Subscriber Bases: Quantity Or Quality

 

Newer Services Still Focusing On Building Bases

In the satellite radio market, there is little difference in subscriber acquisition models and it seems both Sirius Satellite Radio and XM Satellite Radio are still trying to grow their base, says Rusch. Both have built business mostly from partnerships with automakers and by creating attractive content. XM for years offered service for $10 per month while Sirius offered a monthly rate of $13. Now both are at $13 per month, says Rusch. The two companies are seeking U.S. government approval to merge, and neither would comment for this article.

While analysts agree that satellite radio has secured its place in the market, they also say that XM and Sirius are sliding in profits and subscriber acquisition expectations. In his July report, Mather dropped XM and Sirius’ projected 2010 subscribers from a range of 18 million to 20 million to a range of 15 million to 17 million and noted that profits have been disappointing.

The mainstay of success for XM and Sirius has been in their partnerships with automakers. Again, the cellular phone business has been the model, says Rusch. “It started in cars, too. People have followed the model in these satellite ventures. They want a car dealer to get something for helping them and it is becoming a standard option,” he says. But until satellite radio is available in every vehicle, XM and Sirius will have to be creative in increasing their ARPUs, says Rusch.

In the satellite broadband market, subscriber acquisition seems still to be in the build-the-base strategy, as the only two providers of satellite-only broadband — Hughes Network Services and WildBlue — compete for largely different sectors of a market that is much higher on demand than supply. Hughes held the satellite broadband market for years when WildBlue entered the arena in June 2005. WildBlue has grown quickly, now with 200,000 subscribers to Hughes’ 350,000, but while Hughes competes with telcos for all sectors and locations of broadband, WildBlue is focused on providing high-speed Internet to homes so rural that there is no other option for broadband. The demand is so much greater than supply, Hughes officials have said, that they have not felt the encroachment of WildBlue into their customer base.

WildBlue executives believe there are as many as 20 million potential customers who fit its rural, no-access profile. That’s more than enough to be profitable for at least five to seven years, says Engel. “Even if there are only 5 million, that’s still good business,” he says.
The terrestrial Internet providers can offer service at far lower prices than the average satellite price, which is why WildBlue insists on targeting customers it thinks will not get other options through telcos and cable. “The biggest enemy to a subscription service like ours is churn,” says WildBlue President and COO Ken Carroll. The biggest reason for churn, overall, is relocation. WildBlue is at advantage because there is less relocation in rural areas, leaving its biggest reason for churn the influx of digital subscriber lines or cable broadband.

“We’ll sell our service to anybody, but we’re not looking to sign up customers who have cable modem service available because our price points are above that and they have other options,” says Carroll. “… We’re growing at a pretty fast clip. I don’t think we have a target number, but as we get larger we will get certain economies of scale. … At this point, we’re focused on the blocking/tackling of satellite broadband and we’ll stay focused on that for some time,” he says.

WildBlue’s strategy of focusing on customers with no connection makes sense, says Rusch. They “are willing to accept slightly higher cost and lower quality because they have nothing else.” But Rusch predicts that after the saturation of its target market WildBlue will have to change strategies. “I’ve warned them that there is a danger in that model and it’s an issue of fairness. These people are not hicks. They just tend to be less affluent. They know what other people are getting for their technology and they want the same,” he says.

Next Steps

It is unclear how quickly satellite service providers in the consumer market will follow DirecTV in targeting fewer but higher quality subscribers. While it is always tempting to claim the most customers, analysts say, satellite providers are entering a level of maturity where less means more.

“A high number of subscribers is a good way to prove you’re doing well,” but in the long term, Engel says, “there is no choice” but to go after higher ARPU. “Once you get a saturated market, there are only three ways to get revenue: you get more customers, you charge more of each customer or you get the government to subsidize you.” Most analysts are betting on the second option.

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