AFTER SIX YEARS, SATELLITE radio produced its first-ever profit in Canada when earlier this month SiriusXM Canada reported it was $3.3 million in the black for the first quarter of fiscal 2013.

For executive chairman John Bitove, that Q1 result is vindication after plugging away just as XM Canada to begin with – in competition with Sirius Canada – and then finally merging with it in 2011 two years after the American satellite radio companies combined themselves. Satellite radio faced numerous launch obstacles, chiefly convincing people to want to pay for radio in the first place, then getting the receivers to where Canadians most often listen: factory-built into new cars. Right at its launch, the digital music phenomenon (led by the iPod), where people could build and program their own playlists and say to heck with radio altogether, exploded.

While the combined company is still young, satellite radio has now been around long enough so that SiriusXM’s primary growth focus in 2013 will be used cars. In his presentation to investors last week in Toronto, CEO Mark Redmond said the company will launch a marketing push in February with close to 500 used car dealers where purchasers of certified pre-owned cars will be offered SiriusXM free for three months. The first car with a satellite radio system built into it rolled off the assembly line in 2006 and the company estimates there are more than four million vehicles on the road capable of carrying paying satellite radio customers, if they so choose. The company had about 1.6 million customers at the end of Q1.

What’s really top of mind for many Canadians, however, is not the passive media experience that is radio, but the immersive, active experience their wireless handsets can provide to them. In 2008, Bitove’s Mobilicity (then called DAVE) spent more than $240 million on AWS spectrum in the last auction Industry Canada held. That auction was explicitly designed to bring new competitors into a wireless market dominated by Rogers, Bell and Telus.

Hopes were high back then that wireless newcomers like Wind, Public Mobile, Mobilicity, Shaw, EastLink, and Vidéotron would put a dent in the big three and provide more choice to Canadians. That hasn’t happened to the degree expected. Wind has just over 600,000 subscribers when it thought it could reach 1.5 million by the end of 2012. CEO Tony Lacavera is on the outs and the company is mulling its options. Many assume its owner, global wireless giant VimpelCom, now wants out of Canada. Mobilicity does not release subscriber figures but Bay Street analysts generally peg the company’s customer numbers at around half of what Wind has. While Vidéotron has made some wireless inroads in Quebec, the only province it operates, Shaw has said it will not use its spectrum (and will sell to Rogers) while EastLink has delayed its launch out east so far.

Those dents have not really been made.

While you’ll read below that Bitove (right) did not directly address whether or not Mobilicity and Wind will merge (Public, which does not have the same AWS spectrum, is considered an outlier when it comes to a merger of wireless newcomers), something has to happen before the 700 MHz auction that Industry Canada will run this year. The wireless newcomers have not gained the strength to viably compete with Rogers, Bell and Telus and the fact that a company the size of Shaw found it too expensive to be in the traditional wireless game is telling.

However, while industry sources with direct knowledge of the negotiations have told Cartt.ca Mobilicity and Wind have been “close” to a deal getting done to bring the two companies together (which would then be a fourth, somewhat more viable, national provider with close to a million customers), issues such as Wind’s ownership being in flux and the Rogers-Shaw spectrum option deal have cooled such discussions. The wireless newcomers now worry that one or more of them may be working on another similar option/promise deal with Rogers or Bell or Telus, which would further consolidate Canada’s wireless spectrum in the hands of the big three and severely impact the future of those new companies and their desire to participate in the 700 MHz auction. That would also limit the amount of money the federal government could expect to earn from the auction.

Bitove (also Mobilicity’s executive chairman, among other business interests, Google him…) told Cartt.ca in an interview last week after the SiriusXM annual general meeting that a number of things have surprised him about both his forays into wireless (satellite and cell phones), not least of which has been the “predatory” behaviour of the big three since Mobilicity’s 2010 launch. What follows is an edited transcript of that chat.

Greg O’Brien: A solid quarter for SiriusXM. When you look at it though, how much more difficult was it than you expected to get to where you are now?

John Bitove: It’s been a lot more difficult. The biggest game-changer when I look back on the seven years was really the iPod. When we came out (in 2005) you really only had your CDs that you burned and put in your car predominantly, and that was the real consumer experience we were up against. Then the iPod and MP3 players came out and changed everything, giving the next generation a whole new way of listening to music from what they were used to before.

I always saw the future of the business in cars, and I think over time we’re winning that battle because at the end of the day, most people would rather pay someone to program their music, take them to new experiences and places where they haven’t been. But having said that, it was a real shock to the system for a while.

GOB: Speaking of those cars, I’m sure you saw a lot of what came out of CES. There’s a lot happening and coming to the dashboard with new media and other things coming to cars. What do you have to do to maintain your position there in the face of what’s coming in, in terms of video and internet and whatever else that might come?

JB: Well, you’ve got to look at us two-fold: We’re the pipeline as well as the content provider. With the pipeline, it’s still a lot cheaper to use a satellite to send the signal to the car than it is wireless. Unless you have an unlimited data wireless plan, it becomes even that much harder, so I think as far as delivering the content to the car, we’re by far the most efficient media. As far as the content goes, as long as our programmers do a good job, we’ll always be a leader in terms of which service are people willing to pay for. So far, we’ve been winning that battle, but the one thing about technology is it can quickly change.

GOB: When services like yours came out, some people said “oh they’re going to kill off radio.” Then, when the internet gained popularity, it was “well that’s surely going to kill of radio and satellite radio.” Why hasn’t that happened? Why is traditional radio still strong? Why are you gaining strength in the face of all this technological change?

JB: For the most part, having it factory-installed by the car manufacturer gives you an incredible advantage with your end user. When you can just get in your car and push a button, it’s just easy. When we were younger… but before they put CD players in cars, you’d bring in a CD player and you’d mount it on your dash and you plug it into the cassette player of your car.

GOB: I remember my dad’s eight-track player, actually.

JB: There you go. It was externally mounted, things were hard, so what was built into the car was what you predominantly used. Going back to that example, you could plug your CD player into your cassette. But after a few weeks or months, you’d just make the next cassette tape and put it in, because it was easier. So it’s a huge, incredible advantage we have over other technologies that all the car manufacturers make us factory installed.

GOB: When I look at my own consumption patterns, I’ve got an iPod which I often plug it into my car. I’ve got satellite radio, I’ve got regular radio and some other things. But, it’s hard to program all of your own music and keep track of your current playlists and change them. It’s kind of a pain in the butt really.

JB: Exactly. And you know what? And the older you get, the more important that becomes. When you’re in university or high school, it’s easy to spend hundreds of hours programming your own playlists. As you start having kids and you start working more and your life becomes more complicated… you don’t want to be your own programmer. I probably had 2,000 songs on my playlist on my iPod until my computer crashed – this was before cloud computing came out – and I never programmed my music list again because I just thought “forget it”.

I really think that’s why as long as we’ve got great programmers, we’re going to be the easier choice for a consumer. Pay $15 a month and someone else is doing the work for you.

GOB: What’s been the toughest challenge to get to where you are with Sirius XM?

JB: You have to look at it two ways. When it came to the installations with the car companies, personally I expected it to move a lot quicker in the early days. I didn’t realize these guys work off three, four and five year technology templates to get the chips embedded into the car. I thought it was much more just-in-time management: “Here’s a great idea, put it into the car.” I think ramping up on the cars, which I was talking earlier about what makes it harder for other technologies, it’s very important because you can’t just get in 1. 7 million vehicles tomorrow, even if you’ve got the greatest technology. The car companies don’t engineer cars that way.

Then I think from the business side, getting the merger done – we merged two years after the U.S. and there’s all kinds of reasons for it. At the end of the day it got done, but it just took a lot longer.

GOB: Where’s the growth going to come for you? I heard what (CEO) Mark (Redmond) had to say during the AGM but do you see more growth coming for SiriusXM from online? Is it going to be mobile? I remember your high definition TV station application, too. Do you ever think video is on the horizon for something SiriusXM?

JB: No, I don’t think video is going to be a big part of this business. I used to think it was, but at the end of the day, a lot of cars are being driven by one person and they can’t be watching while they’re driving. The back seat stuff that Sirius has experimented with for kids has been okay. But I really think at the end of the day, it’s that pipeline into the car and the content that we provide and the telematics that we’re providing. The live on screen displays of information, everything else that are going to start becoming more and more standard in vehicles and we’ve been announcing deals with some of the car manufacturers in terms of other data services we’ll be bringing forward.

Then there’s the whole online piece of the business where we take the great programming we produce and make it available in other ways to the consumer. Those two areas are the biggest new pieces. And, we announced today we’re targeting four million used cars on the road by the end of the year. We’re going back to those people who most of them never even know they had the radio installed in the car in the first place – or they tried it and for whatever reason they didn’t pick it up. We’re going back and saying “how about giving us another shot?”

GOB: As for your pipeline, you could send anything over it. You mentioned data earlier. Would you send an internet stream to vehicles as they’re going along or anything else?

JB: That satellite pipeline into the car is so efficient and there are going to be more and more services over time which are going to be brought to the consumer through their vehicle that we are going to be the seller of.

GOB: Who would you say are your primary competitors out there, beyond traditional radio? I’m thinking of iTunes, Rdio and the like that are coming out, Stingray and its Galaxie channels, all those type of things.

JB: They all are our competitors. Who’s our biggest competitor? There isn’t one. There are lots of different options consumers can choose to listen to instead of us, so at the end of the day, they all are, and because we are technology-based it can change quickly. What we have to keep doing is putting up great programming so at the end of the day, no matter how technologies change, we’re the consumer’s first choice.

GOB: There’s so much free music out there like CBCmusic.ca. As a paid service, how do you compete with free? How do you convince people they should pay for music?

JB: Better programming – and I don’t know how many of the free models are going to be around in two years. There are lots of things that started out as free with all kinds of assumptions on how the business model’s going to work. So, we’ll see if any of these other models are sustainable in the long-run, but quite honestly, the biggest thing we have to do is stay focused on putting up great programs.

GOB: This is my segue into your other (communications) business. Are there any synergies – maybe with apps or call centres or other things – between SiriusXM and Mobilicity?

JB: We started Mobilicity utilizing whatever there was, call centers, billing, some of that stuff, so from the back end, there’s some synergies. Where I think it’s going to go long-term is, as we become more central as the nerve center for the automobile, the fact is satellite is only one way and you’re going to need two way. The consumer’s going to be insisting on more two-way communication from their dashboard – and I’m not taking about voice calls. I’m talking about how eventually there’s three gas stations coming up on the road and you can find the pricing on them immediately and other (data) that are going to be going back and forth.

GOB: Like a way to get there… and is the road slippery or is there an accident in the way.

JB: There is going to be some long-term utilization between what wireless spectrum offers and what our nerve center, the brains of all that in the car, can do. But that’s months and years away, it’s not imminent.

GOB: Now, switching fully over to the wireless side, 2013 looks to be a pretty momentous year with the spectrum auction. But prior to that, there’s been a ton of speculation as I’m sure you’re central to, that the three newcomers should be getting together in some way. Is that going to happen? Are Wind and Mobilicity going to get together?

JB: I honestly don’t know. You’ve got three big guys at a 90% market share – and yesterday’s announcement of the Rogers-Shaw deal was quite surprising. The government is going to be facing a lot of tough choices in the coming weeks and months in terms of what, ultimately, do they want to do? None of the new entrants are performing as they had hoped. Some of it is because there are too many of us. I think the flip side is the big three are making sure that we can’t get any traction.

GOB: I’m sure if there were talks among the companies you probably wouldn’t tell me anyway, but what is it like raising money for wireless investments in this current climate?

JB: It’s a lot tougher. It’s been tough from day one. You’ve got to realize that the week we spent $250 million on spectrum, Lehman Brothers went down. It’s been really tough, and I think there have been all kinds of assumptions because of (Canada’s) foreign ownership restrictions. That’s not the issue. Foreigners don’t want to really come here because you’ve got three guys who have 90% market share and most people on three-year contracts.

The characteristics of the market where three have 90% make it a lot tighter. Getting speculative capital is a lot harder than what it was five years ago.

GOB: Has the foreign ownership shift changed anything at all (the federal government changed the rules in 2012 so that non-Canadian investors can own telecom companies here, so long as their market share is less than 10%)?

JB: No.

GOB: It hasn’t done anything?

JB: No. Look I’m a proud Canadian and I love the country, but if you can look at investing in wireless in India or China or Africa, versus 34 million people in Canada spread over the second largest geography in the world, I mean it’s a no-brainer. There’s not enough upside here, especially when three have 90% of the market. Even if three didn’t have 90% of the market, it’s only 34 million people, so Canada is not as attractive to a foreign investor as we’d like to fancy ourselves to think we are.

GOB: Do you ever go as far as to totally second-guess your decision to get into wireless in Canada at all?

JB: You can’t second-guess business decisions. I’m a big believer in wireless. I look at my own family’s habits and how they’ve changed in the last five years and think about what’s probably going to happen. It’s a huge business. There are lots of changes that are going to come and where I’ll be in five years involved in this sector, I don’t know, but it’s certainly exciting.

GOB: Given all what you just said, it’s kind of surprising that something hasn’t happened yet between Mobilicity and Wind, or Public…

JB: Public’s different… It doesn’t have the same spectrum, so their trains run on different tracks.

GOB: True.

JB: I think for the AWS guys, sometimes there are other agendas at play. There have been ownership changes, Quebecor’s got a holistic approach to what they want to do in content in Quebec – which is very different from the pure play AWS guys – which is different from AWS guys who bought spectrum and are now selling it.

GOB: And out east, EastLink hasn’t even launched yet. Obviously, the industry has not developed the way many had hoped. What surprised you most since your 2010 launch of Mobilicity?

JB: How quickly the big three will give up their margins to keep their customers. I really thought predatory pricing wouldn’t be permitted, and that we’d have a space to operate in. I guess the thesis they’d been working on is “let’s try to kill them while they’re young.”

GOB: That speaks to the emergence of chatr and some of the other pricing plans or brands which emerged. Will you be bidding in the 700 MHz spectrum auction this year?

JB: Well, we plan to. A lot can change between now and then. This business, you kind of take quarter by quarter.

GOB: BMO said just before the holidays, however, that the likely losers in the auction are AWS, pure play, wireless new entrants given their strained balance sheets. So if, going into the election, that’s the sentiment on the Street, when you’re trying to raise money, it’s going to be very difficult for you.

JB: Well, something has to change between now and the auction for any pure play wireless players to have a meaningful seat at the table. I don’t know what exactly that entails but the way it’s going now, it’s very hard.

GOB: How much does not being able to offer the iPhone hurt?

JB: That’s a great question. And the honest answer is I don’t know. We sell a lot of Androids but one of the great things the iPhone was able to do was get people onto three-year contracts very quickly. Apple’s done a great job of reintroducing (new models) and building pent up demand with a great marketing program where all of a sudden you’ve got another slew of three-year contracts that are signed when (the latest iPhone model debuts).

When we bid on the AWS spectrum, we expected our business to be 90% talk and text and 10% data. Our traffic on our network is 90% data today and 10% talk and text. So one of the fun and crazy things about the business is it’s just so fundamentally different from what we thought it was five years ago and the iPhone and other smart phones have been propelling that – changing those consumer habits.

GOB: Speaking of consumer habits, what do you think of the CRTC’s wireless code of conduct review, and does it speak to there being a need to regulate the behavior of the big three in your view?

JB: We’ll see what the CRTC does. I remember before we bid in the 2008 auction, one of the findings by Industry Canada was that a Canadian pays more for roaming in this country than a foreigner might pay for roaming in this country because of the roaming agreements that that person’s carrier may have before they come into Canada. That’s just wrong and is never going to change without regulation. There are things like that which exist that are never going to change without regulation and when you have three that have a 90% market share, they can claim that it’s competitive, but it’s not.

GOB: Should three year contracts be banned outright?

JB: Whether they’re banned outright, or it’s made easier for consumers to change if they’re in a contract situation, something should be different. When I launched Mobilicity, I cancelled my family’s wireless plans and I got a bill for $400 for each one to cancel it. It’s just crazy. The handset that I was using at the time didn’t even cost $400.

GOB: Or, should there be some rules that if you’re going to offer a three year contract, you also have to offer two year contracts and one year contracts rather than the options just being to either buy the phone at full price or get it no charge with a three-year contract?

JB: The problem is it’s not just a matter of offering one, two or three, it’s what are the breakage terms in that one, two or three, because they may say “sure you can break a one-year contract, but you’re paying full price of the phone even though you’ve had it for a year, versus on a three-year you get it for free.” It’s not right. Whether it’s an amortization, some depreciation that’s charged to the carrier, there’s got to be something that’s done so the consumer, if they want to move to another carrier, they’re not handcuffed with a penalty as they are today.

GOB: Do you ever feel a little hard done by, being the little guy in two industries having to punch your way up every day?

JB: Look, that’s the great and the bad about business. I look at SiriusXM today and it’s only been seven years and we’ve got a company that’s getting close to being worth a billion dollars – management’s doing a great job – and there were a lot of people who said we’d never make it. Now we’re going through that same pain in wireless. In fact, if it wasn’t for the success of SiriusXM, it would be hard for me to tell the (Mobilicity) management team to stay focused and keep doing our jobs because there can be a better day. I think that’s life.

Where I’m also surprised is… we’ve got just one co-located tower among the big three. And by that, what I’m implying is they have done everything they can to make sure that we can’t get launched or if we get launched, it’s very expensive. I really was expecting more of a level playing field, either by regulation or some other form than what happened. That’s been the shock of this whole thing. Really, it’s a question for the federal government at the end of the day. Did they really intend to bring competition in wireless to this country or was it just a notional idea for a month and they’re happy to let the big three have everything forever? It’s pretty apparent what’s going on, and how it will unfold, I don’t know.

Author