Satellite Radio: The Future Getting Closer to Now

The trend toward corporate broadcast media consolidation – led by poster children against the trend Clear Channel and Sinclair Broadcasting – has reduced localism in broadcasting and reduced variety over the airwaves.

Ironically, satellite radio, which is literally the same all over the nation, is where the variety is, since XM (100 channels) and Sirius (120 channels) since by going national via satellite, they can also diversify.

Each has big news of late: XM just partnered with MLB, and Howard Stern just signed a five-year, $100M A YEAR deal to go to Sirius.

Wharton takes a look at the state of satellite radio:

Satellite radio offers a nearly unlimited selection of largely commercial-free music channels – 80s hair bands, underground garage rock, bluegrass, jazz, classical music and even Broadway show tunes – for monthly fees ranging from $9.99 to $12.95. The radio signal is sent from satellites to receivers that primarily reside in new automobiles for now, but increasingly are becoming portable. The two providers on the market – XM Satellite Radio and Sirius – have deals that include their receivers as options on new GM, Ford, Honda and Chrysler cars.

XM launched nationwide in Nov. 2001 a year ahead of Sirius, which was late getting its receivers on the market. As a result, XM had 2.5 million subscribers as of Sept. 30 and is targeting 3.1 million by the end of 2004. In contrast Sirius has 700,000 subscribers in October and is targeting 1 million by the end of the year. “I’m a fan of the technology and the subscription model,” says Wharton marketing professor Peter S. Fader. “There’s a bright future for them, but it may be a long time before that future manifests itself.”

Meanwhile, neither satellite radio provider is profitable; both companies burn through cash and frequently raise capital on Wall Street. For the second quarter ending June 30, Sirius reported a net loss of $136.8 million on revenues of $13.2 million. For the same quarter, XM lost $166 million on revenues of $52.9 million.

….According to Wharton professor Kevin Werbach, signing such blockbuster content deals makes sense since each additional subscriber will cost both companies less as they expand. “There’s nothing wrong per se about neither company making money right now,” he says. “The issue is whether satellite radio is a niche play or the future of radio.”

Wall Street analysts have voted that satellite radio is the future, especially since a popular (some might say notorious) disk jockey like Stern has jumped onto the bandwagon. “[The Stern deal] reinforces our belief that satellite radio will become ubiquitous, and that investors should start to think of the duopoly of XM Radio and Sirius as Coke and Pepsi,” wrote Bear Stearns analyst Robert Peck in a research report. According to SG Cowen International’s Thomas Watts, Stern’s move shows that satellite radio “is no longer a gimmick.”

….According to Fader, many customers would come around to satellite radio even without big name programming moves such as Stern’s. Still, such deals get Sirius – and the satellite radio industry – free publicity and can lead to more users.

There are hurdles, however. The main one is the idea of paying for radio, suggests Fader. “The idea of paying for radio is a psychological barrier. It’s a generational thing. People were appalled when cable companies asked them to pay for TV. Now, 20 years later, we laugh about it.”

….XM and Sirius have developed a mixed approach that targets both types of users. According to Fader, companies generally use two methods of marketing in such situations: a “skim” approach and a “penetration” one. In the skim method, the goal is to pick off likely users who are willing to pay a higher price. In the case of satellite radio, this may include consumers who buy new cars and opt for satellite radio as an option.

In contrast, the penetration approach focuses on signing up as many consumers as possible. (Example: America Online carpet-bombing the U.S. with sign-up disks and special introductory offers.) Both XM and Sirius are focused on signing up consumers rapidly – Wall Street closely watches subscriber rolls. Sirius offers a lifetime subscription for those willing to fork over $499.99 through Dec. 31. “XM and Sirius have a mish-mash of both approaches,” says Fader. “It’s unclear whether getting a subscriber at any cost is better than building a small, solid base. In the long run, though, it’s difficult to do both.”

….If XM and Sirius are successful signing up consumers – and so far, that is still a big if – their businesses could be highly profitable. “I think the technology and the model will be profitable,” says Fader. “Down the road, subscriptions will be common in radio.”

According to Werbach, the network effect – where the costs of serving an additional customer are low once infrastructure has been built – is likely to work in favor of satellite radio. Both Sirius and XM have already launched their satellites, built networks and signed deals with leading content providers. In addition, satellite radio will gain subscribers as consumers buy new cars. “By installing the receivers in automobiles, it takes much of the decision out of the consumer’s hands,” says Werbach. “All the consumer has to do is decide whether to subscribe or not.”

The automobile strategy should give satellite radio a captive audience and grab new customers. According to Peck, XM has projected that it could reach 20 million subscribers by 2010, largely because of its deals with GM and Honda, which churn out 6 million cars a year. Sirius has deals with Ford and Chrysler, which account for 6 million to 7 million cars a year.

….Selling satellite radio services in the absence of collaboration with automakers will require the industry to transition to new, smaller devices. Today satellite radio receivers are bulky when compared to the Sony Walkman or Apple Computer’s iPod. While the receivers may be fine when fitted into cars, XM and Sirius have cumbersome products that aren’t easily lugged around when running, walking and other activities. Peck has speculated in research notes that XM is planning to introduce a Walkman-sized device. “Mainstream acceptance does depend on new devices,” says Fader. “As technology improves, it won’t be surprising to see MP3 players in the future function also as satellite radio receivers.”

….For now, consumers choose to download music and carry it around via devices like the iPod. Satellite radio, however, can in theory carry more songs. With technology improvements, devices will be able to sort songs played over satellite. It could be the ultimate subscription music service, says Fader, who believes that subscription music services will ultimately win out over downloading. Toss in real-time data and local information, and satellite radio could be a big rival to downloading devices. “There’s so much selection, it’s easy to imagine you could have a real-time playlist.”

Werbach says the iPod vs. satellite radio will offer an interesting contrast. Apple’s business model revolves around its iPod players, while services such as iTunes are used to boost hardware sales. XM and Sirius, in contrast, aim to sell their satellite radio content as a service and the hardware devices are secondary.

I am intrigued by the iPod comparison – I don’t have an MP3 player or satellite radio yet, but I bet I’ll go for the radio first. It would just be simpler and more convenient for me: I am not going to pay for digital music and I don’t have the time (or much interest) to convert the music I already have to digital files.

By the way, I’ll go for the one that DOESN’T have Howard Stern.