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Lost in Space

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Cults of personality are nothing new in business, obviously. Nor are they always necessarily a destructive thing (Warren Buffett pops to mind). But cults of personality—like vapid, hoary shibboleths such as, well, “content is king”—tend to crumple in the face of more-elemental forces, not least among them the crush of competition and the march of technology. Which brings us back to HD radio.

Developed in the early nineties by a team of engineers funded partly by CBS Radio under Karmazin—irony of ironies—HD lets FM stations broadcast three channels, with CD-quality sound, over their existing frequencies. Before the satellite-radio surge, terrestrial outfits were free to drag their feet in adopting the technology. But now they’re racing to do so, out of fear for their survival. In the next year, the number of HD stations is expected to nearly double, to roughly 1,300. And the industry plans to sink $200 million into marketing the service.

For listeners, the downside of HD radio is that you have to buy a receiver—and the cheapest today costs $299. But the price is expected to fall quickly, and backers of HD hope that auto companies will start adding the chips needed to receive HD signals to ordinary car radios over the next few years. (BMW, for one, is already doing just that.) And there is a major upside to HD radio: Unlike satellite, it’s free; there are no monthly subscription charges. And the receivers will have TiVo-like functionality, allowing you to store and replay.

“This looks a lot like what happened in cable TV,” says Fred Wilson, a New York venture capitalist who’s an investor in iBiquity, the company that licenses the HD technology. “The cable-TV companies were fat and happy until satellite TV came along. Then the cable guys got religion, upgraded to digital, and started offering new services like broadband Internet and video-on-demand.”

The biggest boost imaginable to HD radio would come, naturally, if Jobs were to incorporate it into the iPod. But even if that doesn’t happen, satellite radio won’t be free and clear of threats from Apple. With the rapid proliferation of podcasting—the audio equivalent of blogging—the iPod is becoming a potent vehicle for home-brewed, downloadable radio. Meanwhile, Motorola is planning to launch a service called iRadio, which will allow subscribers to store programming from hundreds of commercial-free channels onto their cell phones. Indeed, Sprint Nextel is already offering something similar. And soon enough, you’ll be able to jack all these devices into ports in most cars.

At a Citigroup conference last month, Karmazin was asked about iRadio and other downloadable services that may pose a threat to Sirius. “The Internet, I think, must have hundreds of thousands of radio stations that are available,” he replied. “[But] most people are still more interested in watching Desperate Housewives last night than just the sundry content that’s . . . on the Internet. So we think that our content is our strength.” So it is—but the high price that Sirius paid to acquire it (Howard Stern in particular) may prove to be a millstone around the company’s neck in the face of this flurry of competition. Sirius, after all, has yet to make a dime of profit in its fifteen years of existence, whereas many of the rivals it’s likely to be battling are larger and flush with cash.

Is Sirius therefore doomed? Fred Wilson thinks not. “Satellite will survive, but it’s not going to put the traditional radio guys out of business,” he says. “It will be a premium service, like HBO.”

That would hardly be a disastrous outcome—except for the shareholders who’ve bid up Sirius to its current market value, which presumes that the company will continue to grow at an astronomical clip. It’s clear, in fact, that even among Sirius’s fans on Wall Street, a degree of sobriety has taken hold in the months since Karmazin’s appointment: Compared with this time a year ago, the stock is down a bit.

As for Karmazin, though his run at Sirius will allow him to end his career by returning to his first love, it strikes me as unlikely that it will ever reinstate him to the commanding heights of mogulhood. But then Karmazin, of all people, should know that. Some years ago, one of radio’s wisest sages predicted that satellite would never be anything more than a comfortable “niche business.” The sage, in fact, was Karmazin—and when it comes to the future of radio, who would want to argue with him?

E-mail: jheilemann@gmail.com.


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