Pure radio
Satellite providers cut out commercials, playlists
By Chris Walsh, Rocky Mountain News
November 15, 2004
Flip through the radio dial these days and you'll likely experience a bit of déjà vu.
Most popular stations seem to play only a handful of hit songs - the latest from, say, Alicia Keys and Kelly Clarkson, or Eminem and Ja Rule - over and over and over again. And then there are the repetitive commercial breaks, which can devour almost 20 minutes of airtime each hour.
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So it should come as no surprise that an increasing number of consumers are signing up for satellite radio, a fledgling industry that still faces several challenges but is starting to gain a foothold with consumers.
In less than four years, industry leader XM Satellite Radio Holdings Inc. and its smaller rival Sirius Satellite Radio Inc. have built a combined base of 3.2 million subscribers who pay an average of $10 to $13 each month for service. Combined, the companies are adding roughly 200,000 customers each month and are on track to double their subscribers this year.
And Wall Street certainly appears to be backing the ventures: XM and Sirius are trading at their highest levels in years as investors bank on a bright future for the industry.
The companies, which primarily differentiate themselves through programming options as opposed to price and technology, are betting the bank on future growth. Each has anted up about $1 billion in recent months to cement blockbuster programming deals.
Sirius, for example, locked up popular shock-jock Howard Stern for $500 million in cash and stock. And XM - which controls 80 percent of the market with about 2.5 million subscribers - recently nailed down a $650 million, 11-year deal to broadcast Major League Baseball games.
Although some industry watchers question those high-priced investments, the strategy of shelling out big bucks for programming could pay off. Analysts estimate satellite radio could attract up to 30 million customers nationwide by the end of the decade.
"It sounds crazy that it would grow that quickly, but that amounts to just one-fourth of the nation's estimated 108 million automobile commuters," said Kit Spring, an analysts who follows the industry for Stifel, Nicolaus & Co. in Denver.
XM alone thinks it can capture 20 million subscribers by 2010.
"We think that will be driven largely by the fact that automotive makers will continue to put XM in more and more vehicles," said company spokesman David Butler. "The automotive industry really has driven the success of satellite radio in many ways and likely will in the future."
Satellite grew quickly in state
Satellite radio has caught on relatively quickly with consumers in Colorado, industry watchers say.
It's found a market with people like Denver resident Pete Gillespie, who long ago abandoned commercial radio because of what he sees as its limited playlists and frequent interruptions. For a while, Gillespie, 44, simply listened to his own collection of CDs while driving. Last Christmas, though, Gillespie's wife bought him a Sirius satellite radio receiver. He signed up for a year's worth of service, and now he's hooked.
When he drives his young children to school, he flips on the Radio Disney station. Once they're out of the car, he'll turn to Outlaw Country or catch some headlines on CNN, Fox News or National Public Radio.
"I guess the biggest reason I have it is that I'm rebelling against commercial radio," said Gillespie, who drives an average of 21/2 hours each day. "I can't stand commercials and playlists. Commercial radio stations only offer a small slice of what's out there. Satellite radio has been a great alternative."
XM and Sirius offer consumers a subscription-based service of commercial-free music stations as well as talk, sports and entertainment channels. In addition to monthly subscription fees, consumers must buy a satellite receiver (which typically costs $100 and up) and sometimes other equipment depending on whether they want the service at home or in a car.
Satellite radio ultimately sees its market with people like Gillespie - consumers who spend a fair amount of time in their cars. But it also is carving a niche for the home and portable device markets.
The companies say satellite radio is meant to complement, not replace, traditional radio. Many subscribers occasionally still switch to terrestrial stations to catch local news, weather and traffic.
Still, XM and Sirius tout several benefits of their services over traditional radio:
• Satellite radio offers dozens of commercial-free music channels that play a much more diverse mix of artists and tracks than terrestrial stations. And XM and Sirius feature a wealth of original programming, including musician interviews and live performances.
• Subscribers can choose from dozens of niche stations that play everything from 1980s hair bands to alternative country.
• Satellite radio offers a wide selection of non-music programming - including comedy, news and themed channels. XM even offers the more risque Playboy Channel for a few bucks more each month.
• Subscribers can get continuous reception of stations that are available across the entire nation.
Essentially, the market for satellite radio is among consumers who want to be entertained and informed, those who can't hear certain types of music on their local radio stations and, of course, those who simply love music.
"If you were a big fan of the band Traffic 20 years ago, then you know every song on every album," said Tola Murphy-Baran, senior vice president of marketing for Sirius. "You not only want to hear the fourth and fifth track, but you also maybe want to hear the 10th track. What we're doing is really drilling down for music lovers."
While satellite radio attracts many subscribers lured by commercial-free music, both XM and Sirius also have invested heavily in non-music programming, particularly in the sports arena.
XM has deals in place to air all Major League Baseball games, football games from several college conferences, NASCAR auto races and other sporting events. Sirius recently forked over a fortune for the rights to air National Football League games, and it also features professional hockey and basketball games and some college football matchups, among other sports programming.
The goal, analysts say, is to offer consumers enough value and one-of-a-kind content so it becomes a "can't-live-without" service.
The industry seems to be doing a pretty good job on that front. Consumers who have satellite radio typically don't want to give it up. The "churn" rate - the percentage of people who drop the service - is low, at an average of about 1.3 percent, analysts said.
"Make no mistake about it, if you talk to people who have satellite radio, they don't like it, they love it," analyst Spring said. "They are evangelistic about it. Americans want to be entertained at all times, and $10 for satellite radio gets you a lot of hours of entertainment."
Some analysts disappointed
Despite its growth, the market didn't take off as quickly as some analysts predicted. Bruce Leichtman, a New Hampshire-based satellite industry analyst who years ago researched satellite radio's potential, said he thought the subscriber base would be bigger by now.
He attributes the slower start to an initial lack of advertising when XM and Sirius began offering service several years ago.
"The market did not launch with the marketing dollars it intended to launch with," Leichtman said. "But now they're starting to create that awareness. It's as much advertising as anything in this industry. The attention Sirius got out of signing up Howard Stern, well, you could say it was almost worth every dime."
Much of satellite radio's success, analysts say, will depend on its ability to capture consumers buying new cars.
XM has contracts for its technology to be installed in new cars from General Motors and Honda, which, combined, also own 13 percent of the company. Sirius has deals with BMW, DaimlerChrysler and -Volkswagen. Through these partnerships, XM and Sirius radio are available as options or as standard equipment on higher-priced models.
About half of satellite radio's subscribers come from new car sales, analysts say, and the renewal rate on subscriptions for those customers is 60 percent to 70 percent. Satellite radio also is making a push in the rental car market.But satellite radio faces other challenges.
Some consumers complain of spotty reception if they're in a parking garage, and tall buildings can block the signal.
Also, getting people to pay $10 or $13 for a service they essentially are used to receiving for free can be a tough sell, especially when a host of other technologies - cell phones, video games, DVDs, MP3s - are vying for entertainment dollars.
"There are so many different technologies out there that I think there's a little bit of overkill and a little bit of confusion," said Matt Kleinschmit, vice president at Ipsos-Insight in Chicago.
Still, for people like Gillespie, satellite radio is well worth the cost.
"It cost me $140 for a year, but I've laid out that much money at a record store and walked out with six CDs," he said. "I actually do that frequently. So it's pretty reasonable to pay that much for a whole year's worth of service."
Rocky Mountain News
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