XM, Sirius Fuel Growth Engines
The two U.S. satellite radio service providers, Washington-based XM Satellite Radio [Nasdaq: XMSR] and New York-based Sirius Satellite Radio [Nasdaq: SIRI], demonstrated last year that fierce head-to-head competition can be rewarding, as each netted impressive subscriber gains during the fourth quarter.
XM and Sirius also added fuel to their already revved up growth engines by unveiling plans to provide local traffic and weather information, as well as a host of other new service and product innovations aimed at enticing subscribers.
Industry front-runner XM blew past the fourth quarter forecasts of Wall Street analysts by signing up more than 430,000 customers – its best quarter ever – to amass 1.36 million subscribers by year-end. As a result, XM netted 1 million new subscribers in all of 2003.
The raw numbers for late-to-market Sirius are much smaller, but the company’s 772 percent year-over-year subscriber gains between 2002 and 2003 showed it clearly is on the upswing. Sirius ended 2003 with 261,061 subscribers, up from approximately 30,000 subscribers at the end of 2002. The company added over 100,000 subscribers in the fourth quarter of 2003 alone, due to increased sales at retail during the holiday season.
Bob Peck, a satellite analyst with Bear Stearns, said XM’s 1.36 million subscriber total topped his estimate of 1.225 million. That pace of growth indicates that XM netted 430,000 new subscribers during the fourth quarter – almost 50 percent greater than his estimate of 290,000.
XM officials were encouraged enough by the strong fourth-quarter performance to boost the company’s guidance to 2.8 million subscribers by year-end 2004. That customer base would more than double its year-end 2003 total.
The quarterly market share distribution between the two companies once again was weighted heavily in XM’s favor. XM scored big with an 80 percent market share of new subscribers during the fourth quarter, while Sirius gained the other 20 percent with 110,000 new customers for the same period, Peck wrote in a research note last week.
On Christmas Day, more than 23,000 subscribers signed up for XM to set a company record for the greatest one-day gain in new customers since the company launched commercial service in September 2001, said Hugh Panero, XM President and CEO.
XM’s subscriber numbers are “great,” said Steve Blum, president of the satellite broadcasting consulting firm Tellus Venture Associates. Rival Sirius made good growth gains that it needs to build upon, he added.
XM’s expectation of attaining 2.8 million subscribers and Sirius’ goal of amassing 860,000 subscribers by year-end 2004 are both reasonable, Blum said.
“Satellite radio only has now begun to sink into consumer consciousness,” Blum said. “It is becoming an overnight success after 8 years of planning. Once you pass the one- million mark, pretty much everybody knows somebody who has one.”
Peck wrote to his clients last week that he had been expecting Sirius to offer higher guidance for 2004 that would approach 750,000 net new subscribers rather than the 600,000 suggested by company officials.
Sirius has been at a disadvantage in the original equipment market due to XM’s part-ownership by General Motors [NYSE: GM]. As a result, GM has promoted XM heavily and offered it as a factory-installed option on more than 40 of its new vehicles. XM also is a factory-installed option on several top-selling Honda [NYSE: HMC] and Acura models. Factory-installed radio units in the automotive market account for 50 percent of XM’s new customers.
Peck explained that he is waiting to hear when Sirius may gain a subscriber boost by implementing previously announced agreements to factory-install its units on Ford [NYSE: F] and DaimlerChrysler [NYSE: DCX] vehicles. Large-scale, factory-installed growth would be a catalyst to Sirius.
The sales performance of satellite radio during the holiday selling season was “outstanding,” said Joseph Clayton, president and CEO of Sirius. As proof, Sirius units sold nearly as fast as stores could get them on the shelves, he said.
“We are gaining momentum,” Clayton told SATELLITE NEWS during a phone interview last week.
New transportable plug and play products that Sirius introduced during the fourth quarter sold “exceptionally well,” Clayton said. The Audiovox plug and play unit even exceeded the sales expectations of retailers, he added.
This holiday season marked the first time that Sirius had a full complement of products to offer, especially in the transportable plug and play category. The plug and play satellite radio products are particularly appealing to consumers who want to move their units from the car to the home, boat or RV, using special docking kits.
The competition between the two companies is heating up this year with several attention-grabbing announcements about new services and products at the 2004 International Consumer Electronics Show in Las Vegas.
In an industry first, XM announced it would provide in-flight audio entertainment to passengers on AirTran Airways [NYSE: AAI] and JetBlue Airways [Nasdaq: JBLU] flights. The service will use a system provided by LiveTV, a wholly owned subsidiary of JetBlue. The XM in-flight service will be introduced on JetBlue’s existing fleet of Airbus 320 aircraft beginning this fall and on its new fleet of Embraer 190 aircraft next year. AirTran Airways will offer XM on its existing fleet of Boeing 717s starting this fall, as well as its new Boeing 737 aircraft. JetBlue and AirTran serve a combined 20 million passengers a year.
The deals with the airlines help XM to build brand awareness and familiarity with potential customers by giving them access to the company’s 100-plus channels of programming, Blum said. XM provides engineering and technical support to put its service on the aircraft, but incurs no additional costs to gain the opportunity to showcase its service to the 20 million passengers who fly on the airlines each year.
The deal is similar to the arrangement that XM struck with Avis last October for the service to be offered free on approximately 20,000 XM-equipped 2004 model year luxury and premium class rental vehicles built by GM.
“Millions of people get exposed to XM, love it and buy it,” said Chance Patterson, XM’s vice president of corporate affairs.
XM also moved to protect its front-runner status last week by announcing plans to match Sirius by offering only commercial-free music starting Feb. 1. Sirius is priced at $12.95 a month, compared to $9.99 a month for XM. To justify the higher price, Sirius has been marketing itself as a “premium” service that had been the only one of the two providers not to carry advertising on its music channels.
Also on Feb. 1, XM plans to introduce five new channels, MSNBC, Highway 16, The Blend, Fungus and Lucy, to replace CNET and four music channels: Special X, Aguila, Vibra and Tejano.
The various changes will give XM 68 commercial-free music channels, compared to 60 for Sirius, Patterson said. Talk, news and information formats round out the remaining 100 channels each company offers its customers for a standard monthly fee. XM also sells the Playboy channel for a separate monthly fee of $2.99.
Sirius has been seeking to build its identity as a premium service by also catering to sports-lovers. The company recently agreed to a $220 million, seven-year pact to gain the rights to broadcast the games of the NFL. As a result, the Sirius sports lineup now includes the NFL, NBA and NHL, Clayton said.
To further entice new subscribers, Sirius is providing the sports programming for no additional fee. In contrast, satellite TV provider DirecTV charges a separate price for its subscribers to receive “NFL Sunday Ticket” and the games of other major U.S. sports leagues.
An estimated 25 percent of the potential satellite radio audience would consider sports programming appealing, Blum said.
Local Traffic Reports
While Sirius gained the NFL rights, XM decided that the asking price was too high and instead unveiled exclusive programming of its own last week by announcing plans to introduce 21 channels of XM traffic and weather reports. Service to the first 15 metropolitan markets will launch March 1 and the others will be added later.
Each channel will provide traffic and weather information in one of the 21 largest and most congested metropolitan areas in the United States. The traffic and weather channels will be added to XM’s 68 music channels and 32 channels of news, sports, talk and entertainment starting in March.
Local traffic and weather is a potential “killer application” for satellite radio, Blum said.
“Once you have that, there is not a lot of reason for people to tune back and forth to their local radio station,” Blum said. “If you can push a button to get your local traffic and weather without waiting, that is a powerful selling tool. It makes satellite radio a very attractive offering.”
Local traffic and weather carried by satellite radio service providers is akin to satellite TV operators offering local channels in the home markets of its subscribers, Blum said. That local-into-local service helped to fuel subscriber growth for satellite TV and the same kind of localism could be a boon for satellite radio, he added.
XM traffic and weather station will offer listeners in-depth, up-to-date information about road and weather conditions in the 21 major markets 24 hours a day, seven days a week, providing greater detail and more frequent updates than available on traditional local radio.
The traffic and weather service is being offered in cooperation with Mobility Technologies, a provider of traffic data, and The Weather Channel. XM is bringing on board a staff of traffic reporting professionals to create the audio reports. The traffic and weather channels will carry advertising but much less than the amount typically aired on traditional local radio stations, XM officials said.
“Putting commercials into traffic and weather opens up a new revenue stream with local and regional advertisers,” Blum said. That is probably as lucrative or a more lucrative revenue stream as XM’s previous approach of including advertisements on certain music channels, he added.
It will be easier to sell advertising spots for local traffic and weather rather than for niche music channels, Blum said.
In an attempt to offer a superior traffic service than currently available on local radio stations, XM would:
- Update each traffic report roughly every 10 minutes and repeat the latest report until the next one is ready;
- Provide instant availability;
- Cover a broader set of roads and geography;
- Operate 24 hours a day, seven days a week;
- Provide specific, real-time drive times using Traffic Pulse technology;
- Include corridor information, such as road conditions on I-95 from Boston to Washington, DC.
“We think we will generate an ample number of new subscribers to offset the costs,” Patterson said. The additional staffers that XM would hire to provide the traffic and weather service would be a “small fraction” of its programming department that currently employs about 150 people, he added.
At least for now, Sirius has no comparable traffic and weather service, Blum said. Until Sirius finds a way to match up, XM will have an exclusive new service that consumers should really appreciate, he added.
Sirius does have plans to offer real-time traffic information to subscribers in the next 12 months. That data would be available for an additional charge through a range of tiered-service options. The high-end option would include navigational service similar to what currently is offered through automotive OEMs and aftermarket suppliers.
Sirius plans to integrate traffic information with weather service content. Partners to provide the traffic and weather service will be announced in the coming months, Sirius officials said. Pricing of the various service tiers has yet to be set.
Sirius officials currently plan to provide the information via text or graphics on the vehicle’s dashboard but a voice component to the development-stage service also could be included. All Sirius radios that are capable of showing artist and title information on the display are also capable of providing other kinds of data the same way. –Paul Dykewicz
(Jim Collins, Sirius Satellite Radio, 212/901-6422; Chance Patterson, XM Satellite Radio, 202/380-4318; Bob Peck, Bear Stearns, 212/272-6665; Steve Blum, Tellus Venture Associates, 831/582-0770)