Research Proposal: Xm Radio vs. Sirius

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XM Sirius Radio

XM radio vs., Sirius

XM Sirius Radio: A seriously flawed business model

In the face of the current economic recession, many entertainment companies are suffering. When people are struggling to pay for the basic necessities of life, such as food, shelter, and medical expenses, one of the first things they cut back on is entertainment, such as cable television, going to the movies -- and premium radio. In February of 2009, the radio behemoth Sirius XM declared that it had hired advisers to prepare for a possible bankruptcy filing (Sorkin & Kowue 2009). Few expressed surprise and many declared that the business model for premium radio was flawed from the beginning. "The idea of charging a "modest fee" in return for supposedly "superior programming and sterling reception quality" did not seem "viable" given the diversity of other radio stations and audio options that existed for listeners (Friedman 2009). "Perhaps the industry's entire business model was flawed from the start and the nation had to experience this devastating recession before people reached that conclusion" within the industry (Friedman 2009).

To be fair to its founders, the concept of premium subscription radio services was born in a very different economic climate. Cheerfully disregarding the early naysayers, XM Radio founder Hugh Panero pointed out that once upon a time, people prophesized that cable television would never 'take off' but with the right type of broadcasting, it did, most notably HBO. XM boasted 68 commercial-free music channels, 21 traffic and weather channels, five or six news channels including Fox and CNN, when it was first launched. In 2005, Panero said: "It really is about just delivering quality content. And clearly, having 22 minutes of commercials on a local radio station -- mostly talk, very little music and not the music you want to hear in many cases because it can't be supported by the economic model of a radio station -- has basically drawn people to other alternative forms of getting content they want, whether it be satellite radio, whether it be, you know, iPod, whether it be the Internet, and we're just part of the revolution that's going on to satisfy the needs of people who want content when they want it in a very convenient way" (Smith 2005). The theory was that downloadable music had made consumers impatient with advertising, thus satellite radio would be the preferred alternative to listen to sports, music, and informative programming in cars.

At the time, Panero's confidence was bolstered by new developments in the car market: fifty percent new car buyers purchased vehicles with XM factory-installed products. The user would be given free XM access for several months, much like the buyer of a new computer will be given a 'free trial' of antivirus software or other paid-for-content programming to lure him or her in to viewing the product as a necessity. Panero boasted: "at the end of this trial period six out of ten people subscribe to the service through, you know, companies like General Motors and Honda. And we recently signed a deal with Toyota, who will be in factories, installing XM radio in their cars in 2006" (Smith 2005). Panero was especially excited by his company's new partnership with GM, which in December of 2004 "hit a milestone of 1 million XM customers who are GM car owners" (Smith 2005). Not only is GM bankrupt today but even Toyota is suffering record losses as America's much-vaunted 'new car culture' is on the decline, a development that seriously compromised the car-based business model of satellite radio.

Panero predicted his service would have 20 million subscribers by 2010. However, after the credit crisis of 2008, even commercial radio advertising revenues tumbled five to ten percent at stations across the country and industry analysts predicted they would decline another ten to fifteen percent in 2009 and an additional six to nine percent in 2010 (Murphy 2008). After suffering record losses, XM and its main competitor Sirius were forced to join forces in 2009. The merged company broadcast "more than 300 channels of programming, including exclusive radio broadcasts from shock-jock Howard Stern, television magnate Oprah and home-decorating guru Martha Stewart" (Sirius, XM merger, 2009, AFP). As the recession deepened, CEO Mel Karmazin said: "Forty-three cents a day -- it's not even vending machine coffee," citing the relatively low price of the service, when asked if the "softening economy might hurt subscriptions" (Sorkin & Kowue 2009). Many thought that once the merger was approved by the Department of Justice, finally the fate of satellite radio would turn around. NYU professor Robert Solomon stated in January of 2008 that "the synergies are real and tangible," from merging Sirius and XM (Solomon 2008).

Merging meant that consumers who could not chose one station and thus chose none, would be more apt to opt into the service, in theory. "Not only do the firms have the ability to economize on administrative costs (e.g., why do we need two sets of management to run these firms), but there are some obvious synergies in production (e.g., why do we need two sets of alternative rock stations when one will suffice). & #8230;it [also] adds value for customers. Exclusivity contracts negotiated by these separate firms locked-in consumers. For example, fans of Major League Baseball were forced to choose XM while fans of Howard Stern only had Sirius as an option. Combining the firms allows fans of both to resolve issues of which service to choose…consumers who have chosen to wait for the uncertainty to resolve over which service would become the standard because they did not like having to choose between two options that are second-best (e.g., I want both Howard Stern and MLB, but I won't choose until things get resolved) will no longer have to agonize over the decision of which service to select. With Sirius and XM merged…more consumers will likely opt for satellite radio" (Solomon 2008).

But even after the merger, in fact as opposed to theory, the company never turned a profit. Even when both companies were independent, and when Sirius boasted Howard Stern on its lineup, during the height of the shock jock's popularity, its fortunes flagged. As a merged entity, the company today "is laden with $3.25 billion in debt. Its business model has been dependent, in part, on the ability to roll over its enormous debts -- used to finance sending satellites into space and attract talent like Mr. Stern (who was paid $100 million a year) -- at low rates for the foreseeable future until it could turn a profit (Sorkin & Kowue 2009). But the credit crisis meant that the debt roll-over model was no longer viable.

Bankruptcy may mean the loss of top talent like Martha Stewart and Stern, given that the company cannot afford the celebrity's high salaries. New subscribers are unlikely to flock to a company in such dire straights, given that it is uncertain what the restructured company will be able to offer in the way of entertainment that goes above and beyond free radio. "The company's success and failure are also tied to the faltering fortunes of the automobile industry, which sells vehicles with its radio technology installed and represented the largest customer base among Sirius XM's 20 million subscribers," and the company's failure to win over younger subscribers from other forms of in-car entertainment, such as MP3 downloadable music has also caused its fortunes to lag (Sorkin & Kowue 2009). Once it was suggested that young adults with children and busy lives would not bother to take the time to download music and podcasts to listen to in the car like adolescents, but as the Internet has proved more and more ubiquitous, this has not proved to be the case (Smith 2005).

Radio in general is less popular amongst the key, young 20 and 30-year-old demographic that was supposed to be the core audience of Sirius XM. These consumers now have more options and less disposable income. Additionally, developments in new technology as well as the recession thwarted satellite radio in the form of HD radio. HD radio has the sound quality of satellite radio: "HD Radio technology is not a subscription service, like satellite radio. It is the same free, over-the-air broadcast radio that we've always known. Only better" (Ferency-Viars & Graves 2009, p.5). Radio is also offering more comprehensive listening options of higher quality "In addition to duplicating their analog programming with an HD Radio broadcast, stations can subdivide the digital portion of their signal. This allows a station to 'multicast' -- that is, broadcast two or more programs simultaneously. Listeners might have a choice of, say, a sports game or music. Being digital only, these additional channels could only be received on an HD Radio tuner. But just as cable TV allowed specialized networks to flourish, multicasting provides the potential for stations to offer more niche programming -- ultimately giving the listener a greater variety of formats to choose from" (Ferency-Viars &… [END OF PREVIEW]

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