Broadcast Bullies
Scott Woolley, 09.06.04

In a fair fight, XM Satellite Radio would capture a good share of the U.S. audience. Unfortunately, competition in the broadcast industry is anything but fair.
Hovering 22,000 miles above the Earth, two satellites for XM satellite Radio blanket every corner of the continental U.S. with 130 digital channels--everything from heavy metal to the BBC News to children's songs to seven different flavors of country music. XM's chief executive, Hugh Panero, proudly ticks off the new technology's advantages over traditional radio, which dates back 90 years: greater variety, clearer sound, better coverage, lower cost. And no advertising to interrupt the music--none of the blaring and banal spots that fill almost 20 minutes of every hour on radio; freedom from homogenized formats or cookie-cutter playlists.

Yet XM's geriatric competitors dominate the market in listeners, revenue and profits, nine years after the federal government first cleared satellite radio to compete. In fact, in that same period the old guard--Clear Channel, Viacom's Infinity Broadcasting and other AM/FM giants--has enjoyed a boom. Combined AM and FM revenues this year likely will break the $20 billion mark for the first time. Ad rates have doubled in nine years amid deregulation and a resulting merger binge. Despite all that has been done by broadcast TV, cable and now the Internet to make it obsolete, terrestrial radio commands an average of 21 hours a week of adult Americans' time. By contrast, XM has only 2 million subscribers, accounting for only one in 300 radios in the U.S. The company is set to take in $260 million in revenue this year--and still post a loss of $470 million. Its sole rival, Sirius Satellite Radio, is in worse shape, with just a quarter of XM's subscriber base and even shakier finances. Other promising digital technologies--Internet radio, new cell phones--also offer huge advantages over traditional radio (see box, p.140), but they too remain bit players.

Digital revolutions have transformed television, recorded music, medicine and more. But radio remains frozen in time, an analog anachronism in a digital world. It drives Hugh Panero crazy. "It's 2004. In what other environment does a consumer listen to music in an analog format? Name me one," demands Panero, a former Time Warner executive who fought TV broadcasters trying to block new cable systems in the 1980s. "You have incumbents who are afraid," he says. "I've watched the hand-wringing and whining and protectionism that goes on."

For decades the radio industry has crushed incipient competitors by wielding raw political muscle and arguments that are at once apocalyptic and apocryphal. Radio station owners, who formed the National Association of Broadcasters in 1923, have won laws and regulations that have banned, crippled or massively delayed every major new competitive technology since the first threat emerged in 1934: FM radio.

In 1945 many AM incumbents, ostensibly concerned that interference related to sunspots might endanger their rivals in FM, encouraged the feds to uproot the FM dial and move it to a higher frequency band. This rendered half a million FM radios useless and forced the nation's FM stations to start over. A congressional investigation in 1948 found that the interference fears were bogus and that a Federal Communications Commission report had been conveniently altered to disguise that fact. Too late--the shift helped inferior AM technology remain dominant for the next 25 years. The coda: In 1954 the inventor of FM radio, Edwin Armstrong, frustrated by repeated setbacks and all but bankrupt, penned a suicide note to his wife and leapt out the window of his 13th-floor apartment.

Fifty years later radio's old guard has been as effective at thwarting the digital threat. Existing stations thrive on an array of perks won by radio operators, including free use of the airwaves (XM and Sirius, by contrast, had to pay almost $200 million combined for their spectrum) and an exclusive exemption from paying royalties to performers. But the NAB's real forte has been in the modes of attack and delay, persuading regulators and Congress to impose daunting restraints on the satellite rivals and stalling their debut for the better part of a decade.

Meanwhile, earthbound radio is pushing its own digital service, a long-gestating and tepid alternative aimed at neutralizing the satellite threat: "high-definition" radio, first proposed 14 years ago. It does nothing to expand reach or reduce operating costs, but it will add CD-quality sound to the same playlists and station lineups now on the air, for those listeners who buy the new HD radios that debuted in January. A hundred of the nation's 11,000 commercial AM and FM stations now simulcast their programming digitally.

"Over-the-air radio is facing a challenge in the area of technology. HD radio will answer that call," says NAB president Edward Fritts. A former radio station owner himself, Fritts has run the powerful broadcast lobby since 1982. Shouldn't satellite radio be allowed to compete freely for listeners? "I'm not here to protect consumers from the big bad satellite companies," he says innocently. "I'm willing to let consumers make their own choice."

Yet for 15 years his NAB has taken the opposite tack. Digital satellite radio's origins date to 1990, when Satellite CD Radio, forerunner of Sirius and the first of five nascent players, proposed a new 30-channel service and began the poky and convoluted approval process at the FCC. The NAB's initial response was uncharacteristically subdued: It said approving a new service would be "premature."

But in 1992 the FCC startled broadcasters by setting aside a 50-megahertz swath of radio spectrum for new satellite services--two and a half times the size of the FM and AM bands combined. Four other newcomers applied, including American Mobile Satellite (which would change its name to XM Satellite in 1998 and go public a year later).