Karmazin: Radio's future lies in more choices

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Nobody knows radio like Mel Karmazin. He ran Infinity Broadcasting, CBS Radio, CBS Station Group and CBS Corp. He's been inducted into the Broadcasting Hall of Fame and has served as a director at Westwood One, Blockbuster and the New York Stock Exchange. In 2004, he became CEO of Sirius Satellite Radio, which, along with competitor XM Satellite Radio, has introduced subscription radio to the masses. Together, the two will boast 30 million subscribers by 2010, according to Pricewaterhouse-Coopers. Karmazin recently spoke with The Hollywood Reporter's Paul Bond about (what else?) the future of radio -- of the celestial and terrestrial varieties.

The Hollywood Reporter: Is celestial radio the death of terrestrial radio?
Mel Karmazin: I don't think terrestrial radio is dying. It will be around for a very long time. Just like local television stations exist along with cable networks, local radio stations will coexist with satellite radio.

THR: Playing devil's advocate, local traffic and weather are already available on satellite radio, so why do people still need free radio -- other than because it's free?
Karmazin: If you listen to our service, you'll hear a more national scope. Even our talk-radio stations deal predominantly with national issues. If you're listening to our sports, you're hearing a more national scope. If you're partisan to a local team, you'll find your local sports station giving you more information than we would. If the question is, "Why would terrestrial radio have a role in music?" It would only be for those people who choose for economic reasons not to subscribe.

THR: Will Sirius be more than just a satellite radio operator in the future?
Karmazin: Probably, though we think the business model for just being satellite radio is pretty compelling. But we announced that we'll be doing video to the rear seat of the car .... We're not going into the creation of video programming, but we will license it from others and have a number of kids' channels. We also, obviously, are delivering bits to the car, so whether or not that's more traffic data, like marrying your navigation system with real-time traffic or other kinds of information, we deliver audio bits, video bits or data bits. It's all bits to us.

THR: Has celestial radio forced changes in terrestrial radio?
Karmazin: I'm not sure I can point to too many things that terrestrial has done in an intelligent way to react to satellite radio because I'm not sure there are too many things they can do. Obviously, we have the bandwidth, so where a single operator can only have eight radio stations in a market, we have over 130 radio stations available in every single market in the country. We also have two streams of revenue, so when it comes time to attract content, we have the ability of dealing with those financial needs better because we have subscription revenue as well as advertising. It's a difficult problem that terrestrial radio has, but it's still a very good business, much like the newspaper, magazine or over-the-air TV station business. They generate an awful lot of cash. They're good businesses, just not growing businesses.

THR: You haven't mentioned HD Radio. Is that a response to satellite?
Karmazin: HD Radio is basically saying, like other media, radio is going from analog to digital, and where you may have the bandwidth of one station, you might be able to have two or three stations. Going analog to digital is a very good thing. It started long ago when I was very active and we formed the company that is now HD Radio. If you think about what television did when it went digital, it went high-definition. It didn't want to multiplex. It didn't want to, in that bandwidth, squeeze two or three more stations in because that seemed like not a smart idea if, in fact, you're going to add more stations, and there's no more advertising dollars, and those stations will fragment your audience.

THR: There are magazines, newspapers and music subscription services. There's pay television, TiVo, Netflix, Internet access and now, satellite radio. Will the consumer ever be tapped out when it comes to subscription media?
Karmazin: That's why you need to be relevant. People spend a lot of time out of the home and particularly in their car, and radio has proven the dominant medium in the car. If we deliver on our promise to be the best radio on radio, we think the consumer will be willing and happy to pay 43 cents a day. If we can make their commute more pleasant, we think it's a bargain.

THR: It seems clear that you have conquered the automobile, but there are still line-of-sight and other technological issues concerning handheld and in-home devices. Will you solve those anytime soon?
Karmazin: Obviously, when you're picking up a signal directly from the satellite, you have technical issues. In the car, I don't think that issue exists at all. When all the car companies agreed to put the satellite radio in there, they needed better than a 99% consumer satisfaction experience, and we believe we have that. In the home, there's a lot of other technology to distribute our content, using a combination of our satellite and the Internet as an example. And the experience you might have in a mobile device gets enhanced as you're around repeaters, but it still isn't a perfect listening experience. But again, the Internet, WiMax and WiFi are technologies that will make it easier for us to deliver our content to devices.

THR: How will satellite radio compete with digital music players like iPods that give consumers access to their entire music collection in their car?
Karmazin: In 1926, the first radio station went on the air. Here we are 80 years later, and in spite of a lot of technology, radio continues to do very well. I heard these same questions asked when they introduced 8-track in the car -- people said, "Gee, we're going to get our own music on 8-track." Then, I heard it with the cassette and with the CD and the cell phone. We certainly recognize that the consumer has a lot of choices. That's why it's important that we continue to invest in the content that we have. But there's a big, big difference between Sirius Satellite Radio and just having music. That has to do with our nonmusic content, and it has to do with discovery of music. There's definitely a place for the MP3 player, but I think there's an important role for radio within the music market, and we do radio better than anyone.

THR: How prevalent will advertising be on satellite radio, and will customers object?
Karmazin: Shorter term -- and we're not there yet -- 10% of our revenue can come from advertising. It's obviously a profitable business. It's incremental, but we absolutely will never run commercials on our music stations. The reason for that is that one of the biggest drivers of subscribers is the fact that people are so frustrated with terrestrial radio having so many commercials. Allegedly, what's been talked about is "Less is more." If you think less is more, then running none is better. We're certainly not going to bite the hand that feeds us. But we have other content -- the NFL, Howard Stern, a number of other channels -- where we run commercials in a very modest way. Where Howard, on regular radio, would run 20 commercial minutes an hour, we're running six commercial minutes an hour.

THR: Will Sirius and XM ever merge?
Karmazin: Who knows? Obviously, consolidation has, in my opinion, been successful in the media business. When I first started at Infinity, we had three radio stations. We built it up by buying a lot of other radio companies and saw that shareholders benefited from the cost savings, and ultimately, the consumer benefits, too. I certainly think there would be advantages if the two companies merge, with cost-savings and the like, but our business plan doesn't contemplate that. There's no reason to believe that XM has any interest in selling themselves. Obviously, I'm aware of a lot of chatter, as I get asked that question all the time. I try to answer it as candidly as I can because that's what I do. But there's no discussions going on. I think the idea of the two companies combining is as logical as EchoStar (Satellite) and DirecTV combining, but that doesn't mean they're going to.

THR: Would a Sirius-XM merger even get regulatory approval?
Karmazin: I find it interesting that on one hand, people are talking about the huge investments that these companies make and that they're not currently generating earnings, and on the other hand, people are so worried about these two companies combining because they'll be too big. Based on the questions you have asked me, there's a lot of competition for satellite radio. If there's a lot competition, then the arguments of market power seem to go away.

THR: Sirius and XM are spending a ton of money for content such as Stern, the NFL, Oprah Winfrey, NASCAR, Major League Baseball, Fox News Channel, and the list goes on and on. Plus, you're subsidizing hardware, sharing ad revenue with content partners and marketing like crazy. All this adds up to a fortune in spending. When, then, can you be profitable?
Karmazin: I can't speak for them, but all the things you highlighted are the business plan of Sirius. For us to get the number of subscribers we want, we're going to want the great content. The reason the board asked me to join the company is to do what I do best, and that is to make companies profitable. I came here just for that purpose. On our earnings call, I reiterated the fact that in 2007, our company will be free-cash-flow positive, and it's possible that this fourth quarter we will be free-cash-flow positive. We started our service in 2002. We paid billions of dollars for the satellites and put in hundreds of millions of dollars into infrastructure. That's the nature of the business. Now that we are adding significant numbers of subscribers, that money becomes free cash flow. I'm excited that five years after the company got its first subscriber, it will be free-cash-flow positive. If you look at satellite television and some other companies that might be analogous to us, having gone from investing money to making money in six years is a great accomplishment.
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