XM and Sirius will continue to duke it out in the burgeoning satellite radio market – if they have enough cash to survive.

For music fans frustrated by the homogenous din of the Clear Channel-controlled universe, satellite radio seems to have it all: crystalline sound; more than 100 channels of music, news, and talk; the artist and song title clearly displayed – all for about $10 per month.

The equation seems so right, in fact, that satellite radio has become the second-fastest consumer service to reach the million-subscriber mark in the United States. Only direct broadcast satellite TV was adopted at a faster clip.

There’s only one source of static in the satellite radio model: profits. The fledgling XM Satellite Radio Holdings, which owns 80 percent of the 1.5 million satellite radio subscribers, has close to $1 billion in long-term debt. Top competitor Sirius Satellite Radio, the only other service with a license to launch satellite radio, is also bathing in red ink. With the tech landscape littered with innovative and ground-breaking companies that sputtered and fell to earth – Netscape, Napster, Silicon Graphics, among others – some are skeptical that these satellite radio pioneers will be around to bask in the success of the market they’re creating. Yet despite the massive debts weighing on these high-flying companies, Wall Street opinion is markedly bullish on both.

Phenomenal growth is boosting analysts’ confidence. In 2003, XM brought in revenues of $91.7 million, up 450 percent from 2002. Sirius says its 2003 revenues were $12.9 million – a 16-fold increase over 2002. According to projections from both companies, by the end of 2004 there could be almost 3.7 million people will subscribe to satellite radio subscribers in the United States. The industry is also riding great expectations: satellite radio is supposed to revolutionize radio the way digital cable and satellite did TV, and there is no doubting its appeal.

Chance Patterson, XM’s vice president for programming operations, says the company added more than 1 million subscribers in 2003 bumping its total (as of December 31) to 1.36 million. Although comparatively small with 216,016 subscribers (as of December), Sirius is growing fast. The company added 110,000 subscribers last quarter, almost doubling its size in three months and marking a seven-fold increase over 30,000 subscribers a year ago.

Those subscribers, however, don’t come cheap. The cost to lure a new satellite radio subscriber is around $73 per customer, based on advertising and other promotional fees, according to Steven Weiss, an analyst at financial services firm Bear Stearns. A formidable cost, but still less than one-seventh the price of attracting a new customer to satellite television; DirecTV says it spends about $550 to obtain each subscriber.

Meanwhile, XM and Sirius have kept their monthly churn rate to a modest 1.5 percent, roughly the same as satellite TV.

High startup costs are part of the problem. Before it launched, XM’s debt started to mount when it forked over $1.5 billion for two geostationary satellites (manufactured by Hughes Space and Communications) nicknamed Rock, and Roll. Exploding launches and other delays kept the full network of satellites from forming for months longer than planned; chip procurement also faced snags.

Finally ready to go, XM pumped $100 million into a national advertising campaign geared to fire up consumer interest. The planned launch date: September 12, 2001. One day prior, terrorists commandeered commercial jet liners and attacked the World Trade Center and Pentagon. The U.S. went into shock, financial markets reeled, and the technology sector softened even further. XM quietly rolled out its product later that month in Dallas and San Diego. Two months later, it was available nationwide.

XM rebounded from its stutter start thanks, in part, to industry partnership deals with automobile makers. With XM and Sirius stock and a cut of subscription fees, many manufacturers have a vested interest in satellite radio’s success – and they are willing to pull their weight. Last year, for instance, General Motors started pushing a three-month trial for XM service in 44 new car models – 75 percent of its production line. The new car buyers get the service free for 90 days, and the car companies pay a discounted license fee off XM’s usual $10 monthly service price for the trial window. Unlike many other high-tech gizmos for automobiles, consumers have shown that they’re willing to pay for entertainment: between 70 and 80 percent of trial subscribers stay with satellite radio.

Weak signalsThere is, however, growing skepticism about future viability. Sirius has $58.3 million in debt and $524.7 million in cash on hand, compared to XM’s $937.7 million debt load and $569.8 million in cash, according to figures supplied by research analysts at securities corporation SG Cowen. Most of XM’s debt is in maturing convertible bonds. That means before they mature (twice each year), XM must pay back the debt in cash – with interest – or hand over the equivalent worth of XM shares to the debt holders.

XM is also facing pressure from investors like Chicago VC firm Madison Dearborn Capital Partners and News Corp.’s Hughes Electronics. Both are keen on profiting from early-stage investments. In January, XM filed to sell 18 million shares, including 8.5 million Hughes shares and 2.5 million Madison Dearborn shares. The remaining 7 million on the block will help pay down debt by raising about $187 million, based on XM stock price as of January 22.

Large debt loads make both XM and Sirius all the more reliant on future growth of their subscriber bases. With largely fixed costs, all the satellite radio operators need are enough subscribers to break even, and then they begin to pump out profit with each new listener. XM officials, for instance, say the company needs 4 to 5 million subscribers to turn a profit.

Change in courseThe industry’s rough first few years forced both XM and Sirius to overhaul their original business plans.

“When we were developing our business model, we thought the subscriber base would be dominated by rural subscribers, because they have the least amount of local choice in radio format,” says XM’s Mr. Patterson. But an entirely different demographic turned out to be the cash cow: current figures show satellite radio is more popular among the commuter class in affluent suburbs.

As with most high-tech consumer products, satellite radio’s first adopters were the alpha geeks – those willing to spend top dollar to be the first with the latest gadget. But as major automakers General Motors and Honda start including satellite radio as a standard option in new cars, Mr. Patterson claims the service is becoming a mass market phenomenon.

Wall Street data affirms rapid industry growth. “We see total industry demand of around 35 million subscribers by 2013, enough to support profitable business models for both XM and Sirius,” says Kit Spring, an analyst with St. Louis-based brokerage Stifel Nicolaus. Even if satellite radio only won half of its 35 million-subscriber target, the $10 monthly subscriber fee would build a $2.1 billion market.

An increasingly mobile culture, along with consumer demand for more personalized media, is driving industry growth. But preparing for takeoff requires big investments. Satellites are neither cheap nor permanent, they age and degrade over time and must be replaced. Looking at their corporate balance sheets, Sirius appears to be more robust than XM despite its smaller size. To partially mend the disparity, as of January 15, XM plans to sell 7 million shares to tackle its debt problems.

Second in a two-horse raceDespite XM’s commanding market-share lead, Sirius’ Mr. Clayton isn’t fazed. His company has set out to differentiate its service by targeting specific niches, and high-margin customers. In addition to offering 60 channels of commercial-free music, Sirius has struck exclusive carriage deals for audio content from National Public Radio and the Wall Street Journal.

Taking a cue from the boon DirecTV has had from sports programming, Sirius is also targeting sports fans via exclusive deals with the NFL, NBA, and NHL. Reaping another savvy strategy, Sirius is being packaged in name brand radios like Alpine, JVC, Pioneer, Kenwood, Panasonic, and Clarion. It also has exclusive carriage agreements with Ford, BMW, and DaimlerChrysler.

Sirius is also looking to get a big piece of the 200 million cars and trucks (as well as RVs, heavy trucks, boats, and home users). In fact, the company estimates there are 350 million potential individual users for satellite radio products in the United States. That is plenty of room for two players.

Then there is the secret weapon, which Sirius unveiled at the 2004 Consumer Electronics Show in Las Vegas: video. Within the next 18 months, it plans to beam live VHS-quality video to its customers using MPEG-4 technology – the same video standard used in Real’s RealPlayer and Microsoft’s Windows Media Player. The company says it has no plans to take on DirecTV or EchoStar in the home satellite television arena (both of which use higher-quality MPEG-2 streaming technology), but will focus on mobile customers, pushing products like video players for minivans.

XM had some CES announcements of its own: the company plans a nationwide rollout of localized weather news service. The concept has sparked protest from some local broadcasters, who say satellite radio is licensed to do national programming only and should stay away from local broadcasting. As for Sirius’ high-profile announcements, XM eschews video and sports, saying that the video-based programming in cars is not feasible.

And although most Wall Street analysts agree that satellite radio will eventually be a viable market for both companies, they are unwilling to handicap each individual business model in the long term, and gun shy from making the mistake of dismissing satellite radio as a rural-only plan. For the moment, satellite radio could belong to either – or neither – of its two major players.

For: Red Herring

It doesn’t have much power and it’s relatively slow. That’s why the 802.15.4 wireless standard will soon be king of machine-to-machine communication.

The promise of wireless technology has always been hobbled by one flaw: wireless devices tend to be awful energy hogs. That’s where ZigBee steps in.

ZigBee is tech speak for the Institute of Electrical and Electronics Engineers’ (IEEE) 802.15.4 standard that promises wireless machine-to-machine communication with low power consumption, and low costs. It is already backed by some of the biggest names in tech, including Honeywell, Motorola, Philips, Samsung, Mitsubishi Electric, and Invensys.

Although many standards address mid- to high-data rates for voice, PC local-area networks, and video, there has not been a wireless network standard for the unique needs of sensors and control devices. Sensors and controls do not need the high bandwidth built into such standards as wi-fi and wi-max. They require a low-energy, low-latency network that allows messages to ping-pong across short distances.

Unlike Ericsson-developed Bluetooth, wi-fi, or even a traditional ethernet LAN, ZigBee does not need a centralized hub to coordinate message flow. If a building has multiple ZigBee devices, a message will connect the hot spots until it reaches its intended target. For example, a smoke alarm could pass its message through a thermostat, light switch, or motion detector to get its warning message to the central computer system. This not only boosts efficiency by requiring fewer wireless hubs, it helps keep a system up even if one, or a few, links in a chain are down or damaged.

In a large building, ZigBee technology could connect heating, ventilation, and air conditioning (HVAC), lighting, and security features. The result: a building that knows when a room is occupied and, potentially, by whom. Likewise, it knows when a room is empty – and can automatically turn off the lights or the air conditioning in unused areas.

“We estimate the average large corporation can save about 60 percent on HVAC and 40 percent on their lighting expenses,” says Venkat Bahl, vice chairman of the ZigBee Alliance and business development manager at Philips Semiconductor. He says energy cost savings have proved sizable with ZigBee test demonstrations at companies like automotive systems manufacturer Johnson Controls, which has 8 billion square feet of office space.

Mr. Bahl says ZigBee also has promise in the home. Because the standard is not proprietary, any home appliances manufacturer can install it into its products. It takes the universal remote control to a new level: one device to handle the TV, DVD player, lamps, and home thermostat.

Unlike wi-fi, which strives for always-on, large-pipe bandwidth, ZigBee was designed to be on only when needed, thus using less power. Bandwidth was secondary. The typical 802.11b wi-fi can transfer data at 10Mbps, good enough for streaming video. ZigBee, on the other hand, has a significantly slower maximum data rate of 128 Kbps – more similar to the rate of an average DSL connection.

The ZigBee Alliance stresses that their technology is not competing with wi-fi as much as it is answering the problems wi-fi was not designed to handle. Utility meters are one obvious example. ZigBee can be run off two AA batteries that would last a year, or even nickel-cadmium batteries that could be recharged by solar power. With its 70-meter range, a ZigBee gas meter would allow the local utility to check a home’s meter from the street with no need for a utility employee to enter the homeowner’s yard, or even to leave the safety of the company car.

In some cases, ZigBee’s hype is falling on skeptical ears. Ever since the 1939 World’s Fair teased millions of visitors with its vision of “Building the World of Tomorrow,” electronics manufacturers have been promising gadgets to bring such futuristic concepts as the automated home into reality. So far, technology has fallen short of that dream.

The first ZigBee products are set to be released by year’s end, but the IEEE has not yet approved all ZigBee protocols, meaning some manufacturers are betting on a non-standardized standard.

“Even though the specs aren’t complete, ZigBee has got a good chance to get us there,” says Patrick Gonia, a senior staff scientist with Honeywell Laboratories. His company is looking into using ZigBee in its home thermostats and commercial environmental control systems.

Honeywell has pursued wireless strategies since 1998, and is hot on ZigBee because its low power consumption and mesh network drive down costs while increasing flexibility.

Geoff Mulligan, chief scientist for Honeywell competitor Invensys agrees on the future of ZigBee. He believes today’s economics – not wishful thinking – and cost savings will drive a move to ZigBee-type wireless technology for building management. “In a building setup, 60 percent of the cost of system management is the installation of wires. There is a huge opportunity with ZigBee simply because of initial cost savings,” he says.

ZigBee also can be compatible with wi-fi, which means a smoke detector would be able to talk to your computer. He imagines a world where people can get a cell phone text message or instant message transmitted from a home PC alerting them that their smoke detector alarm has been triggered.

Although Mr. Mulligan says Invensys backs ZigBee, the company is taking a wait-and-see approach before including the technology in its 2004 product line, which includes the almost 15 million smoke detectors it makes each year.

Joyce Putscher, director of converging markets and technologies at research firm In-Stat/MDR says the market will take years to fully develop. “Heightened interest in ZigBee wireless connectivity could slowly make The Jetsons’ home of the future a reality. However, I doubt we’ll see that automated meal maker any time soon.”

For: Red Herring