Technology

Shooting Down Satellite Radio?


Terrestrial broadcasters are going for an

FCC-aided kill in their long-raging fight with XM and Sirius

The radio wars are escalating. In a one-two punch aimed at enlisting regulators to their cause, the National Association of Broadcasters (NAB) and National Public Radio want the Federal Communications Commission to investigate alleged misdeeds by satellite radio companies XM (XMSR) and Sirius (SIRI).

On Oct. 12, National Public Radio CEO Ken Stern wrote to FCC Chairman Kevin Martin alleging that the satellite broadcasters' devices interfere with NPR broadcasts. And last week, David Rehr, president and CEO of the powerful NAB, fired off two letters to Martin alleging several regulatory violations.

Old Radio Vs. New Radio

The latest correspondence should strike Martin with a sense of déja vu—and Sirius and XM with a sense of foreboding. Seven months ago the NAB sought the FCC's help in preventing XM from acquiring wireless licenses to provide an array of new services, such as on-demand audio and video, competing more directly with terrestrial radio. XM abandoned the bid in May, figuring that the agency would oppose the effort.

That's just one of many instances where terrestrial broadcasters and satellite radio outfits have clashed over the years. And the NAB, which represents land radio stations, with some 260 million listeners every week, has won thus far.

"The NAB has tried to kill satellite radio from the beginning," says Tom Watts, an analyst with Cowen & Co. (COWN) "Because the FCC has listened, broadcasters are using the regulators as a weapon now." That's proving easier, however, since XM and Sirius have recently admitted to some of the violations—which is partially why the terrestrial broadcasters are taking their fight further in this latest skirmish.

Satellite Slip-ups

Claiming "a persistent corporate (if not industry) circumvention of the FCC's regulations," the NAB and NPR are demanding an investigation into at least three separate issues, two of which the broadcasters raised with the FCC earlier this year. The NAB's goal seems to be stripping XM and Sirius of their licenses.

The satellite operators have displayed "a lack of candor in dealing with the FCC," says NAB spokesman Dennis Wharton. "In such cases, a licensee can have the license taken away."

That worst-case scenario is unlikely to play out: Some of the alleged violations cited in the NPR letter can't be conclusively linked to satellite radio devices. Other alleged missteps could simply result in tens of thousands of dollars in fines and a slap on the hand, says John Garziglia, a lawyer specializing in FCC issues at law firm Womble Carlyle in Washington. "It doesn't appear to be a big deal," he says.

Yet other allegations, if the FCC deems them serious, could result in temporary degradation in quality of service for satellite radio subscribers, major product recalls, and even shifts in the satellite radio industry's marketing and content strategies. These measures could potentially prompt a slowdown in satellite radio subscriber growth.

Consultancy ABI Research currently predicts subscriber numbers to rise from 14 million by yearend to 30 million at the end of 2011. "NAB's sole interest here is in trying to hamper competing services that offer consumers compelling choices that terrestrial radio can't provide," according to a statement from XM. New York-based Sirius didn't return calls seeking comment.

FCC Compliance

There are several complaints, and several possible outcomes. Take the NAB claim, supported by XM and Sirius' own filings, that some of the satellite companies' terrestrial repeaters (devices that receive signals and retransmit them), installed on buildings and towers to ensure seamless satellite radio coverage, don't comply with FCC rules. Of XM's 794 repeaters, 19 weren't authorized by the FCC, and as many as 142 are located more than 500 feet from their authorized locations.

The NAB also finds fault with 11 Sirius repeaters, though the letter states that "Sirius' effort to minimize the significance of its transgressions is apparent." In an industry where terrestrial radio stations have followed FCC rules to the dot, the violations "bring into question the fitness of the licensee," says Tom Taylor, editor-in-chief of industry publication Inside Radio.

The NAB letter further alleges that 28%, or 221 of XM's repeaters, exceed their authorized power level. XM says that has not adversely affected other broadcasters' transmissions, and it's working with the FCC to correct such problems.

If the FCC were to ask XM and Sirius to remove or tweak the offending repeaters, which is likely, that could result in temporary degradation in service quality for customers in the affected areas while the work is being done, says Frank Viquez, a research director at ABI Research.

In its second claim, the NAB contends that XM and Sirius shouldn't be allowed to give away their products for free to new car buyers or online. Last week, Sirius streamed Howard Stern's program for free on its Web site.

The NAB argues that such freebies ought to subject satellite radio to the same FCC regulations as those governing terrestrial radio. That likely would trigger restrictions, for example, on language and other racy content.

Content Issues

If the FCC listens and tries to regulate the satellite radio industry's content, that could affect programs like The Howard Stern Show, which has single-handedly driven millions of subscribers to Sirius (see BusinessWeek.com, 9/7/06, "A Sirius Stab at XM"). Earlier this year, the Federal Trade Commission and the FCC commenced probes into XM's marketing practices. In September, XM disclosed that the Securities & Exchange Commission began an informal inquiry into how the company tried to reach subscriber targets last year.

Finally, there's the third complaint, from NPR, which claims that many FM modulators, used to feed programming from portable satellite radio devices into car stereos, exceed FCC power requirements. That means a driver listening to NPR might suddenly hear a blast of obscenities from Howard Stern from a car as far as 100 feet away. NPR stations have received hundreds of complaints from listeners, says Mike Starling, chief technology officer of NPR Labs, which has studied the issue.

In July, NPR Labs measured FM modulator levels in traffic in the Washington, D.C., area. While it found that 30% to 40% of the modulators exceeded FCC-mandated power levels, the study couldn't conclusively determine whether satellite radio devices or, say, unrelated MP3 players used in cars were the violators, says Starling.

In June, Marsha MacBride, executive vice-president for legal and regulatory affairs at the NAB and former FCC chief of staff, cited NAB-sponsored research in a letter to Martin, asking him to examine both satellite radio players and MP3 players, some of whose FM modulator emission levels exceeded regulations by as much as

20,000%.

What can the FCC do to solve this problem? Potentially, the agency could order a recall of the satellite operators' FM modulators, installed in cars by people who bought the radios at retail stores. Viquez estimates that such a recall could involve more than 1 million cars.

While the modulators' power levels can be adjusted with a very cheap part, owners might have to take their cars into professional body shops for repair. And that's likely to peeve many customers.

Losing Numbers

Any of these disruptions could affect XM and Sirius' subscriber targets or financial performance. Earlier this year the FCC found that some XM and Sirius FM transmitters, used in portable devices, did not comply with certain emission levels. The companies' manufacturing partners had to halt shipments and tweak their designs. The direct result: XM widely missed the Street's subscriber estimates in the second quarter, says David Bank, an analyst with RNC Capital Markets (see BusinessWeek.com, 10/4/06, "Investors Tune Out

of Radio Stocks").

Of course, whether Martin responds to the land-based broadcasters' latest complaints remains to be seen. But this flurry of blows has the potential to leave satellite radio with a few bruises.


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