Washington Life Magazine
Washington Life Magazine

VERBATIM
with Hugh Panero
of XM Satellite Radio

If you don’t know who Hugh Panero is, you should. He is the president and chief executive officer of XM Satellite Radio, a D.C.-based company that appears positioned to revolutionize radio as cable did for television. XM is one of two U.S. companies that provide satellite pay radio services, betting that consumers are so frustrated with traditional radio’s lack of programming diversity, constant advertising, and static reception, that they will pay $200 or more for the necessary hardware, and a monthly fee of $10 to $13 to get satellite radio in their cars and/or homes. While only having launched XM Satellite radio 2 1/2 years ago, the company is getting Wall Street’s attention. With 1.5 million current subscribers and the numbers growing, one can see why. Nancy Bagley, editor in chief of Washington Life sat down with Hugh Panero to discuss the company and where it’s going.

Washington Life: I know that XM offers 100 digital radio channels with 68 music channels and 32 news, sports, comedy, talk, and entertainment channels. How many of them are commercial-free?

Hugh Panero: As of February 1, all 68 of XM’s music channels became totally commercial-free. We evaluated how we could enhance the service to make it even more attractive to consumers, [and] the offer of commercial-free music resonated with our existing and potential new customers. Offering 100 percent commercial-free music also helps further distinguish XM Radio from commercial AM and FM stations, which typically play anywhere from 17 to 24 minutes of ads per hour.

WL: Your package includes music channels by the decade, and in every genre of music as well as channels ranging from Radio Disney to BBC World Service to a channel dedicated to books and drama called Sonic Theatre. What are your content goals for the future? Are there any new channels we should expect to hear soon in Washington?

HP: I believe beginning on March 1st, you’ll be able to tune to a specific channel that will provide instant traffic and weather information for the Washington-area market.

WL: One of the criticisms of consolidation [as a result of deregulation] has been that local radio has been slow to respond or alert listeners to local emergencies or catastrophes [environmental or otherwise] because programs are being broadcast from afar or were prerecorded. Will XM be able to respond to emergency situations that are localized?

HP: If it’s localized,[that channel will] provide people with up-to-the-minute information about changes in traffic flow. I live in this area as well, so if there’s a problem with any kind of homeland security alert or any other type of emergency that affect a particular area, we’d let people know immediately.

WL: So, the small towns will be able to get informationÉ

HP: Well, basically in the localized areas they’ll get more information about changes in traffic, weather, and security. We will also provide information about what’s happening in the travel corridors that sometimes the local traffic channels don’t cover. For example, when you want to go to the Delaware beaches or if you’re driving to Baltimore via I-95, we can provide traffic information.

WL: So, what you are saying is it’s more regional thanÉ

HP: Right. A large number of people live in the Washington area, but a lot of other people come into Washington from Virginia and Maryland, so we wanted those people to be able to get valuable information as well.

WL: Another criticism of radio consolidation has been that it has made it more difficult for new artists to break out. Are you/XM making a conscious attempt to provide an environment that will be artist- and producer- friendly?

HP: First of all, radio has had a decreased listenership over the last ten years and that’s because people are a little fed up with the amount of advertising. I think that the consolidation of radio among a few parties has caused there to be some very public criticism on the ability of certain kinds of music to make its way on to local radio. The economic model of a local station is to sell advertising around some lowest common denominator or mass market formats like top 40’s or adult contemporary. I think 70 percent of radio stations use one of five generic mass-market formats that do not support some of the more segmented audiences like blues, reggae, jazz, and classical. So, very much like cable television was able to support some of those formats, we have stepped in to create more opportunities for artists in other genres of music. Actually when you look at CD sales in this country, metal and rap are two of the most popular formats, but it’s not heavily represented in a lot of [local radio] markets, because it doesn’t support this sort of mass-market advertising model.

WL: It took billions of dollars to launch XM Satellite RadioÉfor the actual satellites, the new building, and the technology. I’ve read that XM is burning through cash at an estimated $20 million a month. Currently you have 1.5 million subscribers, and you had said your goal is to reach 4 million by 2004. When do you think you’ll reach that goal, and when will the company become profitable?

HP: We’ve actually given guidance to Wall Street that we will reach cash flow breakeven in the first half of 2005. The other important aspect of this business is that we are a business requiring significant capital outlay at the beginning because you have to launch satellites and build your infrastructure, similar to the satellite television model of DirecTV and EchoStar. But then what happens is after you reach a point where your cash flow breaks even, your business throws off a higher return than you would get in more traditional businesses that would have to continue to commit capital building out their infrastructure. [With XM] once you’ve built the infrastructure, it’s built. This business is already growing at a pace that is faster than, I think, any other new audio service that’s been introduced over the last 20 years. We’ve only been operating for about 30 months. So, we’re pretty happy with where we’ve come in a fairly short period of time.

WL: That’s really incredible. It’s also impressive that XM stock rose 75% in the fourth quarter of 2003. A little over a year ago XM’s stock was at $2 a share, and today it’s almost at $23. Do you expect the growth to continue at that rate?

HP: Well, we actually added a million customers in 2003. I think we’re projected to add another 1.4 or 1.5 [customers] in 2004. When you really look at it, we basically began last year with 347,000 customers and added over 430,000 customers in the fourth quarter, 23,000 on Christmas day, pointing towards the appeal of our product, particularly around the holiday season. So, the product has obviously come quite a ways from being a PowerPoint presentation four years ago, to being a power product in the consumer electronics industry.

WL: A lot of XM’s rapid growth has been attributed to your partnership with GM and Honda. What percentage of your subscribers are coming in through that partnership?

HP: Fifty percent of our subscribers come in through the consumer electronics retail stores. The other 50 percent come from the new car market where XM is packaged in when you buy a new car. General Motors and Honda have done an extraordinary job marketing the service with the sale of the new cars. In fact, General Motors which is the biggest advertiser in the world, has been advertising XM for a year, incorporating it into a lot of their television advertising. During the Superbowl, Honda ran Acura ads featuring XM in 60 of the top markets. Honda and GM are part-owners of the company, and they have really embraced it in their advertising. I believe GM’s research has shown that 90 percent of the GM vehicle buyers would prefer their next car purchase to include XM in it. So, it really shows you how important we’re becoming to those who purchase cars.

WL: I understand that new car owners have a nine-day free trial period and my understanding is that 75 percent end up subscribing?

HP: Yes. And then, General Motors and Honda use their enormous marketing machines which is unbelievably significant. GM makes about 30 million XM demonstrations a year in their 8,000 dealerships, so even if someone doesn’t buy the GM car, they’ll leave that dealership with the education of what satellite radio is. So, really it’s a very synergistic marketing relationship that we have.

WL: Do you have other automobile partnerships you can announce?

HP: The Honda and the General Motors deal is that the radios are factory- installed in new cars. We have other relationships with Audi, Nissan, and Toyota that are dealer installed, and we are talking to other car companies every day.

WL: If you have XM hardware in your car or at home on your stereo, is it interchangeable with Sirius, your competitor in the radio satellite industry?

HP: No, we’re using two different platforms. Sirius is selling their own hardware, and we’re selling our own hardware.

WL: It would be nice for consumers to have the option to switch, but it’s probably not to your advantage right now since XM has a larger subscriber base at the moment.

HP: The issue is simply that there wasn’t a technical ability to do it, because Sirius has had so many problems with their technology. They couldn’t even initiate a conversation on how to do it until that technology is stabilized. We are working with them on some interoperable platforms that won’t be available for a number of years but even then, one has to figure out what the cost elements of it are. But right now we’ve been dominating and doing a great job.

WL: Why do you think that you have grown so much faster than Sirius?

HP: We’ve just simply executed better, and we have a better array of products. Our price point is lower. Our music programming is less jukebox and more like HBO satellite radio because we have DJs. Our technology is about a year and a half ahead of theirs, so our radios in the “plug and play” format were in the market sooner.

WL: Sirius doesn’t have DJs.?

HP: They have some DJs. But their programming is not as live and as focused on building passion for the product and as differentiated from what you hear on local radio. A lot of people that they hired are from local radio. They are a lot more repetitious, they have less live programming. We’ve gone a different direction in that we have a much larger programming staff, with people who are experts in content. Our whole philosophy isÉwell, I grew up in New York and I used to listen to Allison Steele who had this deep sexy voice and would introduce us to the Allman Brothers and Eric Clapton and all this great music. She was part of my cultural landscape which really doesn’t exist in local radio. Radio today packages audiences to deliver them to advertisers with some music in between.

WL: So on XM how many times would you air the same program within a week?

HP: We won’t. We have live DJs that are programming fresh music every single day. Some of the programming might be taped or delayed, but the most popular channels actually have DJs on them that are talking about current events. Artists have been here to the facility and performed live, like Black Eyed Peas and B.B. King. We have a real bond with the musicians, and every day we’re teaching people on the Web about great new music that’s coming up and acting as a muse for subscribers to introduce them to new music very much the way radio was in the heyday of FM.

WL: I know that Sirius carries NPR. Why doesn’t XM?

HP: Well, they have a deal with NPR and it does not include “All Things Considered” and “The Morning Edition.” Our feeling was that until those programs were available [to us] it wasn’t worth the cost.

WL: XM began at a time when capital was plentiful. How have you shifted your business strategy in the changing environment?

HP: This is really one of many things we’ve had to endure between the stock market crash, anthrax, the sniper attack, the terrorist attackÑ we were supposed to launch the service on September 12, 2001 and I think you know what happened on September 11. It’s just part of the many things that occurred that make our success all the sweeter. We’ve raised a billion dollars during a time when capital was hard to come by, but the market determined that they wanted to support the business. We are obviously a company that performs well under poor conditions, rolls with the punches, takes a good blow, and then comes right back, and people are surprised that we’ve been successful at raising capital.

WL: There were also some problems with your two satellites, Rock and Roll, and their insurance coverage?

HP: What’s happening is the life of the satellites are shorter than originally projected because of the degradation of power. We raised capital in April that the market supported. The purpose of that raise was to expedite the launch of the replacement satellites. So basically we are launching another satellite at the end of 2004 and another in 2007. The satellites were going to have to be replaced anyway, but we had to accelerate it.

WL: And you got the insurance?

HP: I believe we’re going to recover a significant amount of our insurance proceeds and we are working to do that.

WL: Do you have any plans to launch in the international market?

HP: We currently have a license pending in Canada although there are some regulatory issues to be worked out. We are approached regularly about international partnerships. Our satellites obviously don’t extend to Europe, and our real focus is here on the United States where we have to succeed in order to make any international opportunity viable.

WL: In 2003 you were named Board Chair of the D.C. Chamber of Commerce. What changes do you expect to come under your leadership and what are your goals?

HP: Well actually my term expired [at the end of] 2003.

WL: Right, then under your leadership what was accomplished?

HP: I worked closely with Barbara Lange who’s head of the Chamber and [although] I can not take credit for it, during that period the Chamber became the largest in the region. Its membership soared. It had enormously successful fundraising activity, and most importantly, it fulfilled its mandate to its members, which was to pursue issues of economic development, enhancement of workplace issues, and creating a better business environment for small business in the city. I assisted with that program in 2003, but again most of that credit goes to Barbara Lange who is the visionary and who really makes it happen.

WL: What kinds of charities are you personally interested in and involved with, and are there any particular charities and causes that XM as a company supports?

HP: I serve as a member of the board of the Marrow Foundation, which supports the work of the National Marrow Donor Program (NMDP). XM actively supports the efforts of the Marrow Foundation and the NMDP to increase the size and diversity of the National Registry of unrelated blood stem-cell and marrow donors.

WL: How is XM actively supporting this cause?

HP: XM is producing and distributing public service announcements for the Marrow Foundation that go to radio stations across the country. The PSAs encourage people to become donors, and feature celebrities like Nelly and Quincy Jones. We have also brought in athletes like NASCAR driver Jeff Gordon and the WNBA’s Rebecca Lobo to do PSAs.

WL: How difficult is it to find a donor?

HP: Each year 30,000 people are diagnosed with leukemia lymphoma, and other life-threatening diseases for which a marrow or blood stem-cell transplant may be the only cure. However, only one-quarter of the patients who could benefit from a stem-cell transplant are able to access treatmentÑ a particular problem for African-Americans, Asians, and Hispanics. Our campaign aims to build awareness about becoming a donor, and hopefully increase the size and diversity of the National Registry.

WL: Does XM support any other charities?

HP: Great companies can do good, even relatively new ones. We support a number of other charities. We host regular blood drives for the Red Cross. We donate toys and clothing for children through several charitable groups, including Project North Star. As our subscriber base grows, so does our responsibility to give back to the community.

Photos by Jeffrey Prehn and Anton Papich, P2 Photographic



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