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The result: The Top 40 station in Los Angeles often plays the same songs, the same jingles and sometimes the same syndicated deejays -- and may be owned by the same company -- as the Top 40 station in Washington, D.C. (In fact, it is.)
If XM thought it had a good business plan before consolidation -- to sell more variety to radio listeners -- it seemed like a money machine in the wake of consolidation.
In 1997, Abrams was again restless and looking for something new. He was contacted by a recruiter from the company that would become XM: Do you know anyone who'd like to program 100 brand-new radio channels?
Um, yeah, Abrams said. Me, for instance.
The recruiter told Abrams he was too much of a "heavyweight," and that the company couldn't afford him. But Abrams was relentless, and inundated the recruiter with information and pitches.
Eventually, Abrams was hired as XM's top programmer -- he would be in charge of dreaming up all the formats. It was a chance to do FM all over again, only with better toys. Because he was programming a national service, he would not be constricted by the size of a local market. Which meant that almost any format was game. He and outside researchers identified more than 80 music and 45 talk formats they thought XM listeners would find appealing.
And this time, there would be no calculus-spouting pointy-heads one-upping his research.
Abrams leaned on something called "psychographic" research, which is a sophisticated polling and analytical method that isolates listener groups based on habits, desires, affinities and dislikes. Abrams likes to say it has more emotion than high-math research. Abrams's psych charts classify radio listeners into genera, such as "new rocker," "aging modern rocker" and "real people" and identifies their perceived preferences. For instance, "real people" are aged 25 to 50, listen to country radio, watch network television, own a van, eat at Shoney's, lean politically right, like sports and wish rap would go away. XM programmed five country channels for these fans, broken down into bluegrass, classic country, progressive country, hit country and middle-of-the-road country.
XM's business plan would be based on cable television's.
In the late '70s, television viewers had essentially four choices: ABC, CBS, NBC and PBS. Wildcat companies started laying cable to improve the network reception. Soon, everyone realized that cable allowed for more channels and more viewer choices. Cable-only channels began appearing, no longer targeted at every possible viewer, but at a narrower niche viewer -- ESPN, MTV, HBO. Most importantly, advertisers and subscribers followed. If an advertiser wanted to reach a particular audience, networks were shotguns. Cable channels were sniper rifles.
XM told investors, such as General Motors Corp., that it could create a satellite service that would stretch across the United States. This meant that XM could satisfy niche musical tastes. Translation: There aren't enough, say, reggae fans in Washington to support an all-reggae station here. But there are enough reggae fans across the country to support an all-reggae station on XM, which could be heard coast-to-coast, XM said. Because it would be a subscription service, many stations would be commercial free. Those that did carry ads would be limited to six minutes per hour.
Investors, who knew of the cable success and the steady decline in radio listenership since 1990, liked the idea. XM raised more than $1 billion in capital. In the early days at XM's sparkling headquarters, the company spent what it took to build its dream. XM sank $62 million alone into renovating its headquarters.
To try to lure a major talent, XM waved stock options under the nose of top-rated talker Rush Limbaugh. But his syndicator refused to let Limbaugh appear on XM, knowing that the 600-some over-the-air stations that carry the conservative host would revolt. XM paid millions to top-line ad shop TBWA/Chiat Day for a nationwide campaign keyed to the launch; ads featuring B.B. King, David Bowie and Snoop Dogg appeared on television and in movie houses. In September 2000, the company's stock soared to more than $45 per share. A year later, XM was telling Wall Street that it needed about 2.7 million to 3 million subscribers by 2004 to break even.
On Friday, September 7, 2001 -- five days before the national launch -- XM held another boot camp. Several people at XM had been working for three years to reach this point. The tireless Dave Logan had spent countless hours with each of his program and music directors, taking Abrams's big ideas and converting them into playlists and programs. He was rallying the troops for one final push. "Far better it is to dare mighty things," Logan liked to tell his programmers, borrowing from Teddy Roosevelt.
On this day, he stood onstage and told his staff: "Next week is going to be one of the most memorable weeks of your life, and you'll never forget it."
As it was at every other office across America that had televisions, the XM staff watched the events of September 11 unfold in real-time horror. XM executives were in the air that day, heading to Dallas and San Diego, where the national launch would begin. By the end of the day, it was clear that it would not be business at usual on September 12 at Best Buy and Circuit City, where XM receivers would be rolled out to customers.
The service got a big splash in USA Today, but nobody would see or care about it. Then there were the ads: The high-profile campaign that featured David Bowie and B.B. King was suddenly unpalatable and grisly -- they were depicted falling out of the sky, to mimic music coming down from a satellite. Another XM ad featured a NASCAR car crashing to the ground. The campaign was quickly pulled. By the end of the day, Panero decided that XM would wait at least two weeks to launch.
XM launched on September 25 to quieter fanfare but quick acclaim. Within weeks, it racked up plenty of kudos -- Fortune magazine named it the product of the year. Time called it the invention of the year. But the ripples continued. If the airlines and tourist industries were hit hardest by the fallout of 9/11, the media and entertainment industries were not far behind.
It turned out to be the worst time, maybe ever, to launch a new luxury entertainment product. XM's favorable press and buzz as a hot Christmas present helped the service recoup, however, and through last year, the service hit its subscription promises to Wall Street.
But XM's cash went up like tinder.
A satellite business is an extraordinarily expensive venture to run. Though XM's subscriber growth is on-track, the math doesn't add up. With 300,000 customers paying $9.99 each, the company can gross $3 million a month -- not nearly enough. In the fall, it was burning through $30 million per month, Wall Street analysts estimated, and still it carries more than $400 million in debt. The stock has plummeted from its high of more than $45 per share to around $3 per share.
XM has always been in a race against time. Could the company add enough subscribers to become profitable before the cash ran out? The money paranoia kicked in last summer, when bosses were told they couldn't fill positions that had been vacated. The XM promotional 18-wheeler went to fewer NASCAR races. By last September, suggested layoff lists were being drawn up. On November 11, they were executed: Eighty staffers were fired to cut costs.
First to go was Dave Logan, Abrams's good right hand.
Logan was Ginger Rogers to Abrams's Fred Astaire. Fred got all the press but, as they say, everything Fred did, Ginger did backward and in high heels. As Logan wrote in an e-mail for this article before he was fired, "Lee decides we need to land the plane backwards at Reagan National while the sky turns green. It's my job to make it happen." (As part of his termination agreement, Logan was prohibited from commenting further for this article.)
Despite the money crunch, Abrams remained upbeat. It's always a sunny day in Lee's office, goes the saying around XM's programming department. As a radio vet, he's been through such contractions before. But he will miss Logan.
After the layoffs, Panero and the XM board were faced with the task of raising $400 million within the next few weeks to keep the company going. With XM/AM/FM radios optional in 25 models of 2003 GM cars, he is confident he can meet his projection of hitting 1.2 million subscribers by the end of this year. The second-generation XM radios are more user-friendly than their predecessors. An XM boombox has been rolled out. But the company is still a long way from its break-even number, which has now been pushed up to 4 million subscribers by the end of next year. The question that lingered more than a year ago -- will people pay for radio? -- has been partially answered. Some will. But will enough?
"The money we're raising now is to continue the growth of the service," Panero said in an XM conference room in early December. "Macro-economic forces have slowed us down or hindered the process, but the economy is painful to everybody." He's thankful that XM has more than a year under its belt. "I think if we were starting from scratch today," he said, "I don't think satellite radio would've gotten off the ground."
On December 23, XM got an early Christmas present: $450 million in new financing, a combination of payment deferrals to GM and new cash. "We believe we have achieved full funding through cash flow breakeven," Panero said in a statement.
From Day One, XM has been an attractive product. Now, it must prove it is a good business.
I bought an XM satellite radio for my car just after Christmas 2001. For the first few days, as expected, I spent most of my time on Channel 44, a station called Fred. It is a "classic-alternative" channel that plays the music I grew up with: R.E.M., Clash, Cure, the Jam, the Housemartins, the Smiths, Elvis Costello, Joe Jackson. The sort of stuff that has almost no home on FM radio these days. Blissfully, there are no commercials on Fred. Another appealing feature of XM: The name of the song and artist playing appears in LCD display.
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