Good article on XM

http://www.washingtonpost.com/wp-dyn...2004Nov28.html

 

Could you post copy and paste it here? Thanks.

 

:P

At XM, Boldly Going
Under Hugh Panero, Satellite Radio Is a Hit. Just Ask Howard Stern And Mel Karmazin.

By Annys Shin
Washington Post Staff Writer
Monday, November 29, 2004; Page E01

Hugh Panero has never had much patience for naysayers.

As a young man, after being turned down for a job reporting on the cable industry for a trade journal, Panero created his own version of the publication, complete with original stories and a mock cover. He sent it in and was hired, said Doug Panero, one of three younger brothers.

As one of the early pioneers in pay-per-view TV, Panero overcame doubts that consumers would ever pick pay-per-view over the video store.

Six and a half years ago, he believed in subscription radio service when few others did. Secure in that belief, Panero turned a staff of fewer than a dozen working out of a windowless basement office in downtown Washington into the leading satellite radio service, with more than 500 employees and 2.5 million subscribers. Its only direct competitor, Sirius Satellite Radio Inc. of New York, has 800,000 subscribers.

Satellite radio has now come into its own, and competition is sizzling.

XM Satellite Radio Inc. offers more than 100 channels for a $9.95 monthly fee, with highlights that include popular newscaster Bob Edwards from National Public Radio. In the works for the spring is a 24-hour baseball channel -- the result of a broadcasting and marketing deal worth up to $650 million over 11 years that XM signed with Major League Baseball in October. The District-based company last month introduced the first wearable satellite radio receiver, called the MyFi, expanding its service to outside of the car and home.

Sirius this fall lured shock jock Howard Stern away from FM radio with a $500 million, five-year deal. That was after it agreed in December 2003 to pay $220 million in cash and stock to the National Football League to broadcast its games and related content on a new, 24-hour channel. Sirius, which offers listeners more than 100 channels for $12.95 a month, capped its headline-making announcements on Nov. 18 with the news that former Viacom Inc. chief operating officer Mel Karmazin was joining as chief executive, effective immediately.

Analysts called Karmazin's jump to Sirius a blessing for satellite radio. "We believe this news is good for the satellite radio industry overall because it involves the hiring of one of the most respected managers in the entire media industry," Legg Mason media analyst Sean P. Butson wrote in a Nov. 19 research note.

Following the announcement, Sirius's share price rose 38 percent, to $6.51. XM's stock closed Friday at $37.61, up 8.5 percent over the same period.

Panero's reaction to his new official nemesis was more sanguine.

"A short time ago, [Karmazin] was telling anyone who would listen that satellite radio would never amount to anything. All I can say is [Karmazin's appointment] an interesting confirmation of the validity of satellite radio," he said. "We set the groundwork for people realizing this is the new platform for entertainment. I'm glad we could provide Mr. Karmazin with gainful employment."

A little in your face. But chief executive Panero, who grew up in the Bronx, isn't the kind of executive who gets his nails manicured. But having led XM through a series of professional and personal trials, he's comfortable doing a little hazing.

A Step Ahead

Back in 2001, when the attacks of Sept. 11 looked as if they would sink XM's scheduled launch, Panero never betrayed any doubt in the company's prospects, recalled Gary Hahn, XM's vice president for advertising and creative services. Hahn worked with Panero at his previous employer, Request Television Inc., a pay-per-view company in Denver. "He led by that day-in and day-out relentless pursuit of goals. You tend to look at a leader if you have second thoughts. He had none," Hahn said.

At XM, when capital ran short or articles appeared questioning satellite radio's viability, Panero and his team kept themselves going with the vision that they were helping to create a new medium, Hahn said.

Panero describes the management style at XM as collaborative. But his colleagues at XM credit him with making key early decisions. One big one was moving technology development in-house.

Sirius, by contrast, contracted out the development of the microchips needed to deliver the radio service to consumers. The outside contractor could not get the chip sets ready as scheduled. So, even though Sirius put its satellites in orbit first, XM was able to begin selling its service nearly a year ahead of Sirius.

XM remains several quarters ahead of Sirius in the development of its chip sets, which enabled it to roll out a wearable receiver in time for Christmas. Sirius officials said they expect to have a similar device ready next year.

Panero and XM Chairman Gary M. Parsons also focused early on how to distribute their satellite service. They were able to forge relationships with General Motors Corp. and Honda Motor Co., which became investors in XM, owning 5 and 8 percent stakes, respectively. General Motors and Honda offer XM as a standard, factory-installed feature in more than 100 models of cars and trucks. For the 2004 model year, GM installed XM radios in 1 million cars, while Honda installed them in 200,000. The two automakers also promote XM Satellite Radio in their print and television ads and through dealers.

Sirius also has partnerships with automakers to install Sirius in more than 50 models but has no car companies as investors. And Sirius partners, including DaimlerChrysler AG and BMW, don't install Sirius receivers as standard equipment.

As a result, Sirius has focused more on distribution through retail outlets such as Best Buy. But it needs to persuade its automotive partners to commit to installing Sirius in more cars if it wants the subscriber growth XM has experienced, said April Horace, a Janco Partners Inc. media analyst . The auto market has been one of the biggest drivers of XM's subscription growth, analysts said.

Hedging his bets, Panero is testing a variety of other distribution channels for XM's content, including airlines such as JetBlue and AirTran and Internet streaming. XM earlier this year signed a deal with Starbucks Coffee Co. to create XM's Hear Music channel, which features adult contemporary music that evokes the Starbucks lifestyle. The channel will eventually be piped into Starbucks stores. Microsoft recently imbedded XM in its new Media Center.

"In this kind of business, what you did today is forgotten quickly," Panero said. "We have to find new and innovative ways to reach people."

What Fits Where

Sirius officials say they are closing the gap with XM on a variety of fronts. While XM still has more than three times as many subscribers, a year ago the ratio was 11 to 1, said Jim Collins, a Sirius spokesman. Sirius also recapitalized last year, reducing its long-term debt and boosting its cash position, which helped it make its biggest plays to date: snagging football and Stern.

Though he doesn't debut on Sirius until Jan. 1, 2006, Stern has already proved to be a marketing force for Sirius. The day of the Karmazin announcement, Stern created a spectacle in Union Square in New York, handing out scores of free Sirius radio boom boxes.

XM had also been talking to Stern, said Panero and Parsons. But in the end, they decided they weren't willing to pay the price he was asking. The same goes for football, which Panero believes is better suited to television than radio. Given the number of baseball games played each year, and the length of the season -- nearly twice as long as that of football -- Panero and his team thought baseball offered better value.

Given what Sirius is paying to get Stern, on top of its NFL deal, some analysts have questioned whether the company is taking a big gamble. If Stern and football don't drive Sirius's subscriber numbers up, the company may not remain financially viable.

The NFL deal is already eating into Sirius's bottom line. Sirius recently reported that its third-quarter net loss grew by 60 percent from the same quarter a year earlier, hitting $169 million, in part because of expenses associated with the NFL transaction. The costs wiped out part of its gains in third-quarter revenue, which climbed to $19.1 million from $4.3 million.

By contrast, XM's third-quarter net loss narrowed to $118 million, compared with $133.5 million for the same period a year earlier. Its third-quarter revenue more than doubled, reaching $65.4 million.

Horace of Janco Partners said she is looking to Karmazin, known for his focus on cost-cutting and relationships with advertisers, to bring down Sirius's costs and boost ad revenue. Sirius spends $229 to acquire a new subscriber; XM spends about $57.

With 200 million cars on the road and 108 million households in the United States, analysts said that the market for satellite radio could reach 20 million to 35 million -- plenty of customers to sustain both companies. In the end, Horace said, consumers will decide which service to subscribe to based on content.

And in content, consumers now have a real choice. XM has hired its own shock jocks, Opie and Anthony, and the deal with NPR's Edwards gives it another popular voice. XM officials would not disclose the financial terms of either deal.

So far, the recent content deals have not boosted subscriber growth significantly. Analysts said the announcement of the NFL deal, for example, didn't have any impact on Sirius's subscriber numbers. Edwards and Opie and Anthony debuted in October on XM, but XM does not release figures on how many people are tuning in.

Of course, many of the offerings on Sirius and XM are designed to appeal to narrow segments of the population, while collectively attracting a wide range of listeners. The Starbucks Hear Now channel, for example, is supposed to draw in the coffee chain's many baby boomer customers. Market research indicates satellite radio draws subscribers of all ages, though the majority of them are male.

XM spokesman Chance Patterson said the combination of Starbucks, Edwards and baseball is not part of an attempt to position XM as more high-brow than its rival. At least not intentionally. Edwards, in particular, is more a reflection of Panero's tastes. Panero, a longtime Edwards fan, was unhappy when NPR dismissed him from Morning Edition, Patterson said, and seized the opportunity to woo Edwards to XM with a prime-time show built around him.

Edwards said he didn't pursue any options outside of XM. "They said everything I wanted to hear," he said.

Karmazin, while famous for hiring Stern and Don Imus when he ran Infinity Broadcasting Corp., is not known for taking great interest in programming. At Viacom, he once dismissed the creative side of the broadcast business "arts and crafts," according to the Wall Street Journal.

His Enterprise

Panero's sensibilities permeate XM's headquarters, a renovated printing factory in the Eckington section of Washington. The rough setting outside -- just off New York Avenue NE, by a Wendy's and a FedEx distribution center -- gives way to an industrial loft-style interior filled with high-tech equipment and young, hip-looking staffers.

Panero's playfulness comes through in the second-floor control room, a glassed-in area with a wall of sound monitors, a floor with lights, and what everyone at XM calls "the Captain Kirk chair." Panero sat in it and pressed a button to launch XM in 2001. He and his staff have made use of it at Halloween, dressing up as characters from Star Trek.

Panero keeps the door to his office open. So does his neighbor, XM Chairman Parsons. The two shout over to each other several times a day, Panero said.

"We're a team," said Panero, referring to himself and the other senior managers. "We share everything. . . . It's a very unique environment."

After his wife, Mary Beth Durkin, was diagnosed with leukemia in 2001, that collaborative effort extended to Panero's personal life as well.

Durkin underwent chemotherapy for two years. Her weight dropped to 90 pounds. As a result of chemo, she sometimes suffered from dementia. Panero juggled taking care of her with looking after their two children and the demands of a growing company. His colleagues at XM organized a bone marrow drive to find a match for Durkin. Panero's neighbors in Chevy Chase fed his children and last year took them in while Panero and Durkin traveled to Seattle for her successful bone marrow transplant.

Earlier this month, several XM employees and Panero's neighbors joined Panero and Durkin at a Washington banquet hosted by the Marrow Foundation, where Durkin, Panero and the woman who donated life-saving stem cells to Durkin met in person for the first time. At the event, Panero choked up at the podium as he introduced his wife; over at the XM table, his employees wiped away tears.

The Path to XM

As a manager, Panero admits to modeling himself after Richard R. Aurelio, an ex-Newsday editor and former deputy mayor of New York under John V. Lindsay. In the 1980s, Warner Amex Cable Communications Inc. hired Aurelio to help win the New York City cable franchise. Panero, then a journalist, caught Aurelio's eye with his aggressiveness and smarts. Aurelio hired him for Warner's government relations shop. The two later moved over into operations.

Panero earned his MBA at night at Baruch College but learned mostly by studying his mentor. Panero "was incredibly curious about my management style," said Aurelio, now retired from Time Warner Inc. "He'd say, 'Do you have a few minutes? I was kind of curious about that meeting we had this morning . . . the way you handled that situation. What was your thinking about it?' Sometimes it was annoying. I'd say, 'Hugh, can we talk about this some other time?' But I was impressed."

"Dick ran New York City government during one of the most challenging and disruptive times. He knew how to get significant things done in a challenging environment. You can learn a lot from him," Panero said.

At Time Warner Cable, Panero quickly proved himself, helping launch one of the first high-capacity cable systems that offered more than 100 channels, including a large offering of pay-per-view channels. In doing so, he had to master complex technology, subscription sales, customer service and marketing -- all skills that would become crucial when building XM. Panero left in the early 1990s to run Request Television.

Panero is, by all accounts, a demanding task master who keeps a close eye on his deputies, said Jeffrey Bernstein, a former Request executive who remains close to Panero. At Request, if members of the senior management team slacked off, they knew Panero would call them out in front of their colleagues, Bernstein said. Panero also had little patience with jargon. "He'd say, 'Don't try to pull the wool over my eyes.' "

Panero also fought for his own, his former colleagues said, whether it was demanding higher salaries for them or defending them against petty slights. Panero and his crew of displaced New Yorkers stood out around the Denver headquarters of Tele-Communications Inc., which co-owned Request TV with News Corp.

Once, Bernstein recalled, a TCI human resources official asked Panero to do something about the hemlines worn by a female executive. Panero replied, "What, are you kidding?"

In 1998, Request TV merged with rival Viewer's Choice. Panero wanted to be chief executive of the new company, but he was perceived as a TCI executive. The board wanted a neutral party from outside the company, and Panero was forced to move on.

At the time, friends of Panero recalled, he was crushed. It was the greatest disappointment of his professional career to be passed over not on merit but because of office politics.

Leaving Request proved serendipitous. As Panero cast about for a new direction, he was approached by a headhunter who was looking for a chief executive for a start-up then called American Mobile Radio Corp.

One of Panero's first tasks was to come up with a catchier name -- XM.

"I would have never thought of that," Parsons said. "That's why we hired him."