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Karmazin chases a Sirius dream
An MP3 player-satellite radio combo would be the ultimate music machine. It's just a matter of time.
April 25, 2005: 1:42 PM EDT
By Krysten Crawford, CNN/Money staff writer

NEW YORK (CNN/Money) - Combine the iPod with satellite radio and what do you get?

"The killer app," said Kit Spring, an analyst with Stifel, Nicolaus & Company.

Spring isn't the only one who thinks so.

iPods and satellite radios are the hottest electronic gadgets on the market today. Consumers can buy their favorite songs using an iPod and they can listen to their favorite genre, be it classic rock or country, on subscription satellite radio.

But they can't do both on a single device.

"The iPod is the biggest, baddest thing around and satellite radio is this small, cool device," said Steve Mather, an analyst with Sander Morris Harris. "Put them together and it's the ultimate."

There's no evidence that such a dream machine is in the works. Earlier this year, Sirius Satellite Radio CEO Mel Karmazin said he had approached Steve Jobs, the chief of iPod maker Apple Computer, about a possible deal but said Jobs wasn't interested.

Undeterred, the hard-charging Karmazin has explored similar combos with developers of other portable music players (MP3 players), cell phones, and handheld video games, a Sirius spokeswoman confirmed. The companies involved include Sony Corporation and Motorola.

Analysts say it's likely that MP3 makers Creative Technology (Research), Dell Inc. (Research), and Digital Networks North America, a subsidiary of Japanese home entertainment company D&M Holdings, are all in active discussions with not just Sirius but also its larger rival XM Satellite Radio.

"Everyone's talking to everyone," said Spring.

And at least one analyst thinks Apple (Research), which has sold millions of iPods, is an active participant notwithstanding its public indifference.

"There's got to be a ceiling on the size of the iPod market so Apple clearly has to be thinking about its next step," said Aram Sinnreich, a music industry researcher at the University of Southern California.

It may not be Apple-Sirius or Apple-XM Satellite, but some analysts think it's only a matter of months before a deal between one of the satellite radio operators and either a portable device maker is announced.

"We don't know who it will be, but one such deal will be announced before the end of the year," predicted Spring.

A race to the future

Sinnreich agrees that a deal will happen soon given how rapidly music delivery is changing and standard AM-FM radio operators, cell phone carriers, MP3 device and other electronic gadget makers jockey for dominance.

"Five to 10 years from now, nearly every recorded song will be stored in digital form on servers, and delivered on demand via wired and wireless Internet to homes, offices, cars and portable devices," explained Sinnreich.

Sinnreich says a product that integrates satellite radio into the iPod or a similar device made by an established company will be on store shelves by Christmas 2006.

XM Satellite already markets a portable device and Sirius is developing one too. But their devices are much bigger and have much less battery power than popular MP3 players.

And given the billions of dollars that both satellite operators have already invested in building their services and signing up high-priced talent like Howard Stern, a deal with an established portable music player developer makes perfect sense, analysts say.

And Apple has both the brand recognition and the marketing muscle that Sirius (Research) and XM Satellite (Research) crave.

For its part, Apple has a long-term incentive to cut a deal with one of the satellite providers, says Sinnreich.

Assuming what he calls his "Great Jukebox in the Sky" theory is correct, the iPod will one day have to be wireless. The satellite providers currently offer a far better product than cell phone carriers or any other wireless device maker.

"It's prohibitively expensive to deliver high-quality music over wireless Internet streaming," said Sinnreich. "That's where the benefit of satellite radio comes in."

But there are reasons why Apple has not teamed with either satellite radio player, despite Sirius and XM Satellite's apparent eagerness.

For one thing, analysts say that technology has been a major roadblock because the semiconductor chips imbedded in satellite radios, while getting smaller, are still too big. The final product would be too bulky for the iPod, whose cool sleekness is a major part of its appeal.

At this point "it doesn't make sense," said Mather, the Sander Morris analyst. "The technology development is getting there, but right now it's too costly."

Financial terms is likely another barrier, analysts say.

Apple would probably demand a hefty upfront fee in exchange for an exclusive deal with either XM Satellite or Sirius. Apple could also seek a share of satellite subscription revenues, a painful stipulation given that XM Satellite and Sirius need to recoup every dollar they can given the billions spent on talent and technology so far.

Stifel Nicolaus analyst Spring thinks something else is holding back a deal: Apple, he said, is developing its own subscription music service similar to what Sirius and XM Satellite offer.

Under that plan, explains Spring, iPod users could download and essentially rent a play list of, say, 600 classic rock songs. The service would be similar to Napster's monthly $14.95 subscription plan.

Apple claims it isn't developing a subscription service, but Spring says he's not buying the denials.

A subscription service, while not radio per se, "will make the iPod more of a substitute for satellite radio," said Spring.

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