Radio Waves: will John Bitove's satellite radio play take off?

Will promoter John Bitove's satellite radio play take off?

Another KFC flyer bribing us with coupons to pick up some fried chicken dropped in the mail the other day. It's the kind of offer most just throw into the recycling bin, despite a promotion to receive a Colonel's Dozen of tasty chicken bits for $12.99. But on the flip side was a more unusual come-on: a pitch for satellite radio, also priced at $12.99. The tie-in between the two was lame–“Ironically, the chicken dance is the only thing [satellite radio] doesn't play”–but that's not so surprising: chicken and music make strange bedfellows.

Unless, of course, you happen to be John Bitove, controlling owner of both KFC in Canada and Canadian Satellite Radio Holdings Inc.–which in turn owns the recently launched XM Canada satellite radio service. The launch of this service, along with that of Sirius Canada, has managed to offend existing radio companies, Canadian content proponents and Quebec politicians. And many industry-watchers give satellite radio little chance of ever being profitable.

For Bitove, the satellite play seems to offer plenty–a fortune on paper, and the best opportunity so far to buy into Canada's family-controlled media industry. Bitove has had his sights on the media game ever since his brief days as owner of the NBA's Toronto Raptors in the mid-1990s. (Back then, Bitove would buy airtime, produce games and then sell commercials.)

Making money on the NBA, however, is quite different from banking on a new technology, one that demands payment for something that has been free forever–access to radio. Not to mention there's a whole slew of alternatives offering many of the same things satellite radio boasts, such as customized playlists and clearer sound.

So forgive the skeptics who doubt Bitove's chances. After all, satellite radio in the U.S. has had decidedly mixed results to date. Since hitting the airwaves in 2001, XM Satellite Radio Holdings Inc. and Sirius Satellite Radio Inc. have signed on nearly nine million subscribers, but are burning through money, ringing up more than US$4 billion in losses since 2002.

Aside from literally astronomical startup costs, which included launching satellites, both have been spending like mad to win customers. So much so, Sirius has gambled US$500 million that shock jock Howard Stern can reel in legions of fans once he skedaddles from traditional radio in January. Analyst opinion is also mixed. One industry watcher estimates there could be 51 million U.S. subscribers by 2015–but profits may be equally far away.

Bitove, however, believes XM can be profitable within five years, in part because he has deftly managed to avoid any significant capital startup costs. His company has spent about $45 million to license XM's satellite and programming, and install roughly 80 terrestrial repeater stations to ensure coverage in urban areas. Another $15 million of his own money was spent getting the necessary licence and ensuring the company was ready to rock before the end of the year. “I have no doubt this is going to be a ubiquitous part of everyday life for every Canadian at some point in the future,” says Bitove. “Look at wireless. It wasn't that long ago that they thought 25% to 30% was the maximum penetration rate for wireless within a developed country. Now they're hitting more than 50%.”

In one sense, Bitove's gamble has already paid off. An early December IPO for his Toronto-based Canadian Satellite Radio, backed by RBC Dominion Securities and Genuity Capital Markets, raised net proceeds of $56.9 million. At $16 a share, that puts Bitove's stake in the company at roughly $435 million–not bad for a $15-million investment, although the stock (TSX: XSR.SV) slumped about $1.50 in its first week of trading. The money is being used to finish building XM's Canadian network of repeater stations, and fund its marketing, especially for co-branding the service with GM Canada, XM's primary auto partner.

Bitove deserves credit for hanging tough through two years of wrangling with the Canadian Radio-television and Telecommunications Commission for a licence. This process nearly derailed the company last summer, when criticism from Chum and Astral Media, Cancon proponents and Quebec politicians almost forced a review of the licences granted XM and Sirius. That, recalls XM Canada's president Stephen Tapp, “was one of the most hotly contested regulatory battles” he had seen in his 23 years in the industry. Broadcasting neophyte Bitove was front and centre for much of it.

Flash back to late August 2005, when the federal Liberal caucus blew into Regina for its annual powwow. Outside, the clouds rolled in, obscuring the clear Prairie sky, while inside the Delta Regina hotel, the feds dithered on the fate of satellite radio. The CRTC had already agreed to issue three licences, one each to XM and Sirius, and a third to CHUM-Astral, who, lacking a satellite, planned to use more conventional terrestrial towers. (CHUM's licence has so far not been used.) What stuck in the craw of many was the perceived lack of Canadian (or French-Canadian) content XM and Sirius promised in their applications.

“We saw, and still see, satellite radio as a precedent, a slippery slope for the demise of the regulatory regime that has enabled the success of the whole Canadian music industry,” says Ian Morrison, spokesperson at Friends of Canadian Broadcasting, a self-appointed media watchdog. Morrison dislikes the fact that satellite radio providers will only feature less than a third of the 35% Cancon that traditional radio plays. He's also leery of the way this country's artists will be pigeonholed into Canadian-only stations. “People don't tune into radio on a patriotic basis. They tune in on a genre basis. So what the CRTC has done is license ghettos for Canadian content in these American systems.”

Bitove knew he was in for a fight. So he put together a posse that included former Ontario premier David Peterson, and flew to Regina to press his case. Bitove argued that, among other things, it was ridiculous to compare a radio station in Rimouski, Que., with a limited audience reach, to a service that beams its music all across North America. Yes, he conceded, there's less Canadian content on satellite radio, but it's heard across the continent, increasing exposure to a wider variety of Canadian artists than that of any commercial station in Canada.

At the end of the three days in Regina, the feds had decided to do nothing, and later formed an ad hoc committee, which met in early September. Again, the committee talked the issue over, and again decided to do, well, nothing. Eventually, the CRTC's ruling stood, a decision made slightly more palatable by the two satellite radio providers' decision to up their Cancon to 10% instead of 8%, and offer half their stations in French.

“I was never happy with how long it was taking, but when I cooled down I understood I would do the same thing if I were them,” says Bitove. “There are some people who believe you protect your industry by building walls. There are others who believe the more you acknowledge and embrace new ideas the better off you'll be. I'm in the latter camp.”

That attitude doesn't surprise his second-in-command, Stephen Tapp, who has had stints at Chum Television, Viewers Choice, TSN and CTV. The two met when Bitove floated the idea of carrying Raptors games on Viewers Choice. “I came to this business because I believe in the business, but I really believe in John,” says Tapp. “No. 1, here's a guy that I like, but, No. 2, he has an appreciation for the marriage of content and technology for the benefit of the customer, so it was no surprise to me that he ended up evolving into a media guy.”

Still, it is surprising that a man who made riches off the risk-averse fast-food industry was at all interested in an upstart technology such as satellite radio. Bitove became enamoured of the idea after reading a magazine article in Europe while pushing Toronto's bid to land the 2008 Olympics. The day the Olympic venture failed, in 2001, he got one of his assistants to start researching the idea of landing a satellite radio licence in Canada. “I am fascinated with the broadcasting industry as an industry,” says Bitove. “In Canada, five families control most of the major broadcasting assets. It's a closed shop.”

At the time, the receivers consumers needed for satellite radio were expensive, but not nearly as costly as building the industry from scratch. Since then, the price of the hardware has dropped, making satellite radio more widely affordable. Also, Bitove partnered with XM in the U.S., so he's able to license their programming and broadcasting satellite at a fraction of the cost of building that capacity himself. His chief competitor, Sirius, has the exact same advantages, setting up a classic marketing war. The challenge is both to sway customers to a particular side, and also to a service that competes with free alternatives.

On the surface, satellite radio would seem to be an obvious hit with music lovers. Mainstream radio has become increasingly formulaic, with the same artists populating playlists up and down the dial. A whole generation has grown up tuning into the Internet or iPods to hear the latest sounds. Canadians listen to less radio than they did 10 years ago, and the gap between adult and teenager habits is growing. According to a Statistics Canada survey released in July, teens listen to just 8.5 hours of radio a week, 12 hours less than adults.

Clearly, traditional radio has a problem, but are commercial-free digital signals the answer? Give Bitove a chance for a 15-second elevator pitch and he says, “Did you ever think you'd pay for TV when you used to get five channels over the air for free? Did you ever think you'd pay for bottled water? In both cases you pay. Why? You want better choice, you want better quality, and that's what satellite radio is all about.”

Facing off against Sirius, which is partly owned by CBC and Standard Broadcasting, is going to be a dogfight. But Bitove has experienced a few bare-knuckle battles in the past and isn't shy about getting into the ring. He was the CEO of Toronto's failed bid for the 2008 Olympics, losing out to Beijing in the 2001 ballot even though it was widely believed Toronto had the best plan.

A few years earlier, Bitove had a more successful foray into the world of sports, fighting off wealthy adversaries in Larry Tanenbaum's Palestra group and Bill (son of Harold) Ballard to bring the NBA to Toronto. The NBA's decision to hand the franchise to Bitove surprised many, but Bitove had already proven to be a savvy hoops backer when he led a drive to secure $13 million to stage the 1994 world basketball championship in Toronto. And his Raptors bid brought media mogul Allan Slaight's cash, and a dream for a new arena with him. Unfortunately, Bitove couldn't get the Toronto Maple Leafs to play ball for a new arena, and Slaight bought him out in a power play in 1996. (Today, the Raptors and the Air Canada Centre are part of Maple Leaf Sports and Entertainment, the country's largest sports enterprise.)

Ironically, XM's chief competition in Canada, Sirius, is partially owned by Standard, which is run by Gary Slaight, the son of Allan. While XM has double the subscribers of Sirius in the U.S., that's partly due to XM's head start.

No such advantage exists for either of their northern spinoffs, says Mark Redmond, newly minted CEO and president of Sirius Canada. What's at stake are the estimated 3.5 million subscribers in Canada that Ottawa-based telecommunications analyst Yankee Group believe will be signed up by 2015. Yankee Group analysts predict 80,000 subscribers will be hooked by the end of 2005, and one million three years later, following the growth patterns of other consumer technologies, such as high-speed Internet and cellphones.

Redmond thinks it will come down to which company offers the best content and signal, two areas in which Sirius seems to have an early edge. Sirius is offering 100 channels to XM's roughly 80, 10 Canadian stations to XM's eight. Redmond also notes that due to the respective positions of their satellites, XM will have roughly 10 times the number of repeater towers as Sirius to achieve the same level of coverage.

Both services tested fine in and around the Toronto area, so customer decisions should really be based on whatever programming suits them best. Want to listen to NFL game coverage or Martha Stewart Living? Then Sirius is your choice. Prefer hockey and British news? XM is the way to go, with BBC World Service and exclusive NHL broadcasts starting in 2007. Both offer a range of commercial-free music stations to suit even the most specific tastes, from garage rock to kids' tunes–both genres underserved or not served at all by traditional radio, it should be pointed out. Howard Stern fans, however, will have to wait, as he's not part of Sirius Canada's initial lineup.

So far, Sirius seems to be winning the marketing war as well. Its launch was a well-attended schmooze-fest in Toronto that featured up-and-coming Canadian artists Kathleen Edwards and Ron Sexsmith. The concert was broadcast on satellite. Sirius has also snagged more automotive manufacturing partners, a key segment of the expected user base, signing exclusive deals with Ford, DaimlerChrysler, and BMW. So far, XM has only got GM to sign on the dotted line. (Don't be surprised if Honda and Toyota partner with XM, though–they're both with XM in the U.S.) And both services have relied heavily on retail partners such as Future Shop and the Source to get the word out.

No doubt the fact his old rival Allan Slaight's son Gary heads up Sirius gives Bitove extra incentive to try to dominate this war. And he's also learned a lot about getting things done. Bitove claims he's a “classic entrepreneur,” but selling fast-food chicken with one of the oldest brand names in the industry isn't exactly challenging. Still, Bitove has put his own take on it, spinning the business into two income trust vehicles. It will be interesting to see if he can navigate the broadcasting industry as deftly.

The real payoff for Bitove, however, may not be satellite radio at all, but a broader communications play that combines media and telecommunications. For example, XM Canada's MyFi portable provides some clues to the direction the industry is taking. The MyFi (made by Delphi Corp.) is not much bigger than a cellphone or iPod, and could conceivably function as both in the future. And in-car units could eventually be adapted to receive live traffic updates and video streaming.

“What cable TV did for the home, satellite radio will do for the car,” says Bitove. “Technology has changed in the home, in the office, but it hasn't changed in the car and that's the next frontier.” Now Bitove just has to get everybody as enthusiastic as he is.