Today's New York Times has a 18 page insert completely dedicated to a new advertising campaign for Sirius satellite radio. Inside, the company promises no advertising and no payola.

how many times has music played second fiddle to corporate agenda? how many artists have been kept down because they didn't have the right look? how much music has gone unheard so that boy bands might be seen? when was the last time someone spun a song just because they believed in its ideas?

There are two FCC licensed satellite radio providers in the US, Sirius and XM Radio. XM rolled out about a year before Sirius. XM is based on two geostationary satellites covering the mainland US and currently has about 1 million subscribers. Sirius is based on three satellites in a lower, approx. 16 hour orbit which provide coverage of the US by a least one satellite at reasonable angle at all times, and provides the potential of world-wide coverage. Both systems have a number of terrestrial repeaters, with the Sirius system requiring more for more seamless coverage. Sirius now has about 40,000 subscribers. As one can imagine, the initial capital outlay has been substantial.

It is estimated that each company will need 2 million subscribers to break even on a cash-flow basis, to say nothing of servicing debt or repaying investors. Sirius has already filed tentative bankruptcy papers as part of a restructuring.

How then, will Sirius survive without "pay-for play" or advertising? The answer is, there will be both. (And, more accurately, Sirius will not survive.)

There is a lot of interesting material in the most recent SEC filings from Sirius and XM. For example in the most recent 434 (b) (2) filing (1/30/03), Sirius admits that it has not yet reached an agreement with either BMI or RIAA regarding royalties.

We have yet to enter into music programming royalty arrangements with the performing rights society, Broadcast Music, Inc., or BMI. Radio broadcasters currently pay BMI a royalty of approximately 1.6% of their revenues, though BMI has commenced a court proceeding to obtain a higher royalty rate. We expect to negotiate or establish a license fee with BMI through a rate court proceeding in the U.S. District Court for the Southern District of New York, but such royalty arrangement may be more costly than anticipated.

We must also enter into royalty arrangements with the owners of the copyrights in the sound recordings we play, who are primarily represented by the Recording Industry Association of America. Cable audio services recently agreed to pay these owners 7.0% of gross subscriber revenue earned in 2003 and 2004, and 7.25% of gross subscriber revenue earned from 2005 through 2007. Our negotiations to date have not resulted in an agreement, and an arbitration proceeding is likely to commence in early 2003. Although we believe we can distinguish our satellite radio system sufficiently from cable audio services in order to negotiate or obtain through arbitration a lower rate, we may not be able to do so, and we could be required to pay a higher rate. In any event, we expect to pay the same rates as XM Radio, the other satellite radio licensee.

The latest quarterly report (Form 10Q 11/14/02) on page 14 shows that Sirius already is advertising and books some revenue. The pro formas for the company from last year also include advertising revenue. XM Radio does include advertising in its programming, but the market is tough. These advertisers are a limited group of companies which are mounting national campaigns and, with current conditions, XM's advertising revenues are well below projections.

Regarding payola or "pay for play," XM is partly owned by Clear Channel, which has corporatized payola and continues to push artists, even unpopular ones in return for cash payments. I look at the projected earnings of Sirius (see table) and immediately wonder where this 400-800 million dollars in operating revenues is coming from. The alternative is for Sirius to go out and find musical talent, develop it, record it and distribute it. This is hinted at in the NYT insert. Although that is a possible game plan, this company does not have the capital to compete with the media/record companies and actually will be dependent on them, in the form of the RIAA, for the pricing and supply of content.

So, will people pay $200-300 a year, not to mention the $200-600 cost of the (optional) receivers in the car or specialized radios/walkmans/boom boxes, in order to hear more channels of corporate music with advertising? I expect these companies to go belly up, especially Sirius. Then, someone will pick up these satellites and ground systems for pennies on the dollar and then we will have free satellite radio, like HotBird and Astra in Europe.