• by Paul Gough , August 7, 2003

It's among the newest and most promising forms of media, but after nearly two years the satellite radio business is still barely a blip on Madison Avenue, according to financial reports released this week by its two players, XM Satellite Radio and Sirius.

That's nothing new for a nascent medium, particularly one struggling for share of consumer time in an ultra fragmented media marketplace, as well as share of mind against the traditional radio industry. Yet satellite radio appears to be taking hold among some media people not only because of its concept but because if successful, it offers real hope for media buyers who have craved an easier way to get nationwide coverage on radio.

In a flurry of quarterly and six-month financials both companies released this week, a picture of the nascent industry is emerging. Both beat analysts' efforts on number of subscribers - XM, which had about an 18-month head start, has 692,253 while Sirius has 105,186 - and showed gains in revenues if still losing money. XM's subscriber revenue jumped fivefold to $16.11 million in the second quarter, compared to $2.84 million a year ago. Sirius' subscriber revenue also rose dramatically to $2.02 million in the quarter compared to $50,000 a year ago.

Both satellite radio providers are subscription services, offering mostly commercial-free audio streams. XM offers its channels at an $8.95 a month fee, with several music and talk streams that have under two minutes of commercial spots per hour. Sirius bills itself as a premium service, $12.95 a month, and limits ads even more. Sirius' music plays without commercials and there are only limited ads on the news and talk networks; several streams, such as Fox News Channel and CNBC, run with the commercials that play on television.

In data released Thursday morning, XM reported quarterly ad revenue of $599,000, down from the $699,000 during the same quarter a year ago but up from the $448,000 in revenues earned during the first quarter. Sirius said it earned $27,000 in ad revenues in the second quarter, compared to $20,000 the same period a year ago. For the first six months of the year, XM earned $1.04 million in ad revenue compared to $1.08 million the same period a year ago. Sirius's six-month totals were $44,000 so far in 2003, compared to $49,000 the first six months of 2002.

Both XM and Sirius report ad revenue net of agency commissions, which brings down by an undetermined percentage the actual ad revenue. Total figures couldn't be determined Thursday.

XM calculates its net ad sales per subscriber, which was 35 cents in the second quarter and 36 cents in the first quarter. Net ad sales per subscriber has dropped precipitously since the early days of the service, the fourth quarter of 2001, when it was $9.14 and there were only 27,733 subscribers. In second quarter 2002, XM reported net ad sales per subscriber as $2.24 with 136,718 but by the fourth quarter it had dropped to 83 cents with 347,159 subscribers. Sirius doesn't release that data, saying it's too early in their company's life to measure that adequately.

April Horace, a research analyst at Janco Partners, agrees. She said that advertising sales hasn't been the focus of either company.

"Advertising revenues at this point in time are rather small, and insignificant until the subscriber base grows to the one million, two million mark," Horace said. "You're trying to get, not eyeballs, but ears right now."

Horace said both XM and Sirius are fully funded and on pace to reach cash-flow break-even by the end of 2004 for XM and Sirius soon afterward. She said that financials and building the subscriber base are more important than advertising right now, although XM has snagged several blue-chip advertisers, including American Express and J.C. Penney.

Sirius spokesman Jim Collins said advertising revenue isn't, as of yet, a big part of the company's strategy. He said that the company was still determining what it would do in the future with advertising.

"As time goes on, advertising is going to become more and more of a focus. It's estimated that advertising could represent 16 percent of total revenues in 2008," Horace said. But she added that the majority of both companies' revenues would still be from subscriptions.