A Comprehensive Study Of The Satellite Radio Industry

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TABLE OF CONTENTSHOW SATELLITE RADIO WORKS 5How XM's System Works 6How Sirius' System Works 7TERRESTRIAL RADIO 8SIRIUS' SATELLITE RADIO CORPORATION 12History 12Demographics 14Product Offering 15OEM Vehicle Manufacturers Partners 16Hardware Partners 17Financials 17XM SATELLITE RADIO CORPORATION 18History 18XM Satellite Radio Holdings, Inc. 19Demographics 20Promotions 20OEM Vehicle Partners 21Hardware Partners 22Financials 22SIRIUS AND XM; A COMPARISON 23RECOMMENDATIONS 29INTRODUCTION Would people be willing to pay $12.50/month for commercial free radio beamed right to their car or home. Well two companies and many big investors are betting about $3 billion dollars that people are willing to do just that. In 1997, the Federal Communication Commission (FCC) granted a portion of the S-band spectrum for satellite radio and two companies purchased use of these bands and started the only two companies competing in the satellite radio business today, namely Sirius and XM. Analysts like William Kidd of CE Unterberg Towpin, predict satellite radio will generate about $10 billion a year in revenues by 2007 (McClean, 2012 ). However, to date neither of these companies has earned a dime.

According to industry analyst though, "its not whether satellite radio will take off-rather it's a matter of how fast." (Helyar, 2004). Despite lofty predictions, satellite radio has some big issues to overcome before it becomes a serious threat to the $19.6 billion per year terrestrial radio industry. The article that appeared in Fortune entitled "Radio's Stern Challenge" by John Helyar discusses Sirius' marketing strategy to not only take market share from the entrenched and free terrestrial radio industry but also to beat its only competitor, XM. The Fortune article presents how a fat and lazy radio industry has failed to react to an eroding listening base and an increasing number of competing technologies. Issues like lack of attention to programming, no on-air talent, and an increase of 166% in the time devoted to commercials have driven listeners away from radio. Teens aged 12-17 spend 11% less time listening to radio compared to five years ago and adults 18-24 spend 13% less time compared to five years ago (Helyar, 2004). The article further discusses that terrestrial radio has much to fear from competing technologies like satellite radio, streaming digital radio on the Internet, and Apple's iPod

What terrestrial radio does have in its favor is that it's free compared to any of the current competing technologies like satellite radio. However, satellite radio is banking on a commercial free format to steal listeners away from terrestrial radio. Sirius offers 65 commercial free channels of music and 55 news, sports and talk stations. And the one thing that satellite has over its less lofty competitor is that you can't loose the signal as you drive across America. The two major competitors for the satellite radio listeners are Sirius and XM. Sirius' strategy to beat XM centers around attracting big on-air talent like Howard Stern who Sirius has agreed to pay $500-million dollars over five years.

In addition, Sirius has locked up deals with the NFL for $220 million dollars to air every NFL game on Sirius's satellite radio stations. Sirius is spending big money in order to catch up with its only competitor XM. XM was the first to enter the market and has struck deals with General Motors and Honda to install their receiver in all of its new automobiles. This represents about 50% of its new subscriber base. XM spends about $57 for each of its subscribers compared to the $227 that Sirius spends. However, the fortune article concludes by stating that Sirius' threat may not be terrestrial radio or XM, rather the growing number of new technologies poised to cash in like Apple's iPod and the digital streaming radio. To better understand the assertions made in this Fortune article one must first understand the general trends in the current terrestrial radio technology. Then one must understand how satellite radio technology works in general and how XM and Sirius use this technology within each of their respective companies to gain the competitive edge over each other.

In addition, the history, company structure, financing, and strategy of both XM and Sirius are presented in order to further understand the two companies. And finally a comparison between XM and Sirius is made so that the reader can understand how the two companies are approaching the problem of starting a satellite radio company. HOW SATELLITE RADIO WORKSMost of us have traveled too far in our cars when listening to the radio, to find that our favorite station turns to static and we can no longer listen to it. This is because conventional radio signals can only travel 30 to 40 miles from their source (Bonsor, 2004). Fortunately, similar to television before it, since radio is now available by satellite, there is a solution to this problem.

Satellite radio can launch its signal greater than 22,000 miles with extreme clarity and often little or no commercials to interfere with your listening program (Bonsor, 2004). Basically, satellite radio, also known as digital radio, offers uninterrupted, near CD-quality music transferred to your radio from space. How satellite radio actually works is simple on its surface. According to Silverstein (2004), satellite radio providers "take a music, news, or talk station, beam the signal up to a satellite, and overcome the limitations of ground-based transmitters whose signals generally drop off as distance increases. Then make sure the programming is more appealing than traditional radio stations and cut down on the number of commercials in exchange for a monthly subscription fee." However, it is slightly more complicated than this. It took numerous years to develop the cutting-edge technology to make the satellite radio systems used by Sirius Satellite Radio and XM Satellite Radio actually work.

Sirius and XM each take somewhat different approaches with their systems, although the end result from a listener's perspective is the same: 100 channels of music, news, sports, and other programs available virtually anywhere in the continental United States. How XM's System WorksXM Radio uses two Boeing HS 702 satellites, appropriately named "Rock" and "Roll", placed in parallel geostationary orbit, one at 85 degrees west longitude and the other at 115 degrees west longitude. Geostationary Earth orbit (GEO) is about 22,223 miles above Earth, and is the type of orbit most commonly used for communications satellites. XM Radio's ground station transmits a signal to these two GEO satellites, which bounce the signals back down to radio receivers on the ground. The radio receivers are programmed to receive and unscramble the digital data signal, which includes the digital audio, the song title, the artist, and the genre of music.

All of which are displayed on the radio (Bonsor, 2004). Since GEO satellites are above the equator, the terminals on the ground must have a good view of the sky to receive signals from them. This posed a challenge for XM, since obstacles on the ground, such as buildings or tall trees, can block listeners traveling in their cars from receiving the GEO satellites' signals. Their solution was to supplement their system with a network of repeaters, ground transmitters consisting of antennas on buildings and other sites that receive satellite signals from an optimally placed antenna and retransmit them (Silverstein, 2004). These repeaters are primarily located in urban areas where the loss of the satellite signal most commonly occurs. Each XM receiver contains a proprietary chipset, consisting of two custom integrated circuits designed by STMicroelectronics and uses a small, car-phone-sized antenna to receive the XM signal (Bonsor, 2004).

Each of these XM receivers is equipped to receive signals from both of the Boeing satellites as well as from a repeater simultaneously. Provided one of these sources is available, the radio will play with no interruptions. In the event a signal is briefly unavailable, the receivers also have buffers that store programming for several seconds to ensure continuing programming (Silverstein, 2004).How Sirius' System WorksUnlike XM, Sirius does not use GEO satellites. Instead, Sirius uses three Loral FS1300 satellites in unique elliptical orbits in an effort to avoid the problems presented by GEO satellites (Silverstein, 2004). The elliptical path of these satellites ensures that each satellite spends approximately 16 hours per day over the continental United States, with at least one satellite above the US at all times (Bonsor, 2004).

Furthermore, the orbits allow the satellites to appear higher in the sky than XM's satellites, reducing the potential for a listener to be out of range of the satellite signal, thereby allowing Sirius to have a fewer number of repeaters (Silverstein, 2004). Similar to XM, the Sirius system involves programs that are beamed to one of the three Sirius satellites, which then transmits the signal to the ground, where the radio receivers pick up one of the channels within the signal (Bonsor, 2004). The Sirius receiver includes an antenna module and a receiver module. The antenna module picks up signals from the satellites or the ground repeaters, amplifies the signal, and filters out any interference. The receiver module, which consists of eight chips, then picks up the signal. This chipset converts the signals from 2.3 gigahertz (GHz) to a lower intermediate frequency.

Sirius also offers an adapter that enables traditional car radios to receive satellite signals (Bonsor, 2004).TERRESTRIAL RADIOTraditional terrestrial radio broadcasting has been around since 1919. Today two of the top broadcasting companies are Clear Channel Communications, Inc. and Infinity Broadcasting Company. Clear Channel's history begins in 1972 with the birth of the San Antonio Broadcasting Company. Three years later, the first "Clear Channel" radio station, WOAI-AM, was acquired - it had its own nationwide frequency. In the late 1980s, the Company entered the television business and acquired half a dozen television stations.

In 1994 it became listed as Clear Channel Communications, Inc Common Stock and owned 43 radio stations and 16 television stations in 32 markets. Today, the company is headed by Lowry Mays (Chairman of the Board), Mark Mays (President and Chief Executive Officer), and Randall Mays (Executive Vice President and Chief Financial Officer). Randall Mays has either owned or programmed more than 1,376 radio stations throughout his career. Infinity Broadcasting is a division of Viacom International, Inc. It currently owns more than 185 radio stations, most of which are in the U. S.'s top 50 markets. The stations range from news to FM talk, modern rock to oldies, and classic rock to hip-hop and rap. Infinity allows owns 29 of the nation's top sports franchises, such as the New York Yankees, New York Mets, Dallas Cowboys, New York Giants, and the Chicago Bears.

"Further enhancing Infinity's programming exposure is the company's long-standing alliance with Westwood One, which provides stations with news, sports, weather, music, talk and entertainment programming and content, and presents an unparalleled menu of events such as the Olympic Games, NFL football, NCAA basketball, the Grammy Awards, and the Academy of Country Music Awards" (Infinity).The major governmental agency regulating these two broadcasting companies, as well as all the others, is the Federal Communications Commission (FCC). Since 1934, the Federal Communications Act has given the FCC the power to regulate the subject matter broadcasts and administer penalties for noncompliance with those regulations. The FCC is responsible for censoring the media available to citizens. It ensures that foul language and inappropriate and offensive content is not available to vulnerable audiences, such as children. The Commission has the power to issues fines to or revoke the programming licenses of violators who fail to comply with the regulations. One big-name program currently facing persecution for its content is the Howard Stern Show which is broadcast through Clear Channel Communications. In April 2004 Clear Channel Communications was fined a proposed $495,000, for indecent remarks made on the Howard Stern show.

This breaks down to $27,500 for each of the eighteen alleged indecency violations; the maximum allowable fine. "The Commission fined Clear Channel at the maximum amount allowed by law because of Clear Channel's history of airing indecent programming" (Dietz, 2004). When the Howard Stern show's producers and creators refused to make assurances that the content and language would be cleaned up, Clear Channel terminated the show. Stern is currently making plans to air his controversial show on Sirius Satellite Radio. Stern can now revel in his escape from the FCC's regulations since satellite radio does not fall under the FCC jurisdiction. Not only will Sternbe able to say whatever he wants, he also plans to launch an assault on all his terrestrial radio enemies, namely Clear Channel and Infinity. Sirius can't wait for the show's January 2006 debut to boost subscriber growth and really get the system on an aggressively competitive level with traditional terrestrial radio. The satellite stations aren't too worried about the competition, because they know they've at least won the battle over commercials.

Although their talk, sports and news station do have commercials, both Sirius's and XM's music stations are aired commercial-free. Satellite radio's costs, such as salaries and technology and equipment are funded by subscription fees -- $12.95 a month for Sirius and $9.99 a month for XM - plus satellite radio and antenna purchases, and advertising spots on the other stations. Terrestrial radio has a more difficult job when it comes to funding and therefore has increased commercial play time. Unlike most other media channels, radio is free to listeners, so there are no subscription fees to pay the bills. Add rising costs to that, and the only solution is to increase commercial-time, while trying to cut costs in other areas. Many times, stations will replay pre-recorded shows or pre-recorded contest call-in winners. This saves at least a day's salary for each program deejay and attracts more listeners because there appear to be more contest winners than there really are. The remaining time is devoted to music and commercials. Because of the increase in commercial time, it is not unusual for stations to play up to 15 or 20 minutes of ads per hour. Among advertiser's choicess, radio is seen as one of the best mediums for promoting a product or service.

A 2012 study by Arbitron, Inc., an international media and marketing research firm found that "radio leads in the criterion advertisers consider to be most important for selecting a medium: the ability to reach a specific consumer" (McWhorter, 2012 ). Based on the content of the program being aired, it is reasonably simple to determine the age, gender, political party, and/or preferences of the majority of the listening audience. This allows advertisers to specifically tailor commercials for their target audiences. Target marketing and the lack of visual requirements for radio spots also mean that air-time costs a lot less than other mediums for advertising, such as television. Cost efficiency is the number two reason many advertising firms choose radio, according to the same study.

"The economic efficiencies of radio advertising enable you [the advertiser] to..sustain a longer on-air presence and maintain top-of-mind awareness with you target audience" (Vasey, 2004). Because of the reduced advertising costs, more commercials are made and more time must be devoted to the increased number of commercials and the increased number of re-aired commercials. Until terrestrial radio stations can come up with other ways to fund programs, they have no other choice than to play commercialsTo further combat an eroding listener base terrestrial radio is developing a means to broadcast a digital signal. More than 140 stations across the country are developing and testing new digital terrestrial systems. Digital signals will be sent on the same frequencies as the AM and FM stations.

IBiquity Digital Corp is the leading the development and testing of the new digital radio technology. iBiquity was born in August 2000 as the result of a merger between Lucent Digital Radio and USA Digital Radio - the leading AM and FM digital broadcasting technology developers. IBiquity's goal is to commercialize digital radio and provide audiences with "CD-like sound and wireless data services..and to assist broadcasters in making the transition to digital in a cost-effective manner" (iBiquity. com). The actual digital radio receivers were first introduced to the market early this year. Prices run about $200 and up for a digital car radio, but are expected to start dropping within a few months. With the required digital radio, listeners will receiver information about a song's title and artist, as well as stock updates, news, weather, and local traffic. Although terrestrial radio does seem to be reacting to the competition from satellite radio and other technologies like the iPod, it still is number one in the medium. Commercial play is getting longer due to the fact that terrestrial radio costs are going up and there does seem to be a migration of on air talent like Howerd stern, but terrestrial is the entrenched technology with more then $19.6 billion dollars in annual revenue compared to satellite radio's collective 2003 revenue of $111.6 million dollars.

Satellite radio will have a long way to go before it seriously threatens terrestrial radio. SIRIUS' SATELLITE RADIO CORPORATIONHistoryLong before Sirius was the Sirius Satellite Radio Company, it was known as CD Radio Inc, which started in 1990. Robert Briskman, a former NASA engineer and former chief at GEOstar, designed the core technology for satellite radio. Briskman and another former GEOstar employee started Satellite CD Radio Inc. However, the company really didn't take-off until David Margolese joined the company as the first CEO (McClean Fortune Magazine Jan 22 2012 ).David Margolese has a long history in the telecommunications industry. David was a Canadian who dropped out of college in 1978 to start a Vancouver based paging company. Margolese purchased licenses for Canadian cellular phone rights and joined forces with Ted Rogers, a well know corporate raider.

Together they started what is now known as Roger's Wireless, Canadian's largest cellular phone company. During the late 80's, Margolese sold his stake in Roger's Wireless to become a venture capitalist. In 1991, Margolese joined CD Radio Inc as their CEO and president. In 1994 CD Radio Inc changed its name to Sirius Satellite Radio. The early intentions of the company were to offer the U. S market a subscription based satellite radio system. This system would offer 30 commercial free music channels at near CD quality and 20 other channels with all news, sports and talk (LexisNexis).

In 1994 Margolese predicted the company would be operational by 1997 and would cost around $500 million dollars (McClean Fortune Magazine Jan 22 2012 ). In retrospect Margolese was not even close to accurately predicting the amount of money Sirius has spent so far. In 1997, the FCC auctioned off the rights to a portion of the S band (satellite) frequency. Sirius won the auction for one of the two licenses, for $83.4 million with the second license going to what now is called XM Radio (Corrigan, 1997). A month after sealing the deal for the S band licenses, Sirius was working with Space Systems/ Loral to design four state of the art digital audio radio service (DARS) satellites for launch in 2000.

Three satellites would orbit the earth and be the backbone of the satellite radio industry for Sirius, while the fourth would sit on the ground and be a spare if needed (Krebs, 2004). Sirius joined up with Agere Systems, Inc a world leader in semiconductors and networking, to design and produce its chips for all its receivers. Just this year Sirius and Agere released its second-generation chips, which made "plug and play" receivers possible (Electronic News, 2003).It then set up its corporate headquarters in Midtown Manhattan in a 37-story building designed by Margolese. The ultramodern headquarters cost about $38 million to build and presents sate of the art studios and broadcasting equipment. Sirius does a majority of its broadcasting from this location, but they also have smaller broadcast studios in Los Angeles CA, Memphis TN, Nashville TN, New Orleans LA, Houston TX and Daytona FL this as they say, brings "SIRIUS listeners in touch with the centers of music, entertainment and information across America" (Sirius, comp. info). This assortment of locations and diversity allows for some 120 channels, 65 channels of which are 100% commercial free music and 55 channels which are all talk, sports and news.

With major musical, talk and sports talents such as Howard Stern, Eminem, Lance Armstrong, and Bam Margera (Sirius). With multi studios and numerous well-known talents, has allowed in just a few years satellite radio has launched a multi-billion dollar a year industry with numerous way for future growth (Sirius, comp. info). DemographicsSirius is targeting the "more than 200 million people that still tune in to AM/FM radio" (helyar, 2004). In the past few years' studies have shown that "across all age groups, weekly listening has fallen 8% (Haylar, 2004). While XM has over 2 million subscribers Sirius is behind the ball, with only 800,000 subscribers. They have invested heavily in bringing Howard Stern to Sirius because of his 12 million devoted followers, in hopes they will become a member.

However, disc jockey talent like Howard Stern is not enough to allow Sirius to become a serious player in satellite radio. Sirius' main goal is to expand subscriber base since this is the primary source of revenue for the company. As of Sept 30, 2004, Sirius had 662,289 subscribers that pay an average of $11.15/month for commercial free radio (Sirius Quarterly Report Sept 30, 2004). Over the past five quarters Sirius has added about 500,000 new subscribers with an average deactivation rate or churn rate of 2%. For the prior two quarters ending Sept 30 2004, the churn rate was 1.2% and 1.5% respectively suggesting a healthy sign for the company. On November 24, 2004 Sirius announced it had signed up 800,000 subscribers (Clendenning, American Intelligence Wire Novemer 25, 2004). Bob Peck of Bear Stearns states that Sirius is poised to achieve one million subscribers by the end of 2004.

Product OfferingSirius offers 99 individual 100% commercial free music channels. The music section is broken into numerous genres such as Pop, Rock, Country, Hip-Hop, R&B/Urban, Electronic/Dance, Jazz/Standards, Classical and Latin & World. Each of these groups is then broken down into various channels ranging from 3 to 17 channels. They also offer 8 dedicated sports channels were you could tune in anytime to hear the latest scores or up to the minute sports news. The major partnerships within sports are the National Football League (NFL), National Hockey League (NHL), and also college sports with all the big conferences such as PAC 10, SEC, Big Ten, Big 12 and Big East. They additionally offer 14 channels of worldwide news coverage.

With service from many of the biggest well respected names in the world such as CNBC, Bloomberg Radio, CNN, Fox News Channel, NPR Now and NPR Talk, PRI Public Radio World, Weather Channel Radio, C-SPAN Radio, BBC World Service and World Radio Network. Sirius offer 22 channels for talk and entertainment with comedy to politics by way of partnerships with, Radio Disney, Our Time, Wisdom Radio, Radio Classics, Court TV, Discovery Channel Radio, E! Entertainment Radio, WSM Entertainment, Trucking Network, ABC News & Talk, SIRIUS Patriot, SIRIUS Right, SIRIUS Left, Air America Radio, Maxim Radio, Cracked Up Comedy, Raw Dog, SIRIUS Talk Central, SIRIUS OutQ, EWTN Global Catholic Network, The Word Network, Radio Catolica, Mundial, Hispanic Talk and BBC Mundo. That gives Sirius with 143 channels that of a wide spectrum, this gives them a lot of different ways to target their markets. OEM Vehicle Manufacturers PartnersSirius has made strategic alliances with automobile manufacturers to install their satellite radio receivers in new cars. The biggest relationship Sirius is banking on is with Diamler Chrysler and Ford. Diamler Chrysler has agreed to install Sirius tuners in 500,000 automobiles which represents about 12% of its annual production. Other manufacturers have also struck deals with Sirius.

BMW of North America will make Sirius Satellite radios available as a factory installed option on the 2006 model year BMW 3 series for about $595. This will come with a one-year subscription to Sirius Satellite Radio. Mercedes-Benz will design its 2012 SKL350 with a fully integrated satellite radio which will be available as a dealer-installed option. The price will be about $679 and will include a one-year subscription to Sirius Radio. Volvo, Chrysler, DiamlerChrysler, Ford, Dodge, and Audi will all offer some of its models with Sirius radios as options. However, one the most strategic moves Sirius has made lately was an alliance with Hertz Rental car. Hertz will offer Sirius' satellite radio in 53 of its major city locations.

This will have a two-fold effect for Sirius. First it will boost its subscribers through the Hertz agreement. But secondly, it will give drivers of Hertz rental cars an opportunity to "try out" Sirius' satellite radio with out committing to a purchase. Hertz is the largest and best-known rental car company in the world. This gives Sirius serious exposure and publicity. Hardware PartnersSirius does not manufacture its own hardware. Rather, Sirius has made strategic alliances with many different hardware manufacturers.

Sirius has partnered with companies such as Delphi, the worlds largest producer of audio systems for automobiles, Clarion, Audiovox, JVC, Kenwood, Sanyo, and Kenwood. Each of these companies has either marketing or manufacturing expertise that Sirius requires. This will allow them to have access at the millions of new car and truck buyers each year. Also Sirius has what they call "pl...

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