XM Talks Sirius Truce

Fans say the satellite broadcast rivals increasingly see plain old radio as their common foe.
By Scott Moritz ,

Suddenly, talk of a truce fills the combative satellite radio space.

XM Satellite Radio

(XMSR)

and

Sirius

(SIRI) - Get Report

have spent years scrapping for leadership of their small but fast-growing high-tech niche. The rivals have traded insults, engaged in shouting matches and pumped out press releases at a furious rate.

But going by what an XM exec said at an investment conference Wednesday, the clash may be on track to mellow a bit. The comments suggest that as they focus more on attracting advertising dollars, Sirius and XM are starting to see traditional radio, rather than each other, as their greatest nemesis.

Early Thursday, XM fell 17 cents to $31.35, while Sirius dropped a dime to $5.57.

Reaching Out

The armistice buzz started up when XM Chairman Gary Parsons took a question at the Banc of America Securities Media and Telecom conference.

A money manager asked Parsons if Sirius and XM might benefit by making radios that could work with either service and charging $18 a month for the combined services. Right now, each outfit collects $13 monthly for service on incompatible radios.

Parsons, a former engineer, might be expected to bristle at such a suggestion. After all, XM has made much of its supposed technical superiority, along with a strong lineup of automaker partners and a big lead in the all-important subscriber count.

But Parsons seemed pleased by the query and said it was the first time he'd ever heard that question. "I'd have no problem doing that," he answered.

The evident warmth of the reply seemed to suggest that not only was there room for two satellite radio players, but that maybe together the two shops could work against a much larger foe: conventional radio.

In an interview after his presentation, Parsons said that since Mel Karmazin took over as CEO of Sirius, the satellite radio industry has become more cohesive.

"I think we were more adversarial than we needed to be," says Parsons, referring to the history of bad blood between the two companies.

Yet not everyone is convinced that peace is sweeping through pay radio land. One longtime fan of the satellite radio sector says he's a little skeptical about any sudden show of brotherhood between XM and Sirius.

Both companies, he points out, are required by the Federal Communications Commission to work on system interoperability that would provide consumers with more programming choices regardless of hardware. But observers note that interoperability represents a costly development investment with little promise of payback down the road.

"They certainly want to create the impression that they are cooperating, but adding another chip adds costs," says the money manager, who is bullish on the satellite radio industry but leery of the current stock valuations and has no positions.

Bigger Stakes

Still, the change of tone between the two companies suggests there's been a little maturity over the years. Some observers say it speaks to a transition of satellite radio from speculative cult to more of a legitimate growth industry. Though both companies continue to torch piles of cash, investors have grown comfortable with the big losses, seeing them perhaps as the necessary table stakes for a shot at a lush mass-market jackpot.

"I'd be surprised if they hadn't thought of that before," said one conference attendee, referring to the combined-service question. "But then, they've been mostly rivals all along."

"Their real adversary is terrestrial radio," says the money manager, who recently sold positions in XM and Sirius. "They ought to be working together to take listeners and advertising from them."

Parsons acknowledged that the biggest selling point with satellite radio is the ad-free music and that XM was keen to "not disrupt" that position. But he did see advertising as a good fit in talk, news and sports programs that have "natural breaks" in the action.

As a percentage of revenue, Parsons said he saw advertising contributing about 10% of XM's total sales, and eventually that would likely grow to 15%. But he offered no specific timeframe for that growth.

Over at Sirius, Karmazin has made it no secret that advertising is one of the knobs the company hopes to turn to raise revenue levels.

Last year, Sirius narrowed its losses, but came in well short of a profit. The company lost 10 times more money than it brought in. Of course, that's an improvement on the year before, when Sirius lost 20 times what it took in.

Karmazin has said that he'd be happy with 5% of the $22 billion spent on radio advertising annually.

To be sure, it may be a little early to start touting the advertising opportunity, especially since most observers are more focused on subscriber growth for now. To that crowd, Parsons' said he expected to have XM's first-quarter subscriber numbers ready to announce as early as Friday.

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