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The XM-Sirius Deal Can’t Save Satellite-Radio

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In a marriage that will eliminate any kind of competition, money-losing XM and money-losing Sirius will tie the knot in an effort to avoid becoming this decade’s Iridium, which went into bankruptcy protection less than a year after it launched in 1998. Analyst believes a XM-Sirius combination could save the combined entity about $7-billion a year and create a business with 12 million customers.

Before anyone gets too carried way with the possibilities, I would strongly argue the satellite-radio business is dead in the water. Fundamentally, the idea of paying $15 or $20 a month for commercial-free radio service will not generate enough customers to cover the cost of operating the business. If you dig deep into the number of subscribers, how many of them are trial customers who got satellite-radio free for a year when they bought a new car. How many of these people are really going to re-new their contracts? Not many, I suspect.

Don’t get me wrong, the idea of commercial-free radio is, in theory, great – particularly compared with the crap on most commercial stations as players such as Clear Channel work to homogenize what was once a lively, free-wheeling medium. But just because you build something, doesn’t mean people will come. Both XM and Sirius have coughed up billions of dollars launching satellites and attracting talent – Sirius sold its soul to attract Howard Stern, who made $302-million last year – but it strikes me they both lack solid, long-term fundamentals. This explains why they’re willing to do a deal in a last-ditch effort to make the business work.

For more, check out CrunchGear and Paul Colligan, who describes satellite radio as a “gimmick”.

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  • Graig

    It’s not even all commercial free. Most channels have commercials or annoyances after every song telling you about Satellite radio and the channel you are listening to. I would never pay good money for this service.

  • http://www.markevanstech.com Mark Evans

    It has been pretty interesting to see commercials start to become more common on both services. Then again, they clearly have to generate more revenue so it’s not like they really have much of a choice.

  • http://www.inter-canel.com Shaun Rotman

    Hey Mark,

    I can’t agree with you more about satellite radio. It’s a dead technology and the fact that it has surpassed Iridium’s lifespan thus far is a miracle in my eyes. But I do think there is some value to this merger aside from typical radio use.

    As Greg said above, he “would never pay good money for this service” and I too am with him in this respect. I’m perfectly satisfied listening to Edge or 680 News in Toronto, but that may be just me, however I am sure most people won’t want to begin paying for content they are otherwise unaccustomed to paying for. Besides those who have had their issues with local cable companies, how successful has satellite TV been as a nation-wide service?…

    Where this merger may hold value is its North America-wide coverage, and I’m not talking about radio here.

    Take a few seconds to research cellular technology and you’ll find that analog signals in North America are destined to be shut off in the near future (why they haven’t been already is still a mystery in my mind!). And you said yourself that most people using XM or Sirius now probably use it because their cars came with a free limited subscription. Well… what else do these manufacturers offer for free for a limited time? Onstar! And guess what kind of technology Onstar uses? Analog cell signals!

    So what’s my point? Onstar will be in deep trouble soon as its entire network is going to literally disappear into thin air when analog goes away and they will need a new medium to support their service. Looking at this merger one can consider the potential in utilizing this network of satellites for 2-way communication on order to sustain service to customers. Granted those with older vehicles will need to add the satellite module to their cars, but this is still a step in the right direction.

    I understand your point of view that satellite radio is an over-and-done technology, but there are also hidden potentials lying therein that we may have yet to see come about.

  • Magnus

    I had called this scenario last year and even had a conversation with a salesperson for a big box that sells XM and he was shocked I would even come up with that notion. I could see them offering a discounted monthly fee but the consumer would have to listen to commercials.

  • http://passtheremote.wordpress.com/ Eric

    Its a shame. In theory it sounds like the radio of the future, but in practice it lacks the critical mass to make it profitable. For example my cable box comes with the Galaxy chanels ffrom the CBC and we rarely listen to commercial radio in the home anymore… but it comes with my cable service, not sure I would pay for it if I had the choice.

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  • http://www.makeyougohmm.com/ TDavid

    I guess you aren’t a huge radio fan, Mark, if you honestly believe satellite radio is going away any time soon. Until WiFI is omnipresent, satellite radio’s competition remains the dying terrestrial radio choices. It would be nice to see some sort of standard EV-DO emerge so that we could stream our favorite content into our vehicles from the web, but there is always going to be a need to get content from somebody.

    I’m all for indie content producers (podcasters, vloggers, etc), but the vast majority of this content is crap compared to shows by experienced radio people like Stern.

    If XM+Sirius doesn’t whore it all up with ads — and that is a definite danger as mentioned by others above — then don’t expect them to go anywhere in the forseeable future.

    There are enough radio fans to make satellite a viable platform. People are willing to pay $15-20/month for good content, just as they are willing to shell out $50-100/month for TV (not me on the last one). The biggest cost is behind them in getting the satellites up there, now they can monetize, and that’s what they are doing.

    And as for Stern. They gave him shares of stock, not cash for a portion of that money, which is a fact that is often overlooked by casual reporters. Dig deeper and you’ll see it was a five year deal that has performance requirements, similar to what atheletes sign.

    The question you should be asking is there enough good talent on Satellite radio that people are willing to pay for? Before signing up for Sirius in September 2006 I would have said no, but after actually checking it out for the last few months, my answer has changed to “yes.”

    The same question could be asked of TV as we know it. Wallets are driven by content.

  • http://www.markevanstech.com Mark Evans

    You make some good points but what happens to satellite radio when MP3 adaptors come with every car so plugging your iPod into your stereo is quick and easy? If you want me to make a wild prediction, I’d suggest XM and Sirius will merge, only to declare bankruptcy protection in a year or so – a move that will eliminate debt and give the company a fight chance at success.

  • http://www.makeyougohmm.com/ TDavid

    MP3 adapters are already everywhere and that has changed nothing.

    If this deal is actually approved — and as I wrote about on my blog a little earlier this deal is not a slam dunk — then watch even more car makers previously on the fence installing satellite radio in cars like they’ve done with OnStar and offering one year free subscriptions.

    And as for the comment above (Shaun) talking about OnStar being screwed because they are using all analog equipment? Wrong. They started switching to digital already and will be offering digital equipment upgrade to those impacted after Jan 1, 2008:
    http://www.onstar.com/us_english/jsp/explore/onstar_basics/helpful_info.jsp?info-view=tech_equip

    New vehicles purchased are using the digital network.

    Until this goes through there remains a problem with whether to choose XM or Sirius, with the choice gone you’re going to see more people trying satellite radio. Since I first wrote about my experience I’ve talked to lots of different age people who LOVE satellite radio. I was surprised truly how many enjoyed it because I had many of the same thoughts you did, Mark.

    I’m a little wiser now after trying it out myself for awhile :)

    You don’t see this type of passion over terrestrial radio any more. The problem with MP3 players and iPods is the content remains static. How many times can you listen to the same stuff over and over again? There is no serendipity factor like there is with radio. On the internet services like Pandora fill that void.

    Live radio is exciting and immersive and I think it will be the other side of never before you see MLB and the NFL giving their content away. This will fuel satellite.

    Someday we’ll have web everywhere and then satellite days will be numbered but I think that’s much further off than one year. In other countries where broadband internet is more widespread yes it will sooner, but we are behind in the US (not sure about you in Canada).

    In the meantime if you like great radio content, both live and commercial free music (yes, there are still many music stations with no commercials) and especially if you are in the car, there is currently no better fix than satellite radio out there.

  • http://www.inter-canel.com Shaun Rotman

    Hey. You learn something new ^ everyday! :)

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  • http://foroobar.wordpress.com Dead 3.0

    Mark,

    I took your advice and dug into the subscriber numbers. In fact, I recently took a B-school final exam on the satellite radio industry, SIRI in particular. First, the business model has heavy fixed costs, meaning scale is the key to profitability. Second, adoption has been faster than any previous consumer tech trends. Third, per subscriber acquisition costs are dropping (2004: $177 from $491; XM 2004 = $62). Fourth, average revenue per customer is rising (2002-04: $7.47 to $10.02). Fifth, XM reports trial subscriber retention rates of 50% (via OrbitCast). Sixth, in 2007 27% of new vehicles will have satellite radio; OEMs will grow this to 55% by 2010. Seventh, economies of scale due to the merger will help spread out fixed costs over a larger subscriber base. Eighth, they have a large amount of cash on hand and relatively low debt.

    In my opinion, this merger makes sense. You say, “But just because you build something, doesn’t mean people will come” but I’m going to go with the Field-of-Dreams mentality on this one. The content and the technology are valuable to many consumers, valuable enough for a low monthly fee (compared to cell phone and cable bills). It’s not satellite radio, it’s entertainment. Americans spend a lot of time in their cars, they want to be entertained.

    More on my blog…

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  • Lonnie

    What angers me about this possible merger is that it looks like the companies (Sirius & XM) and the market were more concerned about making the investors instant billionaires instead of getting steady monetary gains for quality service.

    I have XM. I paid for sattelite radio because I got tired of hearing the same THREE pop songs In-A-Row over and over and over. I PAID becuase I did NOT want to hear near nonstop commercials between the songs. I Chose Sattelite because I’m over 35 and I want to hear MY music– NOT what the POP music industry thinks 17 years olds should be hearing. I don’t have Cable sattelite TV with their abbreviated music offerings because I still refuse to PAY for Video with Commercials. And the Music selection is NOT as comprehensive as either Sirius or XM.

    Next– I DON’T have it in my car. I don’t LIVE in my car. I Don’t RELAX in my car. The receiver is connected to my nice HOME stereo in my comfortable livingroom. I never understood this myopic focus on only automobile installation. There are quite a few of us PAYING adults do the same thing.

    Forget the kids– THEY don’t pay bills– their parents do. And Kids are too used to getting everything for free off the internet anyway, so focusing on convincing a 20-something to PAY for what he thinks he should get for free anyway is a losing proposition.

    Last– there is simple convenience. I just TURN IT ON. I let the programmers surprise me. I have no iPod, and have nothing against iPods. What I DON’T want to do is spend HOURS and HOURS searching, downloading, sampling, categorizing, copying, transferring, shuffling my music. People: That’s called [i][b]WORK[/b][/i]. KIDS and Teenagers do it because they have TIME on their hands. I WORK! When I get home, I just want to TURN THE MUSIC ON and RELAX.

    And yes, I know a lot of you adults also make a lot of noise about how great your digital music collection is– but you are a small technophilic minority. And in order to keep that digital collection new and fresh– YOU have to go and Search, Sample, Download, Copy, Transfer, Categorize, etc etc. You have to WORK for your music.

    See, I already did the WORK and earned the money. Then I pay a little of that Money and There it is– I just Turn my Stereo on. It’s so much simpler.

    So My worry is more that Sattelite radio will sputter out because the newly merged company STILL won’t make the investors instant quarterly billionaires.