Satellite radio eyes Canadian market

Complex government rules may slow the launch of satellite radio sales in Canada by the two biggest U.S.-based services, according to Wall Street analysts.

But the rules won't stop XM Satellite Radio Holdings Inc. and Sirius Satellite Radio Inc. from attracting Canadian subscribers, as they are already cashing in on demand from a "gray market" of Canadian listeners who receive the U.S.-based signal.

"We think it is a 50-50 percent bet whether Sirius and XM will decide to enter Canada," said analyst Laura Martin of Media Metrics. "Their alternative is to allow the gray market in Canada to continue to grow, whereby (they) receive all the revenue for no incremental costs."

Canadian regulators on Thursday approved applications by companies affiliated with XM, the largest U.S. satellite radio company, and Sirius to launch digital, subscription-based radio in Canada.

The Canadian Radio-Television and Telecommunications Commission said at least 10 percent of the channels offered must be produced in Canada, 85 percent of the music and programming on those channels must be Canadian, and at least 25 percent of the Canadian channels must be French-language.

"The litany of license conditions were stricter than anticipated, leaving both XM's and Sirius' partnerships uncertain as to whether they will move forward as planned," said analyst Alden Mahabir of Vintage Research, in a note to clients.

Canadian Satellite Radio, owned by John Bitove, former co-owner of the Toronto Raptor basketball team, has partnered with Washington-based XM. New York-based Sirius has invested in Canada's closely held Standard Broadcasting Inc. and the publicly owned Canadian Broadcasting Corp.

The Canadian rules, for example, call for the broadcast of nine foreign channels for each Canadian channel, a rule that could strain the services' network capacity. Moreover, some 5 percent of revenues must be set aside for Canadian talent development.

A growing 'gray' market
The government agency said its decision partly reflected the reality that many Canadians are already illegally tapping into satellite radio in the United States, and that it was difficult to stop. The companies have 150 days to respond.

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XM and Sirius' say their broadcast signal, or "footprint," covers all of Canada, although the vast majority of Canadians live within 200 miles of the U.S. border.

A fee-paying consumer with a valid mailing address in the contiguous 48 U.S. states can buy a satellite radio receiver and listen to it across Canada. While no official data is available, analysts suggest that as many as 100,000 Canadian users get their service this way.

After the ruling was announced, both companies said they look forward to expanding into Canada, where analysts see each winning some 1 million subscribers by 2011. XM has about 4 million total customers and Sirius, which launched its service 1 year after XM, has about 1.5 million.

Both companies, however, said they want to weigh their options under the license conditions before detailing what their next move will be.

"They have to figure out whether the economics warrant going into Canada under these onerous requirements," said Media Metric's Martin.

Canadian Satellite Radio's Bitove said he hopes to have digital radio offered in Canada by Christmas time.