Broadcasting; DMX Music, Inc.

Chronology

• Key Dates:
• 1992: American Mobile Radio Corp. is formed as unit of American Mobile Satellite Corp.
• 1997: Company wins license from FCC to broadcast digital radio signals.
• 1998: Hugh Panero is named CEO; company becomes XM Satellite Radio.
• 1999: Initial public offering takes place on the NASDAQ.
• 2000: Company moves to new headquarters in Washington, D.C.
• 2001: Satellites are launched and broadcasting begins.
• 2003: One millionth subscriber orders XM Radio.
• 2004: A $650 million deal is signed with Major League Baseball.