Thursday, January 05, 2006

Is Satellite Radio the New Galt's Gulch?

A friend of mine kids me often that I am extremely low-tech. I never had a cell phone until my company issued company phones to my whole department. I have a tape deck in my truck. I still have dial-up Internet service (although I swear I’ll make the jump to high speed one of these days!). But suddenly, in this past 6 months, I’ve gone into hyperdrive, acquiring all sorts of new gadgets…things my normally cutting-edge technophile friend would be among the first to get, but for some reason hasn’t – an iPod, a DVD recorder, and digital voice recorder with voice recognition software… and so on.

My newest acquisition is XM radio - the satellite radio service that you can get by paid subscription (which he doesn’t have...what a dinosaur!) Satellite radio has been very interesting as a phenomenon in the past couple years. It has really come on as the latest technology fad - and for many good reasons. When you think about it, why would somebody pay to get radio service that they can otherwise get for free simply by turning on the receiver in their car or on their home stereo?

Well…for starters, there are no commercials. Secondly, there aren't a lot of DJs that talk - you just get pure music (or whatever programming you are opting to listen to). Thirdly, the range of choice is much broader – from specialized stations that play nothing but bluegrass, folk music, or “big hair” 80s pop music, as well as sports, weather, and talk radio. XM has over 160 channels, while its main competitor, Sirius has about 130. There is something for everyone. Conventional radio stations need to sell advertising order to generate revenues and make a profit to stay on the air, and generally, they need to appeal to as broad a listener base as possible. Since satellite offers so many choices, listeners can pick more precisely from an array of options. And it's cheap! A subscription runs about $13 a month, which is a bargain after you buy the hardware, which can run $50 to $200, depending on what you get.

When thinking about another reason satellite radio has been increasing in popularity lately, I am reminded of the case of Howard Stern. Stern has been on the FM dial for quite a number of years, and during that time, has been continually harassed by the FCC with various accusations, such as being “indecent” or “obscene”, and whatnot. (Let’s set aside the plain fact that, as Stern speaks to over 12 million people every day, it would suggest that the FCC is out of step with what the mainstream commercial marketplace wants for entertainment.) When I saw Howard Stern on 60 Minutes a couple of weeks ago, he commented about being tired of the harassment by FCC bureaucrats who have profoundly stifled his creative energies over the years. Moving to satellite radio, currently less regulated by the FCC, will allow him to experience more freedom to explore his creativity, and bring more of his own brand of humor to the people who want to listen to such stuff.

One can see right away how government, while engaging in regulation of the marketplace, does so by sacrificing liberty. The State crushes individuality and creativity, all in the name of some absurd vision…“for the good of the community”, or “protecting the children”, or some other collectivist nonsense. So, like the characters in Atlas Shrugged who head off to Galt’s Gulch, so too does Stern depart the airwaves for satellite radio. Good for him, I say. Getting out from under the thumb of his oppressors, and moving to a place where he can delight his fans without interference.

But then just last week, a couple days after the 60 minutes episode, I was driving to work one day and I heard a radio commercial from the National Association of Broadcasters (NAB). The title of the commercial was “Radio: You shouldn’t have to pay for it.” (You can hear the commercials here.) In other words, they were trying to tell you, the consumer, why it's a dumb idea to pay for something that you can get for free - in this case, radio programming. They are, after all, just looking out for your financial well-being. Oh, and the fact that satellite radio is stealing their listener base with its superior service, thus lowering radio’s attractiveness to paying advertisers, I’m sure was only a secondary concern.

I was mildly surprised by the ad. Traditional broadcast radio industry is beginning to realize is satellite radio is cutting in on their market share, and they are attempting to do something about it. I just never expected that would happen so soon. Right now, XM has about 5 million subscribers. Sirius, XM's competitor, is slightly smaller with 2.1 million subscribers. (The amazing thing with Sirius is that they've tripled their subscriber base from just two years ago. In October 2003, they had about 700,000 subscribers.) Since Howard Stern announced that he was moving to satellite about a year ago, a lot of people started to subscribe to Sirius, and will continue to do so as he vacates the conventional airwaves. Needless to say, satellite radio is a high-growth industry. All the projections I have read indicate that another 2-3 million people could make the switch by the end of the year.

This brings up an interesting point - the radio industry is an economic concern with some pretty strong self-interest here. When this competitor in the (relatively unregulated) satellite radio market starts taking customers from them - people who are listening to them every day - as more and more people start turning off the normal FM and AM radio stations in favor of the satellite radio stations that are giving them what they really want (such as commercial free music, a wider range of formats, uncensored comedy, and so forth), how will the radio industry respond? Traditional radio will continue to languish in under the thumb of the FCC. They won’t have the freedom to compete, because of their prior acquiescence to government regulation. You can start to see their response – they are organizing to fight back. My question is, how long do you think it will be until the FCC - at the behest of traditional radio interests - starts making the push for legislation regulating satellite broadcasting? Think that’s not possible? Well the NAB was successful in keeping satellite radio off the air for well over a decade. Check it out:
The National Association of Broadcasters convinced regulators to delay the
launch of satellite radio for almost a decade. Once XM and Sirius got FCC
approval in 1995, they faced daunting restraints on their businesses.
Traditional radio stations get free use of the airwaves while XM and Sirius had to pay nearly $200 million combined for their spectrum. Traditional radio stations are also exempt from paying royalties to musicians. The Digital Performance Right in Sound Recordings Act of 1995 barred satellite radio from enjoying the same break. The FCC license also required the firms to only broadcast to paid subscribers, instead of offering free, advertising-supported stations. Finally, the FCC rules prohibited the new satellite services from broadcasting local sports reports and traffic updates.

As the history of business regulation in America goes - despite all the rhetoric to the contrary - government intervention in the marketplace has almost always been a weapon used by mediocre businesses against their more successful competition. In other words, if one can't win by playing fair and square in the free-market, just recruit the government and some politicians and bureaucrats to go out and harass one’s competition with burdensome laws and other rules that will slow them down. My bet is - and I don't normally like to get into making predictions, because they invariably have a way of not coming true - that eventually, the FCC will start pushing for more stringent regulation of the content on satellite airwaves in the next five years, with the traditional radio lobby firmly backing it up. The most likely excuse - the unregulated satellite market is offering things that aren’t good for “the children” to be hearing. Perhaps they’ll be so bold as to parade out some parents who will claim that they want the regulation enacted so that they won’t have to be bothered with any thoughts about what their kids might be listening to when they are out of earshot. Just like the post “Janet Jackson Boob” crackdown on anything even remotely objectionable - like a primetime broadcast of “Saving Private Ryan” , and the complete watering down of the Bob and Tom Morning Show - the content of what’s transmitted on the satellite wave will become a matter for the federal thought police to weigh in on and give its approval, because God forbid, some people actually ask for racy or off-color entertainment.

So the free-market has produced satellite radio, and it will continue to attract or a repel listeners based on whatever it has to offer. It'll be interesting to see if, as history has shown, satellite radio will become the target of the more envious traditional and archaic radio, and their political lobbyists. But for now, I wish Howard Stern the best of luck in shaping this new medium - I am on XM, so I will not be able to listen to him. For sure, his defection to satellite is sure to invigorate this “infant industry”, and will stimulate more developments on the content side of broadcasting. One can only hold out hope that the satellite industry will grow so fast and organize itself politically to insulate itself from the inevitable carping of dinosaurs it is pushing toward extinction.

Read also, a related article by Harry Browne entitled, "Free the Airwaves!"


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