I spend a great deal of time reviewing articles about Digital Music. And almost always, these articles seem to center on topics like iTunes, RIAA lawsuits, downloading teenagers, and the iPod. Not that these are unimportant topics by any stretch, but I rarely see articles that plunge into some of the "less sexier" aspects of the business - like digital radio and satellite radio.

Digital radio could have a huge impact on our radio listening habits. And with radio, at least in the US, the sensible place to start thinking about the market is the automobile. Right now, commuters in the US usually have a choice of FM, AM, CD, or tape. The ambitious among us will venture into satellite radio, CD/MP3 in-dash systems, Phatbox installations, or simply patch a portable device through the stereo system.

But with digital radio, our options change. FM radio evolves into CD-quality listening, and AM radio steps up to FM-quality. What happens next? More than just a fidelity upgrade will take place.

Think about AM radio. Right now, it is dominated by talk radio, Spanish-language stations and the oddball like the Disney channel. Most of us (especially the discerning readers of Digital Music News) will shy away from listening to music on this frequency band. But once AM improves to FM quality, listening to music on AM won't be so bad. And that could open the door for various niche music stations, including those focusing on genres like Reggae, developing indie artists, and regional music like Go-Go and Zydeco.

All of a sudden it is going to be much harder to complain about repetitive playlists. And it will essentially be free once you have a digital radio installed. Already, affordable devices are on the market, and I would expect auto makers to start installing digital receivers as standard devices in upcoming models. That will be key.

Already major radio conglomerates are beginning to upgrade their broadcasts to the digital standard. iBiquity, which is pivotal to the transition, is supplying much of the technology to make this happen. Who's in? Clear Channel, Enscom and Cox Radio will have most of their stations transitioned within 2-3 years.

Digital radio will not require a $10/month subscription, and will have much more local content - a major selling point for terrestrial stations. Some music lovers will still want 100+ genre targeted radio stations that satellite offers - it's a selection that is simply unmatched. Perhaps the two can share the market, but that will require a major satellite value-add for consumers. In the end, digital radio may be too close of an offering, and at a much lower price. Will that kill the budding satellite radio industry? Interested in hearing your thoughts....

More on digital radio.

More on satellite radio.

XM announced that it has over 5 million subs and expects to hit 6 million after the holiday season.  Sirius expects to get to 3 million.  Interestingly, Sirius' market cap at $8.49 Billion, is nearly $1 Billion more than XM's $7.55 Billion.  I haven't looked at their balance sheets to figure out the discrepancy (given that the one has double the subs as the other), but I can imagine people calling it the billion dollar Howard Stern premium.

Hats off to the both of them.  5 years ago, I didn't think both of them would make it, mainly due to the capital requirements (and especially when times were lean).  But time and time again, they were able to sell their story to Wall Street and use them like an ATM as they continued to hemmorhage money in creating a new segment and buying great content to fill the airwaves.  Now that there's a light at the end of the tunnel, I think it will be easier for them to raise cash if and when they need it. 

I still think satellite radio, as a technology, is a stepping stone -- better than AM/FM but eventually to be replaced with some form of IP-based transmission.  But it matters not -- these companies have successfully built brands around being the MSO of audio with great sub-brands that act as anchor tenants for their content mall (like MLB for XM).  They'll be able to swap out the distribution technology when it does change, just like Comcast will eventually deploy IP-TV.  Besides having built brands with all of that Wall St. $, they also have deep relationships with automakers - the key distribution platform for radio, as well as the CE makers.

Finally, I can see them morph into much more than a pay radio service.  Already they're offering rudimentary traffic & weather information services, which is really getting the traditional radio broadcasters nervous (as well they should be).   By virtue of their brands and distribution, I can see them becoming "Music Service Providers" (MSPs).  Already,  XM has hooked up with Napster in a co-marketing deal.  It's not a stretch to imagine them one day buying Napster whose $170 Million market cap is roughly the same as Napster's cash holdings, and equal to about a quarter of losses at XM.  This would help counter a threat from Apple who is muscling into the car dashboard with iPod docks.  While Apple doesn't have a subscription service nor premium radio, they could do either or both without much trouble.   

People have talked about a merger of XM & Sirius but this would be tough to pull off politically since the spectrum they occupy is a congressionally-created duopoly.  By the time they become profitable, the two companies will have burned
through high single-digit billions of dollars but I'm not betting on
them going away. 

[Disclaimer: I hold no positions on either stock nor am I making any recommendation on them.]

Part of one of my 2007 predictions just came true.  Sirius and XM just announced a merger.  The NAB immediately criticized the merger.  The broadcasters have enough influence in Washington to nix this if it really were a huge issue (as I predicted) but it may be that it squeaks through.   Perhaps they work out a deal in which the NAB allows the merger to go through in return for  a renewed agreement not to go after local markets, which are the bread and butter of terrestrial radio.  XM & Sirius haven't done much in local as of yet but initiatives like having dedicated channels for certain cities and having repeaters have made the broadcasters nervous.  The announced price represents a 21.7% premium on XM's stock and it will be interesting to see how far off this XMSR trades tomorrow.  The discount will represent the market's opinion on whether the FCC will let the deal through.

The woes of the recorded music industry have been well documented. Sales of CDs thus far this year are down 20% compared to last year. Revenues from digital continue to grow but not enough to prevent further downsizing. All of which is why the labels are turning over every rock looking for additional revenue streams such as licensing their music video catalogues, to getting into the advertising business to creating all sorts of derivative products around an artist and a release. This is the backdrop against which we are hearing rumblings about the labels trying to get a performance right from radio so that they'd be paid royalties from the use of their music on terrestrial radio, just as the music publishers, songwriters and composers receive a royalty (typically collected by a society such as ASCAP, BMI and SESAC). Incidentally, business is booming for these societies from their burgeoning licensing revenue -- as I've written in the past, more people are consuming music than ever before, and that represents licensing opportunities for copyright holders.

First some background: Satellite radio pays about 7% of its revenues to the labels and artists, while internet radio webcasters pays anywhere from 12% to many times this rate depending on how you're counting. What does terrestrial radio pay? Zip. Nada. Through a historical accident, terrestrial radio has paid royalties to songwriters and publishers, but not the labels and performing artists. The LA Times has a good rundown of this, and mentions how it may be easier this time around given the troubles of the record industry and the fact that satellite and internet radio have to pay such royalties (as does most of the rest of the world's terrestrial radio stations). The labels have tried to claim this performance right in the past but have found themselves outmatched politically by the powerful broadcasters. Chris Castle has the money quote from the LAT article: "The old saying is the reason broadcasters don't pay a performance royalty is there's a radio station in every congressional district and a record company in three".

There will be rhetoric from both sides with the record companies trotting out starving artists to make their case while the broadcasters try to brand this as an extra "performance tax", which they know will be anathema to many in Congress, and noting how they provide a promotional medium for the labels (so much so that they've been paid extra for this in the form of payola but you won't hear them say this too loudly!).

This makes no sense to me. Call me an apologist for the labels but if you take my product and build a business out of it, I should be able to get paid for it or choose to let you use my product for free in exchange for the promotion I'd get. But that should be my choice. The government shouldn't determine my business model by not letting me charge you for its use. What should really happen is for the government to be neutral on this and let the industries determine the price of playing music on terrestrial radio in the free market (with the government's consent so as not to breach anti-trust regulation, and some ground rules like it being a blanket license so you don't get bogged down over the price of playing one song vs another). It may be that the labels get a windfall from this, or that they decide that the price is 'zero' or even that the broadcasters actually demand a per-play royalty going the other way, in which the labels would have to pay for every time a radio station plays one of their songs. It would be a wonderful thing to let the market decide the price of playing music over the air. Now that's a negotiation I would tune in for...

[Cross-posted from www.ragsgupta.com]