Written in the Stars

Opening Gambit: Spend Furiously -- but Wisely

Sirius is sometimes described as a scrappy underdog. It's more of an underperformer, generating a projected $68 million in revenue while piling up $450 million in losses in fiscal 2004. And it's a dog that lives like a fat cat.

Sirius has a 15-year, $4.9 million lease on its swank headquarters. The company binged on building showcase studios, which sat idle for nearly two years. Now workers are transforming a two-story glass enclosure -- which dominates the lobby -- into Stern's new digs. The company says that being in the media capital of the world helps it attract high-profile talent.

True, the real estate represents chump change in the scheme of things. The economics of building a digital-radio network dictate that Sirius and XM alike must run at a supersonic burn rate. It costs roughly $250 million to launch a single satellite (Sirius has three orbiting the Earth; XM has two). To store its countless digital-audio files, XM has assembled what's believed to be the nation's largest concentration of IBM servers. Like Sirius, XM is pumping red ink -- in 2004 alone, it projected $360 million in losses on $220 million in revenue. Factor in other startup costs, marketing and promotion efforts, distribution deals, technology investments, and the price tag for hiring brand-name talent, and analysts estimate that both companies will spend well north of $2 billion before they ever make a buck.

Still, XM has done a better job of living within its means. Panero once ran a national pay-per-view TV network out of Denver -- a media-industry backwater -- where he learned firsthand that "in today's world, it's not about where you are, it's what you do." When it came time to build XM's broadcasting mecca, Panero bypassed the glitz of Manhattan for a neglected patch of Washington where the real estate was cheap, the talent market was booming, and Capitol Hill was just a short cab ride away.

XM is based in a century-old brick building that was once home to National Geographic's printing presses. When Panero first toured the sprawling, derelict warehouse, it was littered with broken glass and dead pigeons. He promptly signed a lease for $14 per square foot. (XM purchased the building in 2002 for $34 million.) "I didn't want us out in Dulles, in that graveyard of technology companies," he says. "I wanted us in a building with character that's near the vibrant city, so we could attract young people to work for the company."

First as an executive at Time Warner Cable and most recently as the chief of Request TV, Panero grew up in a business where the incumbents, at least in the early days, would rather kill off the competition than improve their own product. By the mid-1990s, he saw that the Goliaths of the radio industry were no different. Deregulation begat consolidation -- today, Clear Channel alone owns or controls more than 1,200 stations -- and radio had become a vast wasteland. The big radio companies homogenized the music, dumbed down their programming, piled on 20 minutes of commercials every hour, and pulled the plug on technology investments. Panero didn't need much convincing: Radio was ripe for revolution.

Seize the Center: "In-house" Means "In Control"

When Panero signed on in 1998, XM was the earthbound startup and Sirius was heading for the stars. Sirius was the first to be founded, it was first to launch its IPO, and it won the space race when it put its satellites into orbit almost a year ahead of XM.

But the business landscape is littered with first movers that were first to stumble, and Sirius is no exception. In its rush to make it to market, Sirius made a serious strategic error: It farmed out the development of the chip-set design for its radios to Agere Systems, a Lucent Technologies spin-off. An endless series of technical problems, coupled with the meltdown in the telecommunications industry, forced Sirius to cool its jets.

Panero followed a different strategy. Many times during his days in pay-per-view TV, he had seen how the cable companies would outsource their technology to a Pioneer or a General Electric, and then face interminable delays as the tech giants dealt with bigger priorities. He wasn't going to repeat that mistake. In what proved to be a game-changing move, Panero hired a crack team of Motorola engineers and kept XM's chip-development effort in-house. That allowed it to control costs, stay on deadline, and gain ground on a floundering Sirius.

(Sirius says the chip problems have been corrected and are now "ancient history.")

But Panero also understood when to look beyond his own walls. He decided to corral a heavyweight strategic partner that would lend credibility to the concept and amp distribution. He targeted General Motors. To Panero's way of thinking, GM was the trifecta: It was the world's largest carmaker; back then it owned DirecTV and Hughes Electronics (making it a satellite content and manufacturing company); and it had launched its OnStar navigation services. All of which meant that GM understood satellite radio.