Satellite Radio Revs Up Its Growth Engine

By Steve Blum, Tellus Venture Associates

At 2.6 million subscribers, satellite radio now represents the 16th-largest radio market in the United States. That’s more listeners than the entire Minneapolis-St. Paul market, even if you count every warm body from the age of 12 on up.

Subscriber growth during the past 12 months has been nothing short of phenomenal. This time last year, XM Satellite Radio and Sirius Satellite Radio had a total of 797,000 subscribers, which put them in the same league as the 59th-rated market, Greenville-Spartanburg, S.C.

Satellite radio’s success primarily is the result of clear strategy and skillful execution. XM, in particular, has held a steady course pretty much from the moment it received its satellite radio license in an auction seven years ago. Under the direction of programming honcho Lee Abrams, XM combined carefully segmented music genres with lively personalities and creative elements that built listener loyalty.

The original and, ultimately, less compelling concept behind Sirius was to let the music speak for itself and just load up the CD player with tunes. Such ancillary markets as health clubs and very limited in-car video also proved to be a distraction as the company dropped “Satellite Radio” from its name and simply called itself “Sirius.”

Sirius positioned itself against XM in the marketplace by keeping its in-house music channels commercial-free. Mobile electronics salespeople were able to explain the difference between the two in just a few seconds: “Sirius doesn’t have commercials, XM costs 10 bucks a month.” But when XM dropped commercials from its own music channels earlier this year, the difference became: “XM is 10 bucks a month, Sirius costs 13.”

Much has changed in six months. Once again doing business as Sirius Satellite Radio, the company has become ever more aggressive about targeting listeners with well-crafted, actively programmed radio channels. Cross-promotion between channels has become more spirited. For example, Sirius recently ran real-time updates from Martha Stewart’s sentencing hearing during commercial breaks on Fox News as a promotion for its exclusive Court TV channel. Even its lineup of original talk programming has expanded, with the latest addition being a “patriot” channel that will combine right-of-center talk with overnight programming straight from the Pentagon.

Crucially, Sirius has effectively matched XM’s pricing via discounts on longer-term contracts. The fight on the mobile-electronics sales floor now comes down to old-fashioned distribution, detailing and training. The victor will be the company that gets its product most prominently into the most stores and does the best job of educating store personnel about the particular benefits of its programming.

With deep consumer-electronics experience in the executive suite, Sirius has its best chance yet to go on the offensive in this key distribution channel. It is already declaring success in the mobile-electronics aftermarket, claiming Sirius units accounted for 44 percent of satellite radio retail sales in March. XM, on the other hand, claimed a 70-percent aftermarket retail share during the whole of the first quarter of 2004.

The other crucial battleground is the new-car showroom. There, XM and Sirius are not fighting each other. Effectively exclusive deals with automakers have kept them away from head-to-head competition. Instead, they are competing against extended warranties; custom wheels; protective undercoats; and a long list of accessories, add-ons and upgrades that car dealers use to build their margins. By all indicators, XM and Sirius are doing well in the new-car sales channel, with both companies reporting steady progress.

A side-by-side comparison shows that XM remains the market leader with 2.1 million subscribers to Sirius’ half-million at the end of June. Satellite radio’s rapid growth in the United States primarily has been a function of XM’s rapidly accelerating subscriber count. The good news for Sirius is that it is climbing the same, steep growth curve established by XM.

Sirius consistently has lagged behind XM by about five quarters. It began 2004 with 261,000 subscribers, a level XM obtained around October 2002. Sirius’ second quarter 2004 count of 480,000 is almost identical to XM’s figure at the end of the first quarter of 2003, and so it goes. Sirius might not like being the market follower, particularly because it squandered a one-year lead over XM during the satellite-and-broadcasting-system-construction phase of the project, but as long as XM continues its brilliant performance and Sirius can reliably shadow it, Wall Street should be happy.

At the beginning of 2004, XM predicted it would end the year with 2.8 million subscribers, while Sirius pegged its year-end total at 860,000 — a figure it later bumped to an even 1 million.

Applying the “five-quarter-lag” rule of thumb, the expectation would be that Sirius’ year-end 2004 total should be close to 930,000, which was XM’s count at the end of September 2003.

Just since the beginning of this year, the satellite radio category has added 1 million subscribers. Looking at the Tellus Venture Associates projection of a total of 3.81 million satellite radio subscribers by the end of the year (which was calculated based on industry trends and not on company predictions), it gives both companies room to make their targets, with 100,000 or so subscribers to sweeten the pot. After nearly three years in the market, satellite radio remains firmly on track to top 10 million subscribers toward the end of 2006.

With the holiday selling season still to come, Tellus’ year-end 2004 projection is starting to look like it might turn out to be a little low. It’s too early to put holiday shoppers in the bank, though, so the forecast stands. Still, that’s more listeners than the 11th-ranked Atlanta market, and just a rounding error away from knocking Detroit out of the top 10.

Steve Blum is president of Tellus Venture Associates in Marina, Calif. He can be reached at 831/582-0700 or at [email protected].