The Success of Satellite Radio

By | February 1, 2011 | Broadcasting, Via Satellite

Satellite radio (specifically Sirius and XM) was created with the idea that such a service could offer more specialized programming than conventional terrestrial radio. A broader range of more specialized content would gain a profitable audience by aggregating demand from a continental landmass. No ordinary radio station could afford to offer the sort of programming satellite radio could offer, because terrestrial stations could not focus their programming as tightly as an individual satellite radio channel could — and there would be many channels. With the additional benefit of continental signal coverage, this high level of choice, coupled with higher quality sound, was expected to convince people to pay for usually free radio.

This same dynamic was successful in the cable and satellite TV (DTH) business, but it took years for DTH to become profitable. Satellite radio suffered from the same problems as DTH — high startup costs and no initial subscriber base. While the DTH business had cable as an example that people would pay for TV, there was no such evidence for satellite radio. As recently as the first quarter of 2009, Sirius XM lost 400,000 subscribers and looked set to fail, and it was widely held that satellite radio had been made irrelevant by the iPod and the Internet.

Now it appears that those sages will have to eat their words. In the second quarter of 2010, Sirius XM reported net income of $15.27 million, rebounding from a loss of $159.64 million in the 2009 second quarter. In the third quarter of 2010, Sirius XM announced a $67.6 million profit. Finally, on Nov. 30, Sirius XM announced that it had passed 20 million subscribers. Results for the full year had not yet been released as of this writing, but it seems certain that 2010 will be the year the satellite radio will become profitable.

So what does this tell us? Nothing for certain; but it suggests that the Internet is not the satellite killer that some have suggested.

First, satellite-based services generally are not limited by location. While satellite radio does have a terrestrial repeater network, it is in no way as complex or expensive as the sort of wireless network that would be required to provide similar coverage to Internet-based programming. I just drove from Texas to California, and as my wife pointed out, there were quite a few long stretches of low cell phone connectivity, where the system could not provide 3G or 4G connectivity, just generic voice. We are a long way from providing mobile access to a large body of entertainment via wireless access to the Internet.

Second, the recent results for Sirius XM also suggests that the use of new car sales channels as the major distribution method for satellite radio has been a success. This approach has made satellite radio more easily accessible to a broader audience than Internet broadcast audio. While the generation that has grown up with the Internet may find it less intimidating than their predecessors do, it is still more complicated than terrestrial or satellite radio. By making satellite radio a one-to-one replacement for the very familiar radio in your car, Sirius XM has opened markets that remain largely closed to the Internet as a distribution channel.

Similar factors have influenced the growth of video distribution by Internet. As services such as Netflix have developed simple user interfaces, they have appealed to more users. Likewise, DirecTV’s DVRs can be hooked directly to the Internet so that the user is unaware of whether the content received is coming over the satellite or Internet connection. Audio over the Internet also has grown quite sophisticated (iTunes is an example), but it is not mobile.

There is no question that the existence of a broadly available wireless Internet would be a strong competitor for satellite radio (if the cost was competitive), but such a network is not likely to appear any time soon. Satellite radio offers a combination of broad geographical coverage, low cost (compared to 4G) and a wide selection of programming (compared to terrestrial radio) that should keep it in the game for quite some time.

The real question was whether it could turn a profit. The only remaining question will be its ability to replace its satellites and that question will remain unanswered for some years to come.

Max Engel is an experienced satellite industry and telecom industry analyst and founder of The North Star Consultancy. He can be reached at maxnorthstar@gmail.com.

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