Global Radio Learns From U.S. Satellite Radio Missteps

By Stephen A. Blum

The most complex satellite broadcasting system ever proposed is under development in a nondescript office building near Luxembourg’s airport. Global Radio intends to provide subscription radio service throughout Europe, beginning in 2006. It will use a powerful three-satellite, inclined orbit constellation, with each bird delivering eight beams. The manufacturer has not yet been selected.

One beam will provide continent-wide service, while the other seven will focus on specific language regions. Crafting the programming line-ups will be equally challenging, balancing the near-term objective of drawing in early adopter ex-pats looking for native language programming with the long range goal of providing mainstream service to the entire European market.

Content and distribution are the two primary factors that determine the success or failure of satellite delivered subscription services. These two factors explain the way the DirecTV-EchoStar battle has played out over the years and account for the failure or success of direct to consumer satellite systems in markets as diverse as Japan, Latin America and Africa.

With specific programming plans yet to be drawn and distribution still in the conceptual phase, it is difficult to make system-specific forecasts for subscriber growth. However, it is possible to look at the overall European market and apply assumptions made and lessons learned in the United States during satellite radio’s introduction over the past year. The result isn’t necessarily a specific projection of how Global Radio will fare. Rather, it indicates what might happen in Europe if a satellite radio system were built using U.S. business models and was as well suited to the European market as XM and Sirius are to the United States.

To some degree, Global Radio anticipated some of the hard lessons Sirius and XM are learning about distributing satellite radio hardware to consumers. The company is building its business plan around some cold, hard facts of the automobile industry, which remains its primary target market. Unlike the consumer electronics industry, which drives satellite television take-up in most countries, the automotive industry does not gracefully go through a complete product design cycle on an annual basis. Three to four years is more typical for carmakers.

One solution for Global Radio is closer cooperation with carmakers during the development phase of its business. By the time it goes to market chip sets should be small enough and cheap enough that all in one, in dashboard receivers will be available at market launch, which would avoid a problem that XM and Sirius are currently having in the United States. Their add-on black box is a much tougher sell to automobile manufacturers.

Another approach Global Radio plans to take is extended beta-testing, which will delay its full scale service launch but, it is hoped, will allow the product and service to come to market better coordinated with automotive manufacturers and distributors.

On a top-level analysis, Europe has many similarities with the United States, but also very significant differences that will impact the growth of a satellite radio service. Europe and the United States have similar numbers of registered automobiles, similar annual new car sales, and similar profiles for some key early adopter segments such as long- haul truckers. On the other hand, Global Radio’s total service area has significantly more TV households and roughly twice the population as the United States, but with lower gross domestic product per household.

From an automotive and consumer electronics distribution standpoint, Europe sorely lags the United States. The European Union not withstanding, European retail chains and wholesale distributors still tend to be broken up into small, national operations, unlike the continent-wide retail infrastructure in the United States.

Another key difference may help offset that problem, though. Viewed as a whole, the European radio market is more thoroughly divided into different language, music, sports and cultural segments than the U.S. market, where regional differences tend to be ones of seasoning rather than substance. Given radio’s proven effectiveness at delivering niche programming and serving thinly segmented audiences, aggressive vertical marketing programs can go a long way towards offsetting a fragmented mainstream retail environment.

Adjusting a U.S.-developed satellite radio forecasting model for the European market requires changing several assumptions, beyond population and income statistics. A European satellite radio operator will likely have to contend with slower consumer electronic manufacturer adoption and more gradual diffusion of product through retailing channels than XM and Sirius, who are already struggling with a more stubborn manufacturing and distribution system than the satellite TV had led them to expect.

Targeting ethnic niches, such as the 4.5 million Turks in Germany, will probably mean more in-home subscribers, although mobile users will still be slightly in the majority. Less dependence on cars for commuting will further tip the balance.

These projections indicate that a business case can be made for a Europe-wide satellite radio system to gain more than ten million subscribers within five years of launch. It quantifies a general set of assumptions about satellite radio subscription growth. Before it can be applied to Global Radio, a more specific programming line-up and beam loading plan has to be factored in, as well as specifics about distribution plans and vertical market strategies.

Another unknown is potential competition. Global Radio might or might not have the European satellite radio market to itself. One potential competitor is WorldSpace. Most of the European market is above 45 degrees North Latitude, which means a geosynchronous satellite like WorldSpace’s AfriStar is at a serious disadvantage when targeting mobile users. However, it’s less of a problem for the in-home market, which could represent roughly half the total.

Global Radio’s most critical next step is locking down a second round of financing. Fund raising success will depend on Global Radio’s ability to make its subscriber growth case, which in turn depends on how well it fine tunes its content and distribution strategy to capitalise on Europe’s particular market advantages, while avoiding the pitfalls. XM and Sirius are also looking to the financial markets for vital additional funding. Mixed early results and a rough financial environment are making that task very difficult, but the basic assumptions that underpin the satellite radio business still appear valid and there is good reason to continue pushing forward.

Stephen A. Blum is president of Tellus Venture Associates, a Marina, Calif.-based satellite consulting firm. He can be reached at email [email protected] or by phone at 831/582-0700.