Satellite Radio

Satellite Radio in Canada

When two satellite radio companies in Canada were licensed in 2005, they began to battle it out in the marketplace but focused on two different market strategies.

Five years and over one-and-a-half million subscribers later, the two companies had decided to merge and asked Canada’s regulatory agency, the CRTC, to approve combining their operations.

The Two Satellite Radio Operators
Canadian Satellite Radio Inc. (CSRI) operated in Canada as XM Canada. CSRI was a wholly- owned subsidiary of Canadian Satellite Radio Holdings Inc. (CSRHI), a publicly-traded corporation controlled by Toronto entrepreneur John Bitove. XM Satellite Radio Inc., the U.S. partner and original XM radio operator, held 10.82% of the voting interest in CSRHI.

SIRIUS Canada Inc., in contrast, was privately-held, owned by three corporations. The Canadian Broadcasting Corporation (CBC) and Standard Radio Inc. (Standard) each held 40 per cent, and Sirius Satellite Radio Inc., the U.S. satellite radio operator, held 20 per cent.

Following a rapid but successful launch in 2005, Sirius Canada focused on the retail market and sales of satellite radio receiver systems. XM Canada focused more on the OEM (Original Equipment Manufacture) automotive industry.

Difficult Early Years
In documents filed with the CRTC in 2010, XM Canada described the start-up of the satellite radio industry: “Initially satellite radio service subscriptions in Canada were driven by the in-store or retail segment, while the automotive (OEM) car market was being developed. As more and more manufacturers installed satellite radios at the factory, the OEM segment has been increasingly important to both XM Canada and Sirius Canada. Currently the OEM market accounts for most of the annual growth in the total Canadian market for satellite radio service…The aftermarket (retail) market has been on a steady decline as more cars are installed with OEM satellite radio receivers.”

Both Canadian companies and their U.S. counterparts found the satellite radio business to be extremely expensive. Both original U.S. companies continued to expand their satellite infrastructures, with launches of more satellites devoted to satellite radio. The need for terrestrial repeaters to enhance the signal on the ground brought even more expense and some conflict with terrestrial radio broadcasters. Add to that the global economic meltdown starting in 2008 which also severely affected car sales and both companies faced difficult futures.

In September, 2006, the year after the Canadian companies were licensed, both Sirius and XM applied to the CRTC for amendments to their conditions of licence. Both companies requested a change in the method of calculation of their contributions to Canadian talent development, set by the CRTC as definitive licence conditions. While the change in licensing conditions may not have saved the companies’ substantial amounts of money in this first licensing term, none-the-less the following year, in May, 2007, the Commission denied both requests.

“The Commission considers that approval of the application could result in a reduction of (XM’s and Sirius Canada’s) contributions to CTD (Canadian Talent Development),” stated the Commission’s Broadcast Decisions 2007-133 and 2007-134, “and consequently would not serve the needs of Canadian artists and eligible third party initiatives. The Commission further notes that (XM’s and Sirius Canada’s) condition of licence was imposed on the licensee(s) following a competitive licensing process. In the Commission’s view, allowing a licensee to reduce significant commitments during the first licence term would, absent special circumstances, bring into question the integrity of the licensing process.”

The regulatory landscape was changing along with the technology landscape, but not always at the same pace.

Competition to Satellite Radio
A key competitor to the satellite radio industry only began to develop during the first decade of the new millennium. Internet radio services began global distribution and live streaming, and now are available world-wide virtually free of charge. Over time, that increased the competitive mix faced by the satellite radio operators.

The XM merger application documents filed in 2010 with the CRTC noted “the demonstrated need to improve the competitive position of satellite radio against other audio entertainment options…. Importantly, unregulated competition is even more of an issue for the satellite radio licensees than for terrestrial radio. Following the Commission’s hearing on new Media in February, 2008, the Commission chose not to regulate Internet radio broadcasters that compete with licensed satellite radio service providers. This leaves satellite radio in a situation where its technology requires a significant investment in hardware and a separate subscription charge while most Internet/wireless radio is available to consumers at little or no additional cost.”

The Commission itself had defined the increasing competition in audio services in its Commercial Radio Policy, Broadcasting Public Notice 2006-158. Increasing competition to radio “is evolving with the advent of new regulated and unregulated technologies. Such new audio technologies include MP3 players, iPods and other personal media devices, Internet music services and radio streaming, including streaming over wireless broadband, podcasting, peer-to-peer file sharing and downloading, cell phone radio, and satellite radio.”

As far back as 1999, the CRTC had decided not to regulate new media including nascent Internet services. The New Media Exemption Order, Public Notice 1999-197, exempted from regulation broadcasting undertakings that provide broadcasting services delivered and accessed over the Internet. In 2003, the Commission added mobile Internet broadcasting undertakings to that exemption, and in 2007, added exempt status for television broadcasting services received by way of mobile devices.

In 2009, the Commission released its major New Media policy, (Broadcasting Regulatory Policy CRTC 2009-329), which reconfirmed its decision not to regulate new media.

“In the decade since the Commission exempted new media broadcasting undertakings from regulation,” stated the policy, “the landscape has evolved significantly. Residential broadband Internet access is available to 93% of households across the country and has been adopted by 48% of Canadian households. Technologies that enable the delivery of high-quality broadcasting content on new media platforms are in commercial use. Canadians have steadily adopted a wide array of Internet-connected and multimedia-capable devices and are spending more time accessing broadcasting content over the Internet and through mobile devices.”

That decision meant that satellite radio would continue to compete head-to-head against Internet radio and television.

U.S. Merger precipitates Canadian Merger Talks
By 2008, south of the border, the two original American satellite radio operators were both facing either bankruptcy or receivership. The two companies decided to combine their operations to reduce losses and begin to create economies of scale.

The U.S. Department of Justice Anti-Trust Division examined the proposal and eventually approved the deal; in July, 2008, the American Federal Communications Commission also approved the merger. Sirius Satellite Radio Inc. bought out its rival XM Satellite Radio Holdings Inc., which became a wholly-owned subsidiary of the new merged company, Sirius XM Radio Inc. Sirius XM continued to provide service from the two different satellite systems originated by each partner, which meant that Canadian operations continued independently.

While that precipitated merger talks in Canada, it took two years before the Canadian counterparts worked out an agreement to merge north of the border. Sirius Canada Inc. and XM Canada announced November 24, 2010 an agreement to combine operations.

When the two companies announced the agreement, Sirius Canada had just over one million subscribers and CSR/XM Canada had just over 600,000 subscribers. “Sirius Canada and CSR together currently have large accumulated deficits,” stated the application to the CRTC, “and XM Canada continues to see substantial net losses each year” (CRTC applications 2010-1723, XM Canada and 2010-1769, Sirius Canada Inc.).

While the companies agreed to merge, operations were slated to remain separate pending shareholder approval in February, 2011 and regulatory approval by Canada’s CRTC, following a public hearing slated for March 7 of 2011.

The CRTC notice (Broadcasting Notice CRTC 2011-6) stated that the Commission intended to examine, “in the context of the proposed merger involving the only two providers of subscription satellite radio in Canada, the potential impact on the market and various related ownership issues; the compliance of the licensees with their conditions of licence relating to contributions to Canadian Content Development; and the licensees’ technical plans, including the compatibility of receivers for both satellite radio services, as well as the satellite coverage of both networks.”

The Decline of DAB
When commercial subscription radio service licenses were issued to XM Canada and Sirius Canada, the only all-Canadian company licensed at the same time as the satellite radio applicants was a Digital Audio Broadcasting (DAB) subscription service, backed by CHUM Radio and Astral Media. By 2010, there were 93 DAB services on-air in major cities across Canada, a large number of commercial and some experimental transmitters. But as the two major DAB backers were sold to other media conglomerates and as the two satellite radio operators launched with and continued to garner substantial automotive support, the DAB effort in Canada slowly began to disintegrate.

According to the WorldDAB organization, “The CRTC has discarded its 1996 plan for DAB replacement of all AM and FM radio. Instead it proposes keeping these stations on analogue and using L-Band for new digital multi-media services….(W)hile existing DAB multiplexes are slowly being dismantled, there is no firm plan for replacing them and delivering digital radio services” across the country.

“Combined with the fact that the U.S., Canada’s powerful neighbour to the south, has opted for a different system of broadcast,” stated WorldDAB, “this has led to a complete re-think by the regulator, CRTC, and broadcasters on the future direction of digital broadcasting in Canada. The situation is complicated by the need for spectrum, currently occupied by dormant DAB transmitters, for new digital TV and broadband roll out.”

The decline of DAB – referred to Digital Radio Broadcasting or DRB – was examined and chronicled by the CRTC in its Digital Radio Policy, (Broadcasting Public Notice CRTC 2006-160, December 2006).

“After a promising start, the rollout of DRB has slowed in recent years in Canada,” said the Digital Radio Policy. “In fact, the adoption of the new digital radio technology by consumers and the switch-over by the radio industry to digital is now effectively stalled. Not only has the extension of services halted, but there now appear to be only token efforts underway to promote the digital radio services that have been launched. As well, there has been little investment in the building and operation of digital radio transmission facilities outside of the markets where these services were initially established. Some stations that began broadcasting in digital have ceased operations.”

The problems were many, including lack of receivers, issues of frequency, the need for French and English technology, the lack of contiguous coverage between major cities, the U.S. adoption of made-in-America IBOC (In-Band On-Channel) digital radio and the North American automotive industry support for satellite radio.

In response, the Commission dropped the ‘experimental’ designation for digital radio licencees in Canada, decided to issue seven-year licences and freed “new digital radio licence holders …subject to the L-band DRB regulatory framework…, to develop whatever broadcast services they believe will be of greatest interest to the listening public.”

New Systems, New Paradigms
While much of the rest of the world moved to DAB radio broadcasting, and Canada’s DAB efforts slowly wound down, the two U.S. satellite radio operators continued to launch satellites to support and strengthen their services. XM-5, the latest satellite to reach orbit, was launched October 14, 2010 and ready for service by December, 2010.

But the U.S. was also seeing even more competition to its own satellite radio services. In the U.S., the radio environment also included the U.S.-developed IBOC (In-Band On-Channel) digital radio system that squeezed digital radio into the existing AM and FM frequency bands. IBOC was developed and marketed by a substantial consortium called iBiquity that included such companies as ABC, Clear Channel, Cox Radio, Harris Corp., Viacom, Texas Instruments and Ford Motor Corporation.

This competitor to Canada’s DAB system was initially dismissed as a less-than-optimal digital radio solution at least compared to the DAB system. IBOC had its proponents in Canada, but the technology of IBOC was not suited to this country. The Canadian Digital Radio Co-ordinating Group (DRCG), composed of engineering staff from the CAB, CBC, CRC, private broadcasters and Industry Canada, examined IBOC and came to the conclusion that there would be substantive technical problems should Canadian broadcasters try to implement what iBiquity, called ‘HD-Radio.’

In addition, a 2007 report by DRCG noted the closely-held technology of iBiquity’s IBOC system. DRCG stated: “A unique aspect of HD Radio is the fact that an important element of this technology remains proprietary to iBiquity…. As a consequence, iBiquity remains a “gate-keeper” with respect to who may produce products bearing the “HD Radio” label, as well as with respect to any future enhancements to the system.”

The CRTC, in its Digital Radio Review, left the door open to licensing IBOC radio, “if the Department (Industry Canada) authorizes IBOC technology for the AM and/or FM bands under the Radiocommunication Act.”

The other technological innovation to emerge from satellite radio was Sirius ‘Backseat TV,’ a mobile automotive television service that partnered with car manufacturers to create a service for TV programming from the U.S. channels Nickelodeon, the Cartoon Network and the Disney Channel. Sirius launched this service in the U.S. in 2007, available as original equipment in a limited number of North American vehicles. The service had not launched in Canada as of March, 2011.

After the Canadian Merger
The merger of the two Canadian satellite radio companies was approved by the CRTC on April 11th 2011, with the approval of applications by Canadian Satellite Radio Inc. (CSR) and Sirius Canada Inc. (Sirius) for authority to change the effective control of CSR and Sirius to Canadian Satellite Radio Holdings Inc.

The Commission also administratively renewed the broadcasting licences for the Sirius Canada and XM Canada satellite subscription radio services from 1 September 2011 to 31 August 2012.

The merger resulted in ownership of the new company being more or less divided between the existing shareholders. Following the closing of the proposed transactions, the voting interest of CSRHI would be held by the following: CSRI Inc., a corporation owned and controlled by John Bitove (30.3%; the CBC (20.4%); Slaight (20.4%) and Sirius XM (25%). The remaining shares, representing approximately 4% of the voting interest, would continue to be held publicly. The board of directors of CSRHI would exercise effective control of both CSR and Sirius.

Updated by Daphne Lavers – May, 2011