The cardiac kids at Sirius XM are at it again. After surviving years of multi-million dollar losses, a high-wire, company-saving merger with XM, and the downturn in auto sales, the company reported a strong first quarter in May. With auto sales recovering at the beginning of the year, Sirius was able to report revenue and subscriber increases and later revised its estimate of subscriber additions for the year to approximately 750,000. But now the ultimate test, the switch to XM, is on.
The subscriber increase, which pushed the total close to 19M, reflected a net gain of 171,441 vs. a decline of 404,422 in the year-ago period. The numbers looked good, but they obscured the challenges arising from an increasingly competitive radio-listening landscape, the increasing inclination of car makers to make satellite radio an option rather than standard equipment and the impending termination of the Sirius half of the combined Sirius XM satellite network. All of these negatives were either swept from the table by the positive earnings report or were not mentioned at all on the earnings conference call.
(In the interest of full disclosure allow me to acknowledge that I am a subscriber to both XM and Sirius services and enjoy the content, as do the members of my family. Each member of my family has his or her favorite stations and it is nice to know that those stations are available anywhere in the U.S.)
Strategy Analytics consumer surveys in the U.S. show satellite radio lagging well behind traditional AM/FM as a must have in the car. While AM/FM is described as a must have by 88% of respondents, satellite radio is regarded as a must have by only 14%. Internet radio lags even further behind at 5% - but that is changing. Interestingly, U.K. survey respondents show a higher level of interest in digital radio (DAB or DMB), with 22% describing it as a must have in the car.
The lack of enthusiasm for satellite radio reflected in the survey results is just one of several negative indicators. Another such indicator is the fact that the aftermarket for satellite radio products is almost non-existent. Just as car makers have been inclined to make satellite radio optional, makers of aftermarket head units have also tended to introduce systems that are “satellite ready” vs. offering one or the other system built in.
And the market for portable devices enabled for satellite radio has been limited thus far. Sirius XM is line extending into the iPhone app marketplace, but here, again, the company will run up against music services and Internet radio. The music services leverage more liberal licensing models for storing and managing music and Internet radio will benefit from the increasing proliferation of programming guides such as Stitcher or RadioTime to access interesting and relevant local content including podcasts. Of course, these services also benefit greatly from having a two-way link.
Millions of consumers are turning to music services and Internet radio. Car and handset makers are developing ways to integrate these music services (ie. Slacker, Pandora) and Internet radio (ie. IHeartRadio) into their platforms – while carriers are scrambling to introduce tiered data programs to shield themselves from the burgeoning traffic.
While satellite radio is increasingly optional either from the factory or in the aftermarket, HD Radio is increasingly standard equipment on cars. But the real killer for Sirius is unfolding in recent meetings with OEMs. Sirius has told its clients, which include BMW, Mercedes, Chrysler, Ford, Kia, Land Rover, Jaguar and many others, that they must switch to XM by 2016. For the car makers that helped make Sirius XM what it is today, there are no special subsidies, no silver bullet hardware fix or retrofit. There is simply a notification that they must switch from Sirius to XM by 2016.
The bottom line, of course, is that the two satellite systems – one based on a satellite in geosynchronous orbit and one on satellites in geostationary orbits and using similar frequencies – require different receivers and antennas. In spite of a legal requirement in the merger agreement that the companies find a solution for interoperability, nothing beyond a combination of the two incompatible receivers and antennas was ever introduced in the market.
The quiet announcement of the switch to XM, though long anticipated, is surprising for a number of reasons:
1. The companies must have known this day would come when they originally merged, yet it was never acknowledged until recently that one of the satellite networks would have to be sacrificed.
2. Given the fact that subscriber growth has reached a plateau it is clear that Sirius XM can ill afford to lose half its subscribers. And winning new subscribers in the current competitive environment will be a challenge especially as auto sales – the source of the majority of new subscribers – continue to move sideways, failing to provide the engine satellite radio so desperately needs.
3. Car makers – including several premium marks - are incensed that Sirius is making this unilateral change with little or nothing in the way of guidelines or even a public information campaign strategy. Sirius has made no public statement yet and company representatives have failed to respond to repeated requests for comment.
4. There is also some irony in the fact that Sirius spent many years denegrating XM's solution but in the end has chosen to consolidate on the XM platform.
Long term, the good news is that the company selected to preserve XM, the more robust of the two solutions. XM was first to market with data solutions for weather (XM Weather in August 2003), traffic (XM NavTraffic on 2005 Acura RL and XM NavWeather on the Acura TL. Sirius made up some ground with the launch of Travel Link by Ford, but XM’s platform, including its terrestrial repeater network, is better suited to providing a wider range of content and services to drivers.
If Sirius can keep car makers on board with a vision of low-cost, nationwide content delivery – and the higher ARPU implied therein – it may emerge profitably and competitively vis-à-vis smartphone and digital radio-based solutions. But the company is changing gears just as these new solutions are gaining momentum and at a time when car makers have little patience for another high-wire act.
Further Insight: CES 2010: The Arrival of Converged Automotive Multimedia Products - John Canali - http://bit.ly/9gq4yo
Automotive Bluetooth: Profile Strategy Key to Infotainment Success - Mark Fitzgerald - http://bit.ly/9qEXbU
Internet Radio: Ready for Prime Time - Mark Fitzgerald - http://bit.ly/ZBXzd
Internet Radio to Vie with Music Services for Automotive Dominance - Lanctot - blog - http://bit.ly/9xm6qR
WorldDMB Car Manufacturers Workshop - Munich - July 7 - Arrange meeting with Strategy Analytics - http://bit.ly/aUcqgm