The Real Satellite Radio Boom Begins

By | February 2, 2004 | Feature

By Jimmy Schaeffler

It’s long been said that Wall Street investors trade stocks based on a company’s expected performance during the next quarter. If true, the year-end stock price gains by U.S. satellite radio service providers XM Satellite Radio [Nasdaq: XMSR] and Sirius Satellite Radio [Nasdaq: SIRI], suggest that the sector is on the rise.

There are a number of reasons for optimism. General Motors [NYSE: GM] is becoming more and more pleased with its strategic and financial investment in Washington-based XM. New York City-headquartered Sirius is moving closer to major factory-installation programs with Daimler- Chrysler [NYSE: DCX] and Ford [NYSE: F]. The entire satellite radio industry is expected to take a major step forward toward 4 million-plus total subscribers by year-end 2004. Along the way, expect many unique software, hardware and marketing announcements to propel subscriber growth and acceptance of both satellite radio companies. This is not unlike when FM joined AM as the radio standard, satellite radio now has begun to establish its place among consumer products and services.

XM’s New Year

Easily the best announcement for XM CEO Hugh Panero and his respected executive team was the year-end 2003 subscriber additions. XM announced on Jan. 7 at the 2004 Consumer Electronics Show (CES) in Las Vegas that the company’s year-end 2003 total of 1.36 million subscribers was 13 percent greater than its earlier projection of 1.2 million. Moreover, XM’s fourth quarter subscriber count of 430,000 was 25,000, or 6 percent, better than that of its strategic and financial investor, DirecTV, which ended the quarter with 405,000 net new subscriber additions. Going forward, XM is offering guidance to analysts that its year-end 2004 subscriber total will reach almost 3 million subscribers. That estimate would require XM to average 400,000 net new subscribers during each quarter this year. In comparison, a conservative estimate by The Carmel Group indicates that DirecTV would add roughly 238,000 net new subscribers per quarter during 2004. For a more precise look at the dynamics of satellite radio industry growth, see the accompanying charts and text. Finally, XM also should be helped by its planned elimination of all advertisements for its 68 music channels starting this month and the addition of several new channels, including weather and traffic, for key areas in the United States.

Sirius’ Outlook

Sirius made a splash at CES with an award-winning booth, featuring live entertainment, cars with pre-installed Sirius radios, and new consumer electronics (CE) hardware. Sirius increased its 2003 subscriber number from 30,000 in late 2002 to 232,000 by year-end 2003. The 200,000-plus rise is a six-fold increase over the company’s subscriber tally a year earlier. Since Sirius only has about one-fifth as many subscribers as XM, it has far to travel. Help is expected during August when large numbers of new, 2005 model year Chrysler and Ford vehicles will offer factory-installed Sirius radios.

A recent Forbes.com article predicted satellite radio would not succeed. The article’s key reasons: terrestrial-based digital radio will be a better competitor than satellite radio; surround sound will be delivered by digital radio better than by satellite; and people are doing too many things in their cars these days to pay more than $100 a year for satellite radio. That article was based in large part on visits to the CES booths of XM and Sirius. The findings did not appear based on hearing one of the satellite radio services in a car during a long, multi-hour trip across a state or the country. Any critique of Sirius or XM based on sitting inside a stationary car and not driving it anywhere seems weak.

As to the arguments in the Forbes.com story, the prediction that digital radio will compete better than digital satellite radio is grossly premature. If all digital terrestrial radio does is “re-can” the existing AM and FM stations – along with their advertisements – then its digital advantage will be lost. The key today is that, as with satellite TV nine years ago, satellite radio came to America not only delivering better quality than analog but also, more importantly, offering better choices. Soon, XM will join Sirius in offering commercial-free music channels. Unless terrestrial radio is able to replicate that service paradigm right away, it will remain millions of subscribers behind. XM and Sirius today total 1.5 million subscribers on their way toward ten million or more.

Next, Forbes.com argued that it is unclear which service will deliver surround sound first or better. In fact, it is most likely that terrestrial digital and satellite radio will both deliver surround sound quite well and at nearly the same time. That’s simply the nature of radio spectrum and how competitors use it. The criticism does not, in any way, give digital terrestrial an advantage over satellite radio. To suggest otherwise is disingenuous.

Finally, the Forbes.com story states that because people are using cell phones they won’t pay for phenomenal new 100-plus channel news and entertainment service whose volume has to be turned down to talk on the phone. This is like saying my 17-year-old son will not use his TV in his room at home because he’s talking on his cell phone. Hard as it may seem for parents to understand, this next generation finds multitasking incredibly easy. Like most teens, my son is watching TV, talking on the phone, and using Instant Messenger at the same time. Thus, for him or me, to listen to the radio while taking on the cell phone and driving is hardly a reason not to buy satellite radio.

One more note here: the size of the core market for satellite radio is 200-plus million vehicles on the road, along with 16 million to 17 million new vehicles produced yearly. More and more of these vehicles will include satellite radios. To succeed, XM and Sirius only need a fraction of that vast audience. The next Forbes.com story about satellite radio needs to offer something that’s a lot more analytical, measured and balanced.

And the Numbers, Please…

As noted in earlier columns, satellite radio is in a strong growth mode, rivaling the early years of CDs, DVDs and satellite TV (SN, pp. 4-5, Dec. 15, 2003). The Carmel Group believes that the U.S. satellite industry’s growth will reach 9.5 million total subscribers by year-end 2005.

For year-end 2003, Sirius had captured 16 percent of the U.S. satellite radio market share, while XM held the remaining 84 percent. At the end of the third quarter of 2003, XM’s 86 percent share of the U.S. satellite radio market topped 14 percent for Sirius. Note that Sirius has begun whittling away at XM’s market share lead. If satellite radio follows what happened with the satellite TV market, Sirius could become the satellite radio equivalent of scrappy EchoStar Communications [Nasdaq: DISH]. EchoStar has chipped away at the market share lead of the 800-pound gorilla DirecTV. Together, the satellite radio duopolists added 542,000 net new subscribers during the fourth quarter. Sirius brought in 111,000 of that fourth quarter tally, while XM added 430,000. At that pace, XM added four net new subscribers for each one that went to Sirius.

Additionally, satellite radio industry’s subscriber total for year-end 2003 amounts to 1,621,000 — an increase of 542,000, or 51 percent, compared to the third quarter tally of 1,080,000. Ultimately, the real satellite radio boom will begin this year.

Jimmy Schaeffler is a subscription TV analyst at The Carmel Group, a publisher of industry databooks and newsletters and a consultancy based in Carmel-by-the-Sea, Calif. (He can be reached by e-mail, jimmy@carmelgroup.com, or by telephone, 831/643-2222.

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