Thursday, December 6, 2012

Mel Karmazin, and the Future of Satellite Radio

I I went to hear Mel Karmazin of Sirius XM Radio yesterday.

Karmazin is one of the legends of the radio business.  At various points in his career he was head of Infinity Broadcasting and CBS, among other media properties.  After CBS was absorbed by Viacom, Karmazin had a short-lived stay with Viacom but then had a falling out with Viacom head Sumner Redstone and left for Sirius in 2004.

His ride at Sirius has not been a smooth one.  The company nearly went bankrupt in 2008, as the autos struggled in the midst of the financial crisis.  Liberty Media (lead by another legend in the media business John Malone) came to the rescue with funding that enable Sirius to survive. 

Not surprising in an industry known for megalomaniacs, Karmazin and Malone clashed.  Liberty recently announced that it was going to take over Sirius completely, and that Mr. Karmazin would be leaving the company in a couple of months.

So why was Mr. Karmazin on the road yesterday marketing the company?

I'm not really sure, other than I suspect it is for other reasons that just helping a company that he is about to leave.

But it was still very interesting to get his take on the media business in general, and radio in particular.

Mel noted that Sirius has 24 million subscribers, and has no real competition in satellite radio.  The company's big challenge is getting consumers to pay for radio, since conventional car radio remains free of charge.

He is convinced this is going to change.  Mel noted that no one used to pay for television, yet most of us now subscribe to either cable or digital television channels.  The attraction of being able to get entertainment when you want it, commercial free, will eventually win over the consumer, he believes.

In a few years time most new cars will come equipped with internet capabilities. This creates both an opportunity and a risk for satellite radio.

The opportunity arises as consumers get used to programming their own music, which could lead to more subscriptions for Sirius over the internet.  On the other hand, a fully-equipped internet enabled car would also have alternatives to Sirius, such as Pandora.

One thing seems clear to Mel: the old business model of free terrestrial radio are numbered.  He noted that Clear Channel - the largest terrestrial radio owner in the United States - has suffered in recent years.  Total industry revenues from "free" radio has dropped from from $18 billion to $14 billion over the last 10 years. 

(I well remember Clear Channel from the 1990's, when it was the darling of the growth stock universe. Amazing how quickly trends change!)

While I enjoyed hearing from Mel yesterday, I must confess that I am less convinced that satellite radio will achieve the adoption rate of pay TV has achieved.  I think the internet-enabled car will offer too many less expensive choices for consumers, as other technology companies target the auto.

In other words, the future of free radio may be dim, but I am not convinced that satellite will be the winner.

For example, here's some thoughts from the blog Seeking Alpha:

The Web 2.0 business model is also re-engineering the music business and destroying satellite radio. Together, Apple (AAPL), Microsoft (MSFT), Google, and Pandora have all created a streamlined ecosystem for sharing digital music files. Ironically, the iPhone has emerged as the centerpiece of this movement. As an entertainment center, the iPhone features iTunes downloads and Pandora streaming radio applications. Users can then dock the Apple iPhone to headphones, stereo speakers, and automotive dashboards to customize and amplify digital music. During its latest third fiscal quarterly period ended June 30, Apple sold 26 million iPhone units. Taken together, the iPhone, iPad, and iTunes accounted for $19.4 billion of Apple's $35 billion in total Q3 2012 net sales.

As I think about it, perhaps the real reason Mel Karmazin came to Boston yesterday was to deliver a parting shot to Liberty Media and John Malone.  By saying, hey, Sirius is doing great as I am leaving, there is only room for disappointment in the years ahead.