Sirius Satellite Radio, Inc.

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Sirius Satellite Radio, Inc.

1221 Avenue of the Americas, 36th Floor
New York, New York 10020
U.S.A.
Telephone: (212) 584-5100
Fax: (212) 584-5200
Web site: http://www.sirius.com

Public Company
Incorporated: 1990 as Satellite CD Radio, Inc.
Employees: 375
Sales: $66.9 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: SIRI
NAIC: 515112 Radio Stations; 517410 Satellite Telecommunications

Sirius Satellite Radio, Inc. broadcasts more than 120 channels of digital audio via satellite to subscribers throughout the United States. The company's programming includes 65 channels of commercial-free music and 55 channels of news, sports, and talk. Its offerings range from a full-time National Football League (NFL) channel to an all-Elvis music station, and include "shock jock" Howard Stern, who signed a five-year contract to broadcast exclusively for the firm beginning in 2006. Sirius's broadcasts are beamed from three satellites to more than one million subscribers who pay a monthly fee of $12.95. The company also offers a subscription service for businesses that wish to play its music in stores and offices. Automakers including Ford, Chrysler, and BMW offer Sirius-ready radios as options, and retailers including Wal-Mart and Radio Shack sell similar units for home and boat use.

Beginnings

The roots of Sirius Satellite Radio date to 1990, when ex-NASA engineer Robert Briskman formed a company called Satellite CD Radio, Inc. in Washington, D.C. Briskman, the former chief of operations at Geostar, a satellite messaging company, had created technology that could be used to broadcast digital radio signals by satellite. He joined with several other ex-Geostar staffers to start the firm, and they found investors including David Margolese, a Canadian venture capitalist who had founded a pager company and then helped launch Canada's largest cellular telephone company. After investing $1 million in Satellite CD Radio, Margolese began working with the firm, and eventually was named its CEO.

The company's plan was to develop a digital radio service that would be broadcast with satellites to listeners with special receivers, earning its revenues from charging subscription fees. This type of broadcast had not yet been allocated radio bandwidth by the Federal Communications Commission (FCC), and the company faced many hurdles before it could begin to turn a profit.

In 1992 the company became known as CD Radio, Inc., and made Satellite CD Radio, Inc. its sole subsidiary. There were now several different companies seeking to create satellite radio networks, and in 1993 CD Radio bought one of them, Sky Highway Radio Corp., for $2 million.

By 1994 the company had spent $10 million on development costs, but had accumulated a deficit of $9.5 million. That year, the firm made an initial public offering of stock on the NASDAQ, raising close to $7.5 million. Its prospectus claimed that it would offer 30 channels of CD-quality, commercial-free music via "S-Band" radio receivers, which were not yet being made. Its monthly subscription price was projected to be less than $10. The cost of the company's ambitious plan to launch satellites and create programming was estimated at upward of $500 million.

Purchasing Bandwidth in 1997

After the stock sale, CD Radio signed a contract with a unit of Loral Corp. to build two satellites, which it would launch when it obtained a FCC license. In April 1997, after fighting a fierce anti-satellite radio lobbying campaign by the National Association of Broadcasters, the firm bought the first of two licenses granted by the FCC to broadcast digital radio signals, paying $83.3 million at auction. The company had received a discount price under the FCC's "pioneer's preference" program, because it had been the developers of the technology. One of its three competitors at this time, American Mobile Satellite Corp., won the second license for $89.9 million. CD Radio soon announced plans to begin broadcasting in 1999, nearly ten years after the firm had been founded.

The late 1990s saw CD Radio actively seeking more funding. In late 1998 Apollo Management L.P. bought $135 million worth of new stock shares and took an option to buy $65 million more within a year. The company's costs had been escalating, with its estimate for building its now three-satellite network standing at $965 million.

In early 1999 the firm filed suit against its sole rival, now known as XM Satellite Radio, alleging that the latter company had infringed on three of its eight patents. In May 1999 CD Radio's financing topped $1 billion when it sold $200 million worth of senior notes to investors. The company was now planning to offer 100 channels of programming, with a start date of late 2000 projected.

In November the firm was renamed Sirius Satellite Radio, after the brightest star in the night sky, and it moved into a new $38 million, 100,000-square-foot space in Manhattan that contained multiple broadcast studios, a music library, and a satellite tracking center. The ribbon-cutting party featured a performance by rocker Sting, who also had been signed by the firm as a consultant for its music channels.

Although the company's projected broadcasting debut was now on hold while technical problems were resolved, it was actively working on developing its content, signing up musicians and well-known disc jockeys to program its music stations, enlisting self-help experts for others, and reaching deals with content providers including National Public Radio and a distributor of classic radio shows from the 1930s and 1940s. The firm also was planning to spend $100 million on a promotional campaign to lure subscribers.

In February 2000 Sirius and XM ended their legal standoff and agreed to jointly develop unified standards for satellite radio. The company expected the bulk of its listeners to tune in while driving, rather than at home, and had lined up a number of automakers to offer its receivers in their vehicles, including Ford, Chrysler, BMW, Mercedes, Mazda, Jaguar, and Volvo, as well as the makers of Freightliner and Sterling trucks. In June 2000 Sirius arranged for $150 million in new credit from Lehman Brothers, which would become available after its system was successfully demonstrated.

Launching Satellites in 2000

In July 2000 the company launched its first satellite from the former Soviet facility in Kazakhstan where Sputnik had taken off in 1957, and the third successfully entered orbit in December. At this point Sirius was well ahead of XM, which had launched neither of the two satellites it planned to use. Both firms also would utilize ground-based "repeaters" to boost the signal in urban areas where tall buildings caused interference, though Sirius's three-satellite system required far fewer of these.

CEO Margolese was now projecting that the company would begin to break even with as few as two million subscribers, which represented just 1 percent of the total number of Americans who listened to radio. He was banking on listeners' unhappiness with the increasing amount of advertising on music stations (typically 15 minutes per hour), the limited playlists and the fact that many types of music were not heard at all, and the company's ability to deliver diverse nonmusic programming, such as sports events from around the country and different news viewpoints. Sirius was continuing to add content, reaching agreements with such performers as comedian Sandra Bernhard, who would have a show on the firm's comedy channel, as well as outside concerns including The Discovery Channel, A&E, CNBC, and the BBC. Total investment in the company now topped $1.5 billion, but it still had generated no revenues.

In early 2001, while it projected that broadcasting would start in the summer, Sirius sold additional stock worth $230 million. Audio equipment manufacturer Kenwood USA Corp. was preparing to ship "Sirius-ready" radios for sale via the automotive aftermarket, though in April Margolese announced that only 20,000 were likely to be sold by Christmas. The firm had contracted out development of the microchip sets that would be installed in the radios, and the unit of Lucent Technologies charged with making them was having problems completing the work. Once again, the company was forced to push back its broadcast launch, even as XM prepared for its own. In May, Sirius announced that it would charge subscribers $12.95 per month, $3 more than originally forecast.

In the fall of 2001, a class-action lawsuit was filed by shareholders who asserted that company executives had inflated the value of Sirius stock by making false claims that its service would be launched in 2001. Shortly after the lawsuit was filed, CEO Margolese quit the firm, though he denied that it was due to the suit. In November, Sirius named Joseph Clayton, 52, to the top job. Clayton had formerly served as executive vice-president of Global Crossing Ltd., a telecommunications firm. After taking control, he inaugurated several money-saving measures, including reducing the company's headquarters from three floors to two.

Starting to Broadcast in 2002

On February 14, 2002, Sirius launched service to four states, and coverage was extended to the rest of the country by July 1. XM, which had officially launched in September 2001, had already gotten a big headstart in finding subscribers, and Sirius was now scrambling to catch up.

Company Perspectives:

Satellite radio is the future of music and audio entertainment. And SIRIUS is satellite radio. We offer over 120 channels of satellite radio: 65 devoted to commercial-free music, in almost every genre imaginable, plus 55 channels of sports, news and talk. From our futuristic studios in NYC's Rockefeller Center, to our fleet of satellites over the continental US, to a full line of SIRIUS satellite radio products—the future of music and audio entertainment has arrived.

The company was facing more competition than just XM, however. Radio giant Clear Channel, with its listener numbers stagnating, was pledging to reduce the number of ads it broadcast each hour, while free broadcast digital radio was now a reality, courtesy of a company called Ibiquity Digital. AM and FM radio stations could broadcast a digital signal with the addition of a $75,000 digital transmitter module, and all of the nation's broadcast stations were expected to offer digital signals by 2017. Unlike Sirius or XM's offerings, reception would not require a subscription, just the purchase of a digital-ready radio.

In October 2002, reportedly edging close to bankruptcy, Sirius announced a recapitalization plan that would convert $700 million in debt and $525 million in preferred stock into common stock, with Oppenheimer Global Funds, Blackstone Group LP, and affiliates of Apollo Management LP providing an additional $200 million in cash to keep it afloat. The plan was approved by shareholders the following March, and they also agreed to the issuance of $200 million worth of new stock. Following the reorganization, the total number of shares Sirius had outstanding would balloon from 80 million to nearly 1 billion.

By June 2003, Sirius had attracted 75,000 subscribers, far less than XM's 500,000. Many of the latter firm's listeners had been delivered with the help of investor General Motors (GM), which was putting XM receivers in its cars. Sirius was banking on the installation of digital-ready radios to many of its partners' vehicles in the fall, and it also signed a deal with rental car giant Hertz to offer the radios at 33 airports.

Sales in the fall were strong, as newly introduced "plug and play" receivers sold well, and by January 2004, Sirius had 261,000 subscribers, compared with XM's 1.36 million. The firm was projecting a subscriber base of 1.3 million in 2004, 2.5 million in 2005, and 4.9 million in 2006, when it expected to post its first profit.

In December 2003 Sirius signed a seven-year, $220 million deal with the NFL to broadcast its games. A similar deal had already been struck with the National Hockey League. Revenues for 2003 reached only $12.9 million, with a loss of $226.2 million reported. The following year, revenues rose to $66.9 million, while losses expanded to $712.2 million.

In early 2004 an agreement was reached with Standard Radio of Canada to offer Sirius's service in that country, subject to government approval. The firm also began providing traffic and weather reports for the top 20 U.S. markets in late February.

Spring saw a deal signed with DISH Networks to provide Sirius radio programs free of charge to subscribers of certain DISH packages. In June an exclusive all-Elvis Presley radio station was launched, which broadcast from the singer's former home of Graceland in Memphis. In the fall, broadcasts of live football games from the NFL, as well as from 23 major college teams, were begun. The company had also reached agreements with retail giants Wal-Mart and Radio Shack to feature Sirius radio receivers in their stores.

Signing Howard Stern in the Fall of 2004

The company got a major promotional boost in October when it signed controversial radio "shock jock" Howard Stern to a deal worth $100 million per year for five years, which would make him heard exclusively on Sirius beginning in January 2006. The firm had reportedly bid three times what XM was willing to offer, and significantly more than what he was earning from current employer Infinity Broadcasting. Stern, whose morning talk program was syndicated around the country, and who had been fined a total of $2.5 million over the years by the FCC for obscene content, had recently been removed from six Clear Channel-owned stations. A survey by market research firm Odyssey found that 30 percent of Stern listeners said they were "very likely" to subscribe to satellite radio if Stern was only available there, and Sirius anticipated a spike in subscribers.

Following the signing of Stern, Sirius issued $200 million worth of convertible bonds and 25 million new shares of stock, raising a total of $321 million in new capital. Ford also committed to offer Sirius-capable radios as a factory-installed option in 20 of its vehicle lines by the 2006 and 2007 model years, having previously offered the radios as dealer-installed options only. Rival XM was getting half of its subscribers from installations in GM cars, which typically included a free trial subscription, while only a quarter of Sirius's business came from its carmaker partners.

In November the firm hired former Viacom CEO Mel Karamzin for the job of CEO, and gave Joseph Clayton the title of board chairman. In the 1980s Karamzin had built Infinity Broadcasting into a major force in radio, and it was hoped that he could draw on this experience to boost Sirius's fortunes. In late December the company celebrated the signing of its one-millionth subscriber, and in early January it announced a partnership with Microsoft to broadcast video programming to cars, some of which were being equipped with televisions in the back seat.

Key Dates:

1990:: Satellite CD Radio is founded in Washington, D.C.
1992:: The company becomes known as CD Radio, Inc.
1993:: Sky Highway Radio Corp. is purchased.
1994:: The company makes its initial public offering of stock on the NASDAQ.
1997:: A broadcast license is purchased in a Federal Communications Commission (FCC) auction.
1999:: The company name is changed to Sirius Satellite Radio, Inc.; the company moves to new headquarters in New York City.
2000:: Three satellites are launched successively into orbit.
2002:: Nationwide radio service begins.
2003:: A $220 million pact is signed with the NFL.
2004:: Howard Stern signs an exclusive contract with Sirius, beginning in 2006; Mel Karamzin is named CEO; the one millionth subscriber signs up for Sirius service.

In 15 years' time, Sirius Satellite Radio, Inc. had spent more than $2 billion developing a digital satellite radio network that boasted 120 channels of music and information programming, though it had yet to earn a profit. The signings of such high-profile franchises as the NFL and Howard Stern were expected to boost its subscriber base, but it remained to be seen whether Sirius could overtake rival XM Satellite Radio, which had been the first to market and had already developed a sizable subscriber base.