Xm vs. Sirius Term Paper

Pages: 8 (3039 words)  ·  Style: APA  ·  Bibliography Sources: 4  ·  File: .docx  ·  Topic: Business

¶ … Competitive Strengths and Weaknesses of XM Satellite vs. Sirius Satellite

In November, 2007, Sirius and XM announced their intention to merge and on March 24, 2008 the Department of Justice (DOJ) approved the merger, citing the companies as competing in the audio entertainment industry instead of the more specifically defined satellite radio industry. Detractors argued that the value positions of each company, Sirius and XM, underscored their intentions to dominate the satellite radio industry, yet the DOJ stated in approving the merger that both companies face significant competition in the broader audio entertainment industry. Both XM and Sirius has heavily invested in each of their product and service divisions, with Net Income (Tables 1 and 3) being elusive for each company. It is predicted by financial and industry analysts that the combined companies will deliver $4B in operating expenses over the next six years (Holahan, Hesseldahl, 2008). The $13B merger is one that brings together two unique competitors, with Sirius having strong regional service launch capability as illustrated by their regional roll-out, in addition to strong relationships with Tier 1 automotive OEMs. Sirius has also been the more aggressive of the companies to concentrate on video content with their Sirius Backseat TV, a specialty offering concentrating on children's programming for $6.99 plus subscription fee. XM's strength in national roll-outs, coordination with automotive Tier 1 OEMs including Toyota who projects there will be 1 million of their auto produced by 2010 that will be factory-equipped with XM satellite radios.

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The pricing, product and marketing challenges for the company center more on the synergy of their merger vs. being purely centered on pricing alone (Edwards, Barris, 2008) or through liquidating the assets of one company relative to another and concentrating only on customer retention (McBride, 2008). At the center of the pricing, product and marketing challenges is the issue of keeping Sirius and XM customers loyal to their respective brands and then delicately transitioning them to shared compatible devices (Holahan, Hesseldahl, 2008). A device capable of accepting both Sirius-based and XM satellite radio signals is due by November, 2008.

Term Paper on Xm vs. Sirius Assignment

Pricing Considerations

From the five-year financial ratio analyses completed of Sirius and XM shown in Table 2 and 4 of the Appendix derived from analysis of filings of each company with the Securities and Exchange Commission (Sirius Satellite Radio Investor Relations and SEC Filings, 2008) and (XM Satellite Radio, 2008) quantify the financial challenges of each company. Most noticeable for each company is the highly erratic nature of Return on Equity (ROE), with each company having significant swings in the return generated. This signals an unstable capitalization ratio and a consistently negative Return on Assets (ROA) over the last five years, driven by the lack of consistent pricing strategies that centered on market penetration over value-based pricing. In effect both companies had been pricing services and radios, accessories and components as if the satellite radio industry was in the midst of price war, hastening each of their negative ROE and ROA, in effect creating a consolidation of the industry prematurely, based on their pricing alone. The DOJ's approval of the merge however was based on the pricing of receivers being high and having been proven inelastic to pricing reductions, ironically saved the merger for each company. If a price ware had broken out in full force on the receivers and each had been able to simply emulate one another, the DOJ would have been tempted to reject the merger as services have already seen significant cost reductions. Table 1, Sirius Satellite Radio Income Statement Analysis shows how the company continually invested in operating expenses, often outpacing revenue growth every year, an not attaining a positive Return on Assets (ROA), Return on Equity (ROE), and Return on Investment (ROI). There are many operating expense factors that contributed to the fluctuating yet consistently negative returns on asset, equity, and investment, yet much of the initial factors that contribute to this are pricing strategies that invited price wars with substitute technologies including personal MP3 players and Apple iTunes increasing their advertising spending, even considering a one-price-all-access model to iTunes to further combat satellite radio.

The initial decision to go to a penetration pricing strategy in each of these companies was short-sighted and nearly destroyed both companies in the initial years of their existence (XM Satellite Radio, 2008) and (Sirius Satellite Radio Investor Relations and SEC Filings, 2008). What would have been far better of an approach would be to concentrate on value-based pricing for the premium services and the de-bundling of the radios, accessories and components necessary to receive satellite radio. This short-sighted and potentially disastrous approach to pricing also pervades both companies' approaches to new market entry, pricing services to what they are internally vs. their value to the outside world (Fen 2008). Value-based pricing would have saved both companies the highly erratic ROA, ROE and ROI performance in addition to put more of finely turned filter on operating expenses that are disproportionately large for both companies, with XM Satellite paying hundreds of millions of dollars in royalties (Table 3) with Sirius paying only a fraction of royalties (Table 1). Initially appearing as a business strategy aspect of their partnership strategies, these wide variations in royalties are actually tied to the varying approaches to defining pricing. For XM, their insistence in paying premium for talent and programming is not necessarily based on a differentiated value-based strategy but a roll-up pricing methodology that takes into account the high prices needed for these sources of content. For XM to contribute to the profitability of the merger, this insistence to the point of being a weakness to pay high royalties for content and personalities needs to be completely re-thought and re-vamped.

For all their weaknesses that must be addressed in value-based pricing methodologies for their services, XM has the superior strategies in pricing for advertising strategies and has a consistently higher level of financial performance in this area of their business. XM paradoxically has been able to find value-based pricing equilibrium in their advertising business. Yet comparing the revenue streams over the last five years for both Sirius (Table 1) and XM (Table 3), XM has been significantly more successful in launching and sustaining revenue streams in advertising. Again however the lack of pricing differentiation and the need to be more focused on value-based pricing including the creation of audiences that could form the basis of audiences not reachable through any other competing medium could have propelling XM to profitability within the five-year financial analysis period shown. From a pricing standpoint, Sirius and XM both again show that the lack of sophistication in creating segmentation and audiences that are highly unique and therefore highly valuable in the context of an advertising business. This is the unexplored area of the combined business models created through the merger, and for the companies to effectively penetrate them executives need to work very diligently to discover, package and sell these audiences. Using psychographics-based research this could lead to value-based pricing that could contribute to the merged companies attaining profitability much faster than through their mainstream subscriber businesses.

In conjunction with the lack of focus on value-based pricing throughout both company's financial statement and documents highlighting their approaches to operating (Sirius Satellite Radio Investor Relations and SEC Filings, 2008) (XM Satellite Radio, 2008) there is the significant challenge of customer churn. In Sirius there are indications there are conflicts between Sales and Customer Service, with the latter concentrating their objectives on minimizing churn with the former looking to the continual growth of the market. Customer churn is a very significant problem at XM, with an average of 2% of customer lost per month (XM Satellite Radio, 2008), and with many different strategies attempted to minimize this problem, from service bundling through the development of entirely new lines of services. None of these approaches have helped to alleviate the churn however, and industry analysts attribute this to the perception of commoditization that is pervasive in the XM customer base. For Sirius, the challenge on churn is even more significant, with 2.7% churn rate reported through the latest fiscal year (Sirius Satellite Radio Investor Relations and SEC Filings, 2008). It is unusual to find churn so high in relatively new industries, and the lack of clarity and precision of pricing on value-based vs. penetration strategies is one of the primary determinants of this happening so quickly in such a nascent industry. The merged company must concentrate on increasing the value pricing strategies combined with more thoroughly-defined product strategies, in conjunction with more effective advertising pricing models, if the combined organization is to attain profitability.

Product and Service Strategies

Both Sirius and XM have successfully penetrated the Tier 1 automotive OEM marketplace and have successfully had their respective satellite radios installed in selected auto models as they are produced. Of the two companies, Sirius has taken a more aggressive product development and strategy approach to creating their retail strategy. Their product strategy is broad… [END OF PREVIEW] . . . READ MORE

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