Satellite Radio Industry Revenue Projections

By Sean Badding

The digital satellite radio industry’s run to its one-millionth subscriber is approaching fast. The Carmel Group predicts this first major milestone will be broken during August-September 2003. At this rate, it will have taken less than two years — since XM Satellite Radio [Nasdaq: XMSR] first launched nationwide service during December 2001 — for the satellite radio market to go from zero to 1 million subscribers. Equally important, it will have taken even less time for the satellite radio market to go from zero dollars to more than an estimated $500 million in revenues. By the end of this year, we’re projecting total revenues will reach $610 million, up from $218 million in 2002. Without question, the money’s flowing back into satellite radio and it’s coming from many different directions.

On June 10, Sirius Satellite Radio [Nasdaq: SIRI] raised $146 million by issuing 75 million new shares to the public. That move was preceded less than two weeks earlier by a $175-million financing round of convertible notes. On June 17, XM Satellite completed its own $175 million debt offering to secure funding for operations into 2004. Even Wall Street got into the act, as investors helped push both XM and Sirius to more than double its market capitalization in the last three months. As of July 10, XM and Sirius had a market capitalization of $1.3 billion and $1.2 billion, respectively. By the end of 2004, XM and Sirius will have a very good shot at doubling their market caps, as the industry quickly approaches its second major milestone of 5 million subscribers early in 2005.

Subscriber and Revenue Milestones

Let’s assume the companies combine to total 1 million subscribers as projected, since the industry has been tracking strong numbers this quarter and the “magical million milestone” is practically within touching distance. The greater feat and more critical question now is how the satellite radio market gets from 1 million subscribers to its next major milestone of 5 million subscribers.

The next question becomes how the market gets from $610 million this year to its first major revenue milestone of $1 billion in sales. This kind of performance won’t come easily, but we think it’s very achievable, if not inevitable. To start, it’s important to note the obvious reasons for the satellite radio industry’s pending success. The four key components are: 1) a huge total target market of 209 million U.S. registered vehicles; 2) a strong original equipment manufacturer (OEM) support base; 3) an attractive hardware price reduction; and 4) cool, trendy gadgetry for automobile- and music-loving Americans.

The lesser-discussed points supporting satellite radio’s success over the long-term will come from four additional areas:

#1 Customer care. We know it’s not sexy and it’s just about boring to think of, but customer service is absolutely critical for the satellite radio industry to succeed in the long-term. The Carmel Group’s first couple of experiences with XM and Sirius for customer service have been very positive thus far, and it’s comforting knowing they are on the right track. Customer service is one of the key basics of any subscription TV service. As the satellite radio industry grows and competition sprouts from new IP-enabled providers, the back-office management process will be the backbone that strengthens subscriber loyalty and strong word-of-mouth.

#2 Cost control. It says a lot when two relatively small, start-up companies can raise serious money in a stomach-wrenching market environment. It says even more when two companies that are stacked up with brow-raising debt know how to spend the money. XM and Sirius have done a great job so far crafting their marketing message, without breaking the bank. We expect this trend to continue into the foreseeable future. XM Satellite CEO Hugh Panero once told us, “Before we even spend one dollar, we think of how this dollar could effectively be used to capture a new subscriber.” Well, the subscriber numbers speak for themselves, and we have no reason to doubt Panero’s strategy.

#3 Product re-invention. Taking a page out of cable TV’s book, it is no longer taboo to pay for something that was once free. The satellite radio industry is reinventing this concept for the radio side of the broadcasting business by taking a lesson from TV and putting a glamorous digital spin to it. Don’t be surprised to see applications offered on today’s pay TV service that are reinvented and deployed on tomorrow’s satellite radio service. Applications such as storage-based Personal Audio Recorders (PARs) will have a Personal Video Recorder (PVR) feel to them, and provide audio consumers with PVR-type trick-mode features (e.g., pause, record, skip, etc.). When storage gets cheaper and smaller to fit into the audio receiver someday, this theory will become more of a viable technological idea. We’re predicting some activity on this PAR concept, beginning in 2005, when satellite radio outgrows its “niche” image and becomes more of a mass-market product/service. Of course, one of the first concerns about PARs and satellite radio is the advertising effect. The satellite radio providers both are well aware of the impact PARs could have on advertising, especially XM, which promotes slightly more of its “advertising lite” to subscribers. In either event, XM and Sirius will be managing this advertising issue very delicately when they cross the brand new PAR bridge.

#4 Executive management. XM’s Hugh Panero and Sirius’ Joe Clayton, both seasoned subscription services executives, have acted individually and collectively in a way that makes them the key glue holding their companies and their industry together. Assuming these savvy and capable executives, as well as the core members of their staffs, keep performing as they have, at the expected levels, these companies seem destined to achieve success.

What The Numbers Tell Us

By year-end 2003, satellite radio subscribers will reach 1.5 million to grow three-fold from the previous year. By the end of our forecast period in 2008, we’re estimating there will be 24.3 million satellite radio subscribers, penetrating more than 11 percent of U.S. registered vehicles. In 2003, subscription sales will account for 20 percent of total satellite radio revenues and grow to 86 percent by 2008.

By year-end 2003, satellite radio hardware revenues will generate $450 million, up 156 percent from the previous year. The hardware revenue growth will stay relatively flat by 2008, as the majority of sales will occur on the subscription level. The satellite radio market is a subscription business, so it’s no surprise to see hardware sales dropping after 2005. At the end of this year, hardware revenues will account for 74 percent of total revenues but drop to just 8 percent by 2008.

Advertising sales gradually will become more meaningful, as subscriber levels pick up in the next two years. By year-end 2003, advertising will generate an estimated $37 million to increase to $321 million by 2008. From 2003 to 2008, advertising will account for 6 percent of the total satellite radio revenues.

By year-end 2003, total satellite radio revenues should reach an estimated $610 million and grow more than nine-fold to $5.5 billion by 2008. Total satellite radio sales will climb an estimated 72 percent, based on a compounded annual growth rate, during 2002 to 2008. Our analysis clearly shows that XM and Sirius will be playing happy tunes.

Sean Badding researched, analyzed and wrote this monthly report on behalf of The Carmel Group. He is president and a senior subscription services analyst at The Carmel Group, a publisher of industry data books and the monthly newsletters Satellite Radio Investor and DBS Investor, as well as a consultancy based in Carmel-by-the-Sea, CA (http://www.carmelgroup.com). The company specializes in telecommunications, computers and the media. He can be reached by e-mail reached by e-mail, [email protected], or by telephone, 831/643 2222.