Howard Stern tosses his long black locks away from his face, which recently underwent some plastic surgery to eliminate some rough spots. However, the shock jock says he's still not happy with his appearance. "I know I'm hideous," Stern says, while appearing earlier this year on CNN's Larry King Show.

But Stern always has loved the sound of his own voice. And so have millions of loyal listeners nationwide. The radio personality's unique mix of humor and soft-core raunch has made him a cultural icon, in addition to the Federal Communications Commission's (FCC) favorite whipping boy. The agency has fined Stern and the stations that carried him nearly $3 million over the last 10 years for various indecency infractions.

That's why Sirius Radio, a new satellite radio service, was able to hire Stern away from CBS Radio's FM stations last year to host a new program on satellite. Stern debuted on Sirius in January 2006. That, of course, and a contract worth $500 million over five years.

"A guy like me was dead in the water on terrestrial radio. I was dead creatively," Stern told King. "They were taking away all my stations. I couldn't work anymore with all the censorship. Because of technology like this, we have a complete rebirth. And that's brilliant."

SATELLITE RADIO BOON
Stern's hiring was the shot heard around the radio world. Although Sirius and rival XM Satellite had been operating since 2001, many industry officials believed that satellite radio only would attract a select group of audiophiles and early adopters. Certainly, they thought, it never would threaten the dominance of AM/FM. But after news of Stern's big switch, Sirius gained 1.1 million subscribers in the last quarter of 2005 and XM added 900,000. At the end of 2005, the two radio upstarts had a combined 9.2 million subscribers (XM: 5.9 million; Sirius: 3.3 million)

Years after it was written off as a secondary medium, radio is suddenly hot again. Stern's deal soon was followed by other celebrity hirings (See sidebar: Battle of the Stars); consumer electronics retailers happily are selling new satellite radio devices; and the trade magazine, Inside Radio, reports that the two services will combine this year for $80 million to $100 million in advertising revenue.

And that's not all.

"XM expects to exceed nine million subscribers by year-end, and we're on track to have more than 20 million subscribers by 2010. We project subscription revenue will reach $860 million in 2006 and expect to achieve positive cash flow from operations by the end of this year," says XM CEO Hugh Panero.

Sirius CEO Mel Karmazin is equally bullish, telling investors in an early 2006 conference call that he expects that Sirius ad sales will approach 10 percent of overall revenue in the next few years. (The company reported $242 million in revenue in 2005.) In late February, Sirius had already generated $6 million in ad revenue for 2006, exceeding its entire 2005 total.

Karmazin also said that Sirius added 620,000 auto subscribers in 2005-a 241 percent increase over 2004.

"In 2006, we believe this positive momentum will be further reflected in our automotive (subs), where we expect to more than double our subscriber base," Karmazin said.

It would seem that the sky's the limit for satellite radio. The success of satellite radio would appear to be another case of new media taking advantage of old media's inability (or unwillingness) to change with the times. Just as satellite TV services captured subscribers from a stagnant cable TV industry in the 1990s, the satellite radio companies now seem poised to peel away listeners, and advertisers, from terrestrial radio.

However, unlike cable a decade ago, AM and FM stations already are prepared with a new service of their own. It's called HD Radio and some people think it could be a strong competitor to satellite radio.

Regardless of how the competition rolls out, the emergence of the new radio services has created interesting new revenue sources for retailers and hardware manufacturers. And it has caused business executives and advertising agencies to re-address where to place their bets.

It would seem that the sky's the limit for satellite radio.

In 2001 and 2002, respectively, XM Satellite and Sirius Radio launched service. Run initially by some ex-satellite TV veterans, such as former RCA executive Joe Clayton (who headed Sirius), the new radio services offer Americans some things they weren't getting from terrestrial radio.

1. LESS ADVERTISING
Although XM and Sirius stations run ads on their talk, news and sports stations, the music channels are commercial-free. Radio surveys have long indicated that listeners were getting fed up with the constant stream of ads (and disk jockey chatter) found on most terrestrial stations. Satellite radio allows people to enjoy their favorite tunes for long stretches without being interrupted.

2. MORE CHANNELS WITH  BETTER SOUND
In most major markets, you can find two to three dozen stations on the AM/FM dial. However, because of poor reception, many people can only listen to about half of that amount; and the sound is often poor on those.

But XM has more than 160 digital channels (68 are music channels), while Sirius has more than 125 (67 are music channels). And because it's digital, the audio is near CD-quality.

3. MORE NICHE PROGRAMMING
Not only does satellite radio have more channels, it has a station for every niche you can imagine. XM, for instance, has an entire channel ("Frank's Place") devoted to the music of Frank Sinatra and Sirius has a channel called "Elvis Radio," which plays Elvis Presley all day. XM also has an exclusive agreement to broadcast every Major League Baseball game while Sirius has similar deals with the National Football League, the National Basketball Association and the National Hockey League. And answering critics who say satellite radio lacks the local touch, XM and Sirius offer channels devoted exclusively to local traffic and weather for about 20 different cities.

4. MORE CELEBRITIES
Noting that terrestrial radio benefited from the rise of stars such as Limbaugh and Stern, XM and Sirius soon packed their programming line-ups with celebrity guest disk jockeys, such as Tom Petty and Fred Durst. Then, after a few years, it hired Stern and other big-names such as Oprah Winfrey (XM) and Martha Stewart (Sirius) to host and/or produce their own shows. Satellite radio listeners now are treated to original programming from some of America's most famous stars. There are few local terrestrial or radio syndicates that can afford to pay what XM and Sirius are shelling out for the likes of Howard and Oprah.
In the last few years, XM and Sirius have given listeners more reasons to subscribe by signing partnerships with leading automakers to include their radio receivers in new model cars.

Despite the growing subscription rate of satellite radio, it's premature to suggest that AM/FM is about to become a dinosaur. In fact, satellite radio has its own marketing challenges, which could single-handedly slow sales or possibly even put one service out of business.

1. COST
The monthly subscription price for each service is $12.95 (additional receivers add to the monthly cost). Paying for radio? Some Americans won't hear of it. In fact, American Media Services, which analyzes and values terrestrial stations, says its research shows that 86 percent of Americans are "not very likely" to subscribe to satellite. Also, satellite radio listeners must buy the receiver, which can cost up to $300. (Car receivers are less expensive, with some under $100 with rebates.)

2. RECEPTION
Like satellite TV, satellite radio channels are transmitted from satellites in the sky. Depending upon where you live, you may have difficulty getting a signal, particularly indoors. Both services provide antennas, but they are not perfect.

3. COMPETITION
Sirius and XM are locked in a spending war to become the leader in the field. Stern's $500 million contract with Sirius has been well-publicized, but an XM board member resigned from the company earlier this year because he said the company is spending too much money. Many Wall Street analysts have speculated that this intense battle will either result in a merger between the two or force one to close.

4. LACK OF LOCAL BROADCASTING
Despite the local traffic and weather services, satellite radio can't provide news about the neighborhood. AM/FM stations provide coverage of local events, such as sports teams and area politics. For many people, the information is particularly helpful during the drive time to and from work. However, satellite radio offers audio versions of national and special-interest news channels, such as CNN and Fox News.
The challenges facing satellite radio is one reason why the terrestrial stations are still confident of holding their position. The other reason is called HD Radio.

HD MOVES IN
At press time, the terrestrial radio industry had launched HD Radio in 28 markets (with many more coming this year) and backed it up with a $200 million advertising campaign.

Terrestrial radio stations believe that HD Radio, 'though, eventually will counter the advantages of satellite radio.

Like digital TV, HD Radio allows local stations to offer multiple broadcasts via different digital signals. For instance, a news station could send its regular feed to two channels-one digital, which would be available on HD Radio receivers, and one analog, which would be available on a normal radio receiver. But the station also could offer entirely different programming on a separate channel, such as classic music or Top 40 tunes. The increased options could help a local station attract a more diverse group of listeners-and a more diverse group of advertisers. However, the HD Digital Radio Alliance, a consortium representing radio companies behind the launch of HD Radio, has agreed to stay commercial-free until mid-2007 at least. The group wants to compete with the satellite music channels, which are also ad-free.
Like satellite, HD Radio also provides crystal-clear, near CD-quality sound.

The cost of the receivers run around $299, but should drop when more stations go digital. At presstime, about 100,000 HD radio receivers had been sold.

Terrestrial radio stations believe that HD Radio, 'though, eventually will counter the advantages of satellite radio. Although the receiver will require a purchase, there will be no subscription charge for the service. So, local radio stations will promote the "free" benefits of local radio.

For CE retailers and manufacturers, the radio war is a pleasant surprise. Many companies had concluded that radio was a relic of the past, hardly worth finding shelf space for. But satellite radio and HD radio should provide a steady flow of new revenue for years to come. V

By Phillip Swann
May/June 2006