[Satellite News 11-19-08] With WorldSpace filing for bankruptcy protection in the United States and Sirius XM Radio struggling post-merger, the outlook for a new satellite radio business does not look good. David Krueger, CEO of Ondas Media, believes his company can buck the trend.
    Ondas plans to launch service in Europe within the next the three years, and Krueger is using lessons learned from his satellite radio predecessors in hopes of avoiding their struggles. “We are essentially first to market in Europe but third to market overall, as XM and Sirius paved the way for us. We are taking advantage of the fact that the risk reduction has taken place,” he told Satellite News.
    Krueger also believes Ondas will begin in a better position than XM Radio and Sirius Satellite Radio because Ondas has been able to negotiate more favorable deals with car manufacturers such as Nissan and BMW, and. “In order to get the service started, XM and Sirius had to offer extremely high incentives to the automobile industry to include the radios in their cars,” he said. “Essentially what that amounted too even up until today, and going forward, were two key variables. Firstly, a very high subsidy of the cost of the radio, in fact 100 percent. We know in the contracts available, these show a 100 percent subsidy of the radios for many years in various cars. The second major component was an incentive they had to offer based on the revenues from the subscribers. Public information shows revenue share rates are in excess of 40 percent in the United States. We have heard that there are arrangements can get as high as 50 percent, so half of everything that is generated in revenues is going to car companies.
    Ondas also hopes to avoid the high content costs that have plagued Sirius and XM, said Christoph With, CFO of Ondas. “There were a lot of silly numbers in terms of exclusive content deals in terms of DJs and sports. If you have these economics, they bring about huge subscriber acquisition costs and you will struggle with profitability. What we are seeing in Europe is very different thankfully. That is now just borne out of the couple of contracts we have already signed, and the ones we are currently negotiating. We are seeing a total subscriber acquisition as it relates to the car element, which is only about 20 percent of the subscriber acquisition cost in the United States.”

Lessons from WorldSpace

WorldSpace has been operating in Asia and Africa for about a decade and hopes to launch services in Italy in 2009, followed shortly thereafter by other major European and Middle East countries, including Germany, Switzerland, Bahrain and the United Arab Emirates. The company in October filed voluntary petitions for reorganization under Chapter 11, and the U.S. Bankruptcy Court in Delaware has approved the first part of an interim debtor-in-possession financing in an amount up to $2 million. WorldSpace still plans to move forward with its European offering, said Tedros Lemma, vice president, regulatory affairs, WorldSpace.
    “We had some financial problems and some debt we were not able to repay, so we voluntarily filed for bankruptcy,” said Lemma. “But the assets are such that any buyer or investor that were to come into WorldSpace could stick with the 2009 timeframe to deliver a satellite radio service in Europe, starting in Italy. Our business model is actually on the XM-Sirius business model, and while that business has run into some problems in the United States due to the cost of content acquisition that they incurred prior to the merger, our constraints have been around the acquisition of capital to continue to develop our business plan. There may be a different ownership of the company going forward, but in terms of the model, if we look at the assets that WorldSpace has, we have satellites that are today over Europe. We have chipsets, repeaters, receivers, etc. We have content. We have a repeater network up and running. It is not just a business plan on paper. There are assets on the ground. Regardless of what ownership structure emerges, whoever ends up owning the business could start a satellite radio service in 2009.”
    Krueger believes the WorldSpace business plan is fundamentally flawed to an extent no amount of funding could rescue it. “I don’t think these latest actions (WorldSpace going into bankruptcy protection) have effected us in any tangible way. I think the car companies have known the difference between our two stories for a long time now, so we are not modifying our strategy in the wake of what has happened. In our opinion, this was the result of certain fundamentals not being there. If someone were to pump another $2 billion into WorldSpace, it would not result in anything different unless the company was to completely restructure its strategy. We have looked at this very carefully, I think it would be difficult for WorldSpace to be restructured and become satisfactory to the car industry.”
    But in the current global economic climate, Ondas also must find financing to keeps its plans on track. “There are always concerns about gaining access to funding,” says Krueger. “You look at XM-Sirius, eight or nine years into service, they are still sweating about gaining access to funding and refinancing and getting rid of debt. We would expect that to continue for XM-Sirius but anticipate a different situation for Ondas Media. There are entities that have the vision for European satellite radio. They understand what it means to have a pan-European media opportunity. The fact the [European Union] has harmonized a frequency band for this type of service is facilitating the understanding that you will be able to have a pan-European service. 27 member states have endorsed this. That clearly opens the door to see this materialize.”
    In terms of who might fund Ondas, Krueger said, “By its very definition, this is a longer term project, so you are going to be dealing with strategic players and companies who have an understanding of that. They have derivative benefits that are borne out by their involvement in the project. So rather than targeting financial investors, we are targeting private, high-wealth individuals who have a vision for this, and then strategic investors who have a derivative benefit that they get from participating in the project.”