Wednesday, April 27, 2005

Sirius Radio’s New Addition…………“It’s a Good Thing”

Sirius Satellite Radio has just announced yet another high profile deal to add to its lineup by making an agreement with Martha Stewart to create a 24-hour lifestyle channel for women. This deal marks one of many high profile agreements within Sirius’ repertoire since its first broadcast in July 2002. Other notables are five-year deals with both Howard Stern and NASCAR. Although the addition of Martha Stewart will broaden Sirius’ scope of listeners, the success of these high profile and high dollar deals are unproven. But in the long run does it really matter?

The satellite radio world is made up of only two players, XM and Sirius. Up to this point neither of these companies have made any money. In fact both are in the range of $1 billion in debt and growing. The only significant revenue stream up to this point has been through monthly listener subscription fees. This is very similar to how cable television started out. The one area that satellite radio is trying to stay away from is adding advertising dollars to support its existence. Although advertising does exist within satellite radio, the desire to keep it to a minimum is what adds to its allure towards acquiring new listeners. The only way to create the critical mass of listeners needed to make the satellite radio venture pay off is through offering entertainment that cannot be accessed through current terrestrial channels. The subscription fees range between $10 - $14 a month and both companies have acquired on-air talent. XM’s high-profile lineup consists of a $650 million deal with Major League Baseball and its own set of shock jocks, Opie and Anthony. The one question remains with both of these satellite radio stations: will either of them make any money?

XM radio has approximately three times the number of subscribers as Sirius does and is still losing money. At what point do these big deals ultimately pay off and which strategy works best? Sirius’ deals with Howard Stern and Martha Stewart indicates that they believe loyal followers will follow straight to satellite radio. Howard Stern’s deal starts January 2006 and subscription of Sirius hasn’t risen significantly since the news broke. Since Stern currently broadcasts on terrestrial airwaves, few of his listeners have made the plunge into satellite radio. Sirius is banking on only a small percentage of Stern’s listeners to follow after his departure from traditional airwaves. Considering the estimate of Stern’s listeners is in the neighborhood of 12 million, only 5% of those listeners would be needed to pay for the $100 million annual deal at a subscriber price of $14 a month.

Analysts have had mixed reactions to these deals by both XM and Sirius. Gary Pickman of Standard & Poor’s believes that the kind of content that Martha Stewart provides is not “a good fit for radio,” while analyst Penelope Patsuris says that the deal could bring “an entirely new audience of women”. The type of content appears to be of great importance when looking at radio as a medium. Current terrestrial radio programming that makes the transition to satellite radio is an obvious choice but Martha Stewart’s deal appears to be a concern. XM radio had passed on a deal with Martha Stewart Living and believed that the content was inappropriate considering the hands-on nature of cooking and decorating. The prices paid for all future high-profile programming, with respect to satellite radio’s current earnings history, is a big gamble for both companies, and analysts aren’t sure if XM and Sirius will ultimately see a return in the near future. With projected break-even points far in the future, the blockbuster deals may only be pushing the dates even farther.

Both companies have been signing deals with automakers to install satellite radios in their cars, XM more so. These factory-installation deals have helped to drive subscriber growth, but switching costs between the two services will eventually be mitigated when new satellite radio equipment will have the ability to receive both services. This is where the content offerings become the largest source of differentiation between the two competitors.

Analysts are clearly overlooking the long-term issues with satellite radio. We don’t believe that the short-term success will determine a winner or loser within the satellite radio market. This is a new market with a small percentage of U.S. consumers currently using it. The long-term success of satellite radio programmers will depend upon who can grab the most share the quickest. XM and Sirius will have more experience and both have the potential to be successful. The satellite radio market is not necessarily about a winner or loser, but rather the acceptance of a new medium by consumers. The domestic market alone has the potential to make both XM and Sirius a lot of money in the long run. Ultimately the question about whether or not Martha Stewart is worth a $30 million deal on Sirius radio is not as important. The success of satellite radio will depend on bringing additional content to the airwaves that currently isn’t on terrestrial airwaves. This idea should bring people back to a time when cable television first started. Who would have imagined that consumers would now be spending $50-$100 a month on additional television programming through cable or satellite?

Written by: Josh Emerson, Stephanie Jose, and Diana Sheehan


Blogger jcg said...

It would be interesting to compare/contrast these two players with the never-got-off-the-ground 1998 entrant, CDRadio. They had all the deals (with motorola, hughes, and GM), but failed to convince listeners that they should pay for radio...

4:01 PM  

Post a Comment

<< Home