The Future of Satellite Radio

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					The Future of Satellite Radio




                                 Jennifer Bieber
             New Media and Mass Communications
                             Fordham University
                     Graduate School of Business
                                  April 14, 2005
Introduction

Satellite radio is a new product and service offering to consumers. There are only two

service providers in the industry: XM Radio and Sirius Radio. XM has been available to

consumers since September 2001 and Sirius has been available to consumers since June

2002. Analysts and journalists have been trying to predict who is going to stay on top

and succeed. This is fairly difficult since it is entirely possible both could fail and go out

of business. Also, the market place that satellite radio is trying to succeed in can be

entirely different than that of a marketplace where another technology failed/succeeded.

Two important questions that must be asked are “Do people want it?” and “Will they pay

to use it?”1 Even though satellite radios are available at consumer electronics stores and

through car manufacturers, many people are still unsure about what the product is, what

the service is and how it all works. This is a big obstacle in getting people to subscribe to

satellite radio. People’s thinking right now is that satellite radio is a luxury, not a

necessity. In addition, the barrier that satellite radio has to break through is the

perception of why would someone pay for radio, when AM and FM are free? What’s the

difference? Is there that much of a benefit by subscribing to it? Why pay for it when I

receive music stations on my television because I already have satellite TV? There is

confusion among the consumers because they do not fully understand all that it offers.

Before a critical mass is reached in consumer adoption, they need the full demonstration

to understand what it is, what it does, and why it’s worth paying for. It is still to early for

analysts to predict where these companies will go and how many people will be

subscribers in ten years. There are many factors that can affect the outcome of the



1
    “The First 100 Feet for Households: Consumer Adoption Patterns”, by John Carey.


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satellite radio industry. For my analysis, I will begin with a background on the industry

and the two competitors. My analysis will be concentrated to the end of the paper.



What exactly is satellite radio? It is a digital signal transmitted from a satellite directly

to the consumer. At present, there are only two stations competing against each other –

XM radio and Sirius radio. Each station delivers specialty programming the consumer

cannot necessarily receive on a traditional AM/FM radio station.



How does satellite radio work? First, programming is broadcast from the station’s

broadcast studio to the station’s satellite. Second, the satellite delivers a signal directly to

the consumer. Third, the satellites also send the signal to ground repeaters in cities where

the signal could potentially be interrupted by tall buildings.



What are the benefits to the consumer? The digitally transmitted signal offers better

sound quality – there is no static in satellite radio. Radio stations are broadcast nation-

wide, so a person could drive from Maine to Florida or New York to California listening

to the same channel the whole time. XM radio offers 150 channels of programming and

Sirius radio offers 120+ channels of programming. All music stations on satellite radio

are commercial free. Only the premium stations and television stations contain

commercials. Currently, satellite radio is unregulated by the FCC, so there are no

restrictions as to the type of language, violence or content that can be broadcast on the

channels. Many adults find this to be an attractive feature, others do not.




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What are the negatives to the consumer? One is the cost of the equipment. You

cannot subscribe to satellite radio without first buying an adapter for your car stereo, an

in-home receiver for your house, or a boom box with a special chip or a “MyFi”, which is

XM’s portable radio. Second, there is a monthly subscription cost. XM radio’s

subscription was $9.95 per month until April 2, 2005, when it increased its price to

$12.95. The subscription cost for Sirius radio has always been $12.95, and it included

premium content, except the Playboy channel, which costs an additional $2.99 per month.

Another negative is that local news, weather, and traffic reports are not available in all

markets. Those that are available are broadcast nationally. So, for example, you could

be in South Dakota listening to traffic reports for Boston, Chicago and New York. Most

consumers will have to switch back to traditional AM/FM radio to hear their local

information. And, finally, satellite radio is still an emerging technology; both XM and

Sirius are not profitable companies. There is always the possibility one or both of them

will no longer be in business.



The Players – Overview of XM Radio

XM radio was founded in 1997 by American Mobile Satellite Corp. of Reston, VA. The

company bought bandwidth that was auctioned off by the FCC. The company placed

five of its employees in a boardroom and gave them the following task: Consider the

commercial possibilities of using the new bandwidth for satellite radio.2 The employees

liked the idea and had the radio division spun off for development. In 1998, they hired

Hugh Panero as CEO. He renamed the company XM, as a logical extension of AM and

FM. “You don’t want some long complex name. It had to be something that could fit on
2
    “Radio Heads”, by Justin Martin, Fortune Small Business, February 14, 2004.


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the button of a car radio.”3 In order to raise the capital XM needed to get the company

off the ground, they turned to large corporations as strategic investors – General Motors,

Hughes Electronics, DirecTV, and Clear Channel Communications. In addition, XM

went public in 1999, so the IPO helped to raise the balance of capital needed. Before XM

signed a single subscriber, they needed to build two satellites and a broadcast center. The

two satellites, “Rock” and “Roll” were to be launched in January of 2001. Rock was

launched, but Roll’s launch had to be aborted, due to a technician misreading a computer

monitor. This caused a set back of two months.



In the meantime, XM was working on building its broadcast center. There was no

precedent for a satellite radio broadcast center, so the decision was made to house

everything – DJs, executive offices, and electronics under one roof. They built 80

studios, for the DJs to be able to broadcast simultaneously. One thing that differentiates

XM from Sirius is that the company believes a good DJ personality is essential for people

to connect emotionally with the station.



Finally, XM was ready to go live – they planned their launch for September 12, 2001.

Unfortunately due to September 11 it was delayed, but only by two weeks. They

considered waiting a year; however it would give their rival Sirius an advantage to launch

ahead of them. Today, XM has over 3,000,000+ subscribers. Its monthly subscription

price has been $9.95 although as of April 2, it has raised it to $12.95 – the same price as

its rival, Sirius, and the price includes more premium content. The broad distribution of

XM radio through the new automobile industry is central element of their business
3
    “Radio Heads”, by Justin Martin, Fortune Small Business, February 14, 2004.


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strategy.4 XM radio has exclusive arrangement with General Motors, Honda, Hyundai

and Toyota. The arrangement with Hyundai is brand new. Beginning in 2006, Hyundai

will offer XM radio as a standard feature on its cars. All other car manufacturers offer it

as a factory-installed or dealer-installed option. In the after-market, XM has negotiated

arrangements for Delphi, Pioneer, Alpine, Audiovox, Sony and Polk brand names to

manufacture XM radios, boom boxes, “MyFi” for sale at electronics retailers such as Best

Buy, Circuit City and Wal-Mart. Yamaha will be the first electronics manufacturer to

make an in-home stereo receiver with the XM chip built-in. XM stock continues to trade

at around $30.00.



The Players – Overview of Sirius Radio

Sirius radio was also founded in 1997; it won the other auction of the bandwidth offered

by the FCC. Sirius radio is named for the Dog Star – the brightest star in the sky. Its

logo is a sketch of a dog and is very easily recognizable, which can be great for brand

recognition. Its name however, may not fit as easily on a button as XM’s. Sirius radio

has three satellites in space as opposed to XM’s two. The different system offers its own

advantages and disadvantages. The three satellites are located directly above the United

States, which means they have a much better line of sight.5 An advantage is that the

system needs less terrestrial repeaters. However, they travel in an inclined elliptical orbit

and every eight hours the one of the satellites must hand off the task of broadcasting to a

satellite that is not currently transmitting a signal. This is a great logistical challenge; it



4
  XM Radio Form 10-K, filed with the Securities Exchange Commission, for year ended December 31,
2004.
5
  Yale School of Management, Satellite Radio: Industry Report.


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also means loss of one satellite would result in complete loss of service for several

hours.6



Sirius radio launched its service in June 2002, nine months behind its main competitor.

This was due to the complexity of its chip allows the radio to receive the broadcast signal

from the satellite system. They outsourced the sole responsibility to a third party, who

did not fully understand the system. This resulted in delays and Sirius was at the mercy

of this company. It allowed their competitor to be in the marketplace first.



Sirius radio believes the core of its enterprise is programming and is committed to

creating a unique and compelling entertainment experience for its subscribers.7

From the beginning, Sirius radio has differentiated itself from XM by offering

commercial free music stations (XM now offers this.) and it also has focused its

programming towards sports as opposed to music. (Sirius puts little emphasis on

developing the on-air personalities.) Sirius is the official satellite partner of the NFL,

which is the most popular sport in the US today. In contrast, XM has focused its sports

efforts on NASCAR and MLB. Sirius radio also broadcasts NBA games, as well as

college basketball and football games. In addition, Sirius is also the official satellite

broadcaster of Barclays English Premier League soccer.8 This may have been an

excellent move on the part of Sirius due to soccer’s popularity among foreigners in the

United States.


6
  Yale School of Management, Satellite Radio: Industry Report
7
  Sirius Radio, Form 10-K, filed with Securities Exchange Commission, year ending December 31, 2004.
8
  Sirius Radio, Form 10-K, filed with Securities Exchange Commission, year ending December 31, 2004.



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Sirius also uses the automotive industry as a distribution channel to win subscribers.

They have exclusive agreements with DaimlerChrysler, Ford, Mitsubishi and BMW to

offer Sirius radio as a factory or dealer-installed option. They also offer the trial

subscription for approximately 60-90 days (XM does this as well.), except in BMW cars.

New BMW owners do not have the option of the trial free service. They have to

subscribe from the beginning. In addition, Sirius radios are available for after market sale

at Best Buy, Circuit City, Wal-Mart, RadioShack, Crutchfield, Office Depot, Sears,

Target and Dish Network outlets.



Sirius has always offered its subscription price at $12.95 per month, however they let the

subscribers receive a discount by signing a longer term contract – i.e. join for two years

for a certain fee. Included in this higher price tag is its premium content – Howard Stern

– who will join Sirius in January, 2006. At present, Sirius has 1,000,000+ subscribers

and its stock trades at approximately $5.00.



Profitability – At present, both XM and Sirius radio are not profitable companies.

Satellite radio is still an emerging technology and the costs associated with their business

are astronomical compared to their revenues. For 2004, XM earned revenue of $244

million and its net losses were $642 million. Sirius suffered a worse fate; its revenue was

$67 million and its net losses were $700 million. For both companies their revenue put

them in a niche market like specialty coffee, however their losses are like what a large

corporation would spend on building a technology factory. Both companies plan to

achieve profitability through increasing their subscriber base. They plan to do this by




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offering discounts for pre-paid and long term subscribers (Sirius currently offers this and

XM will begin to offer this to offset its increase in subscription cost.). In addition, they

hope to gain more subscribers when the 90-day free trial expires (for consumers who

buy/lease new cars.) According to GM, 75% of the consumers become subscribers after

the initial trial subscription ends. Each company will offer promotions and rebates

periodically. In addition, both XM and Sirius have agreements with rental car companies

and XM has agreements with two airlines to offer satellite radio in-flight.



Consumer Adoption and Analysis

Satellite radio is still in an early adoption phase. Many new technologies often follow

what is called the S-curve pattern of growth. Their growth begins slowly and then after a

certain period of time their growth grows very quickly. It is at this point critical mass is

reached. Presently, satellite radio is not near this stage. To illustrate, there are four

million subscribers to satellite radio and there are approximately 200 million cars in the

U.S. That means satellite radio has only reached 2% of this market.



The user that subscribes to satellite radio is characterized as an “early adopter”.

Typically, early adopters are men. The market for satellite radio appeals to men in their

early twenties to mid-forties. They are subscribing to satellite radio as a luxury and to

fulfill a need they cannot receive through traditional radio. For example, some men are

subscribing to satellite radio for its commercial-free music to listen to during their long

commute to work. Their behavior is driven by not wanting to be inconvenienced by

listening to commercials. Other men are subscribing to satellite radio for its sports




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programming. Perhaps the games they want to hear are not readily available on

traditional AM/FM radio as well as from their cable or satellite provider. These men may

be known to us as “sports fanatics” but their behavior suggests they are consumers with

an insatiable appetite. Another need that can be filled simultaneously by subscribing to

satellite radio is the need to entertain children in the car. Some of the men that are the

early adopters have families as well. For example, when the family goes off on vacation

the children can listen to the Disney channel (XM radio) or other programming geared

towards them.



Before satellite radio can reach critical mass, one barrier it needs to break through is to

change consumers’ opinions about paying for radio. Many consumers just do not feel the

“need” to pay for radio. One way the satellite radio is dealing with is by its agreements

with the car manufacturers. Since the satellite radio is offered as a factory or dealer

installed option typically with a free two or three month subscription, the consumer has

the opportunity to test out the product. This is an excellent way to get the product in the

consumers’ hands because it allows them to use the product by listening to the stations

that interest them. My personal belief is that because satellite radio is so new, it is

important that the consumers test the product out to see what they are really missing.

This will help them to feel a “need” to subscribe to satellite radio because they now have

a connection to it. Both the car manufacturers and the satellite radio companies will need

to research how many of the people continue to subscribe after the initial trial period is

over. Currently the churn rate for satellite radio is less than 2% per month. Another

thing that is too new to assess is will this change as people buy or lease cars every three




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to five years? A factor not to be overlooked while analyzing churn rate is will the churn

rate increase as XM and Sirius acquire more programming? Again this is too early to

assess because XM and Sirius are highly competitive and are always looking to have an

advantage over the other. At this point it is not possible to predict what popular

personalities or type of programming they will lure to their stations.



Lastly, I would like to point out that consumer adoption of satellite radio may be heavily

dependent on upon content: XM and Sirius have different identities, clearly have

different identities. Although they each offer 100+ channels, some things are similar and

some things are not. XM focuses more on music and DJ personalities, sports are

secondary to them. Sirius focuses very heavily on sports. Its executives come from the

satellite TV industry and view radio as an extension of it. DJs personalities are

secondary; they believe the listener does not want to connect with the DJ.



Satellite radio will eventually succeed, but it is going to be a long haul. The potential to

fail and go out of business is very high however; a company that operated in the red for

awhile and succeeded is Amazon.com. In addition, as satellite radio carves out its path in

the market, new uses for its technology may develop. An example of this is Nissan

signing an agreement with one of the satellite providers to supply in-car messaging to its

radios. My prediction is that Sirius will slowly succeed over XM. However, since there

are only two competitors in the market, just because you are not in the lead, does not

mean you are going away. Provided neither fails to due to bankruptcy or something like

that, there is plenty of room for both in the industry.




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