Dollars and Sense: Creating Successful, New Satellite Services

By | August 2, 2004 | Broadcasting

by Michael R. Flynn

We have been pondering the growth of Digital Audio Radio Service (DARS) and Direct Broadcast Service (DBS) throughout the last couple of years. Right now, these are the only emerging service success stories of note in the satellite sector. The reasons for their success, however, are not at all intuitive.

For example, while continuing to do well in rural markets where cable penetration is low, DBS also shows impressive gains in urban and suburban areas. Similarly, Sirius and XM Satellite Radio are picking up local commuters and soccer moms as subscribers in addition to cross-country drivers. A quick review of these two businesses shows some interesting commonalities–and also some possible factors to consider in creating the next successful satellite service.

For DARS, content is key. I subscribe to a satellite radio service for one reason: The local radio stations in the New York City market have terrible programming and are saturated with commercials. If DARS simply existed to transmit existing radio content over a different medium, the advantages of "near-CD" quality and nationwide coverage would probably not amount to much.

Interestingly, consumer reviews of these services typically gloss over the technical aspects and instead focus on the channels available. Satellite radio is following in the successful footsteps of HBO, whose content production should be an example to the industry. In doing so, DARS refutes the theory that satellite service is nothing more than a fungible conduit for data: better content, rather than transmission technology, can be the driving force behind a successful satellite company.

For DBS, other intangibles also matter. How can DBS possibly be thriving in New York City? With unmatched population densities, extensive cable penetration and plenty of free broadcast TV channels, DBS should not have a chance in this saturated urban environment. Moreover, DBS programming is broadly comparable to cable. Unlike satellite radio, DBS providers do not create hundreds of channels of new content.

Satellite television broadcast providers offer extensive sports and foreign language content–critical in ethnically diverse New York. Moreover, as any cable subscriber will tell you, the cable operators’ customer service would embarrass the New York Department of Motor Vehicles. If not exactly a pleasure, at least subscribing to DBS service is not an ordeal.

For both, success comes with improved distribution. More than any other factor, the roll-out of satellite-enabled products by auto manufacturers and retailers built the fortunes of the two satellite radio providers.

Similarly, DBS providers now offer plug-n-play solutions through thousands of retail outlets, and up-front installation costs are nominal. The lesson is clear enough: Develop strong sales channel relationships at the correct point of purchase and you get subscribers.

Perhaps the most interesting point is what is not included on this list: the entire space component and all the extraordinary technology of which the industry is so (rightly) proud.

This is certainly not to say that the space-side technology is irrelevant. Consumer acceptance presupposes a degree of reliability that compares to terrestrial alternatives. Moreover, in some cases the technology will drive the consumer choice: I am stuck with cable television because I lack a view to the south; people in areas without cable service have no alternative to satellite-enabled broadcasting. Still, the bulk of the consumer market can now fairly be characterized as platform agnostic. In other words, once the price, reliability and ease of use of satellite service approaches its terrestrial competitors, consumers become indifferent to the underlying technology.

This may be bad news for operators and service providers who want to think of this industry as something special. If DARS and DBS are correct, the goal is to stop thinking of "satellite services" and just think of "services." The path is becoming clear:

  • The scope of possible services is not limited to instances in which the intrinsic features of satellite technology preclude terrestrial competition. Satellite service can compete head-to-head with terrestrial in any market.
  • Low, up-front costs (covered by longer-term subscription pricing) and easy deployment are preconditions to consumer acceptance.
  • To succeed, operators must develop and enhance channel relationships, joint ventures and similar arrangements with distributors, co-developers and even potential competitors.
  • Operators may even need to develop competencies–such as content creation–that they now perceive as wholly outside their core business.

The story of DARS and DBS points to a bright future for satellite businesses that heed these lessons.

Owen Kurtin co-wrote this article. Kurtin and Flynn are partners in the New York office of law firm Sonnenschein Nath and Rosenthal LLP. They may be reached at 212/768-6700 or by e-mail at okurtin@sonnenschein.com and mflynn@sonnenschein.com, respectively.

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