The satellite radio industry consists of Sirius Satellite Radio and XM Satellite Radio and is perhaps one of the most turbulent industries in North America. Even though there were only two companies providing satellite radio services, both companies subsisted through large debt. Hoping to overcome the financial problems, the two companies merged as Sirius XM. This paper will investigate the whole satellite radio industry in a dynamic manner.
The paper is separated into two main sections: Pre-merger and Post-Merger. To begin, brief histories of Sirius and XM are provided. Succeeding from the historic aspect of the companies, problem statements are deciphered since predicaments precede analysis naturally. The problems that both companies faced include huge overhead cost, and destructive lawsuits. External and internal factors are examined in the analysis section since they are essential to resolving problems. While the external analysis is done through the ECC model, the internal analysis focuses on the competitive advantages and the core competencies of both companies. Lastly, with all the analyses, the benefits and the detriments of the merger are given to justify that the merger is in fact a wise strategic decision.
Following the rationalization of the intuition behind the merger, there is an examination of the industry after the merger. Again, the problem statements after the merger are given in order to stimulate the analysis. The issues after the merger include the current inauspicious economic situation, rising substitutes and imitators, and the ongoing financial crises. The analysis subsequent to the merger is more in-depth. The external analysis consists of Porter’s Five Forces, while the internal analysis of Sirius XM is divided into different facets of business. These facets of business include resources and capabilities, target market and market shares, channels of distributions, pricing and promotion strategy, and human resources. Following the analysis are the recommendations. The recommendations for Sirius XM include reduction of overhead costs, differentiation from its competitors, partnership potential, human capital usage, and development of influential niche market. Finally yet importantly, the conclusion wraps up the paper in addition to realizing the existence of limitations.
XM Satellite Radio and Sirius Satellite Radio had a tumultuous time capturing listeners and turning a profit ever since the launch of their first satellites. These two pioneers have been competing for the past several years, and their similar operations and strategies have reinvigorated the idle radio industry. Now merged as Sirius XM Satellite Radio, the recent history of the companies provides examples of pioneering firms hoping to create demand in a new niche market. The dynamic history of the satellite radio industry is rooted in each company’s underlying mission to deliver diverse programming that appeals to different segments of consumers.
This paper provides a close examination of the strategies that brought upon significant changes for XM and Sirius. The analysis begins with an overview of the broader broadcast communications and entertainment industry as well as a summary of each company’s history. This initial examination will lead to discussion regarding the past and current problems XM and Sirius face and how the recent actions of each company strategically address and compensate for these issues. This analysis includes an in-depth examination using Michael Porter’s Five Forces framework as well as other tools discussed in BUS 478 lecture. Drawing inferences from the analysis, recommendations for Sirius XM on future development are given. Additionally, an in-depth discussion of analytical limitations and potential framework failure conclude the paper.
History of XM Satellite Radio
XM Satellite Radio Holdings Inc., based in Washington, is a satellite radio service company that provides music, news, talk, information, entertainment and sports programming for vehicle, home and portable radios nationwide and over the Internet (Funding Universe, 2009). “XM’s founding was prompted by the radio industry’s first major technological change since the popularization of FM radio in the 1970s: the creation of a third broadcast medium, transmitted by satellite, now taking its place alongside AM and FM on the radio dial” (XM Corporate Information, 2001-09). XM has more than 170 digital channels, featuring 69 commercial-free music channels; five commercial music channels, 37 news, talk, and entertainment channels; 38 sports channels; 21 instant traffic and weather channels, and an emergency alert channel. Given the vast number of diversified channels, XM strives to developed strategies targeting more than 240 million registered vehicles and over 110 million households in United States (XM Corporate Information, 2001-09).
History of Sirius Satellite Radio
Sirius Satellite Radio Inc., a satellite radio provider based in New York, incorporated on May 17, 1990. Sirius offers over 130 channels to its subscribers 69 channels of commercial-free music and 65 channels of sports, news, talk, entertainment, traffic, weather, and data content. Sirius’ primary source of income comes from the collection of subscription fees from over 6,024,555 subscribers. Sirius also derives revenue from activation fees, the sale of advertising on its non-music channels, and the direct sale of SIRIUS radios and accessories (Funding Universe, 2009). In 2006, it introduced a service that provides graphic information for road closings, traffic flow and incident data to consumers with in-vehicle navigation systems, as well as a marine weather service for recreational boaters (SIRI.O, 2009).
In February 2007, XM and Sirius agreed to merge in a “tax-free, all-stock merger of equals with a combined enterprise value of about $13 billion, including net debt of about $1.6 billion” (“SIRIUS and XM to Combine in $13 Billion Merger of Equals”, 2007). According to the agreement, XM shareholders would receive 4.6 common shares of SIRIUS for each share of XM they own, and XM and SIRIUS shareholders will each own about 50% of the merged company. Both companies look forward to showing how the merger will substantially benefit the public interest. In April 2007, the U.S. Department of Justice requested additional information regarding the proposed merger of XM and Sirius, a request issued when there are potential antitrust problems (Boles, 2007).
Pre-meger Strategic Issues &Problems
Since the inception of Sirius and XM, both companies have faced a series of challenges and issues that have seriously hindered their respective success and growth. Both companies’ initial strategies were based on the notion that listeners were unhappy with the increasing amount of advertising on typical music radio stations, the limited amount of playlists, and the narrow categories of music. In contrast, both XM and Sirius believed that they could deliver diverse programs that satisfy the whims of all customers without having to advertise (Funding Universe, 2009). The ability to deliver unique content represented each company’s key competitive advantage in the crowded digital media market. However, some analysts have argued that the problem with satellite radio is it appeals to very small groups of people and the market saturates quickly (Kharif, 2008). Furthermore, according to the Radio Advertising Bureau, the radio industry is already reaching 235 million listeners or almost 80% of the U.S. population; thus, it is already a red ocean (Kharif, 2008).
At first glance, a market of 235 million listeners may look attractive. However, the cost of maintenance and manufacturing defects diminish the attraction. Both Sirius and XM perpetually looked to long-term loans and new offering of stock to raise enough funds in order to operate. Just a few months before the launch of its first satellite, XM had already accumulated $1.4 billion in debt obligations (Funding Universe, 2009). As for Sirius, it faced numerous cash shortages. After a recapitalization in 2002, Sirius had total of $426 million outstanding debt (Lowry, 2004).
In addition to the debt problems, both companies faced a number of lawsuits. For example, in late 2003, the National Association of Broadcasters (NAB) managed to place restrictions on satellite broadcasters, thereby forcing them to pay royalties to performers and songwriters. As a result, XM spent approximately $10 million a year on performers and other large amounts to performing rights organizations such as BMI and ASCAP (Funding Universe, 2009). In 2007, both companies were also required to pay performance royalties for sound recordings based on a percentage of adjusted gross revenue (Bruno, 2008).
Despite each company’s inability to turn a profit in their respective histories, XM and Sirius began a series of signing battles, which ultimately added more obligations to their already growing bottom line. For example, in October 2004, Sirius signed talk-show host Howard Stern to a five-year deal worth $500 million. Two weeks later, XM signed an 11-year contract to broadcast games for Major League Baseball for $650 million. According to an analysis by Bear, Stearns & Co., XM needs 1.6 million additional subscribers just to break even over the 11-year term of the MLB deal (Lowry, 2004). In just over a decade, both companies have spent billions on programming; XM spent more than $2 billion putting together a satellite radio service that offered more than 120 channels of music and informational programming, but ultimately, the industry was not yet profitable (Funding Universe, 2009).
Analysis of XM & Sirius Prior to the Merger
ECC: Evolution of Technology
FM and AM radio was first launched in the early 1900s. The basic design of FM and AM radio is based on the creation of radio waves. However, there are several constraints to radio wave technology. First, it is susceptible to the limitations of weather conditions. Second, it gets highly disruptive in some circumstances. For example, the presence of metal structures, elevated buildings, and electronic noises obliterate the presence of radio waves. Lastly, FM and AM radio have low geographic coverage. In order to overcome these aforementioned problems, satellite radio was introduced (Oborny, 2007). Furthermore, the introduction of portable internet devices helped to further evolve radio technologies. Internet radio services became widely available as internet was successfully integrated into a prominent aspect of life. Given the growing demand for internet radio services, it is a wise decision for XM and Sirius to invest in internet radio technology instead of focusing solely on satellite radio as it might become obsolete in the near future.
ECC: Evolution of Market
Radio was once the sole venue for interactive entertainment. However, the emergence of television has severely diminished the demand for radio. Fortunately, the main complimentary asset of radio, automobiles, secures the demand for radio. Nonetheless, satellite radio services fluctuate with economic conditions. While consumers are willing to pay more for radio services in an economic boom, they are less likely to pay for satellite radio services given that there are abundant supplies of free radio services. Additionally, the growth in portable media players such as mp3s, Apple iPods, and even cell phones, decreases the demand for satellite radio services (Vardera, 2005). The growth of substitutes, combined with the recent economic downturn, make the radio communication a less profitable industry as it is.
ECC: Competitive Forces
It is insufficient to examine just the satellite radio industry since it is a minor portion of the whole public broadcasting industry. In the public broadcasting radio industry, there are few competitors with each competitor having its own competitive advantages (Worth, 2005). AM and FM radio are government owned, and they are free and widely available to everyone (Worth, 2005). Internet radio streams stations worldwide and is largely free (Worth, 2005). Satellite radio offers a variety of commercial-free channels with a monthly fee. Given all these advantages of each type of broadcasting, Sirius and XM ought to focus on differentiation strategy rather than simply cost cutting.
Internal Analysis of XM
One of the advantages that XM radio has over its competitors is that federal regulation exerts less force and rules over the contents of its broadcasts (Tavernise, 2004). XM is capable of offering many channels including comedy, news, business, sports and a variety of music genres. However, unlike AM and FM, XM does not offer localized services, such as local weather or road conditions (Maines, 2007). However, XM hopes to brand with AM and FM, the two most well known types of radio communication in order to get recognition from the similarity in the names (Reuters, 2009). In addition to branding with famed radio telecommunications, it has developed strong alliances over the years. XM has collaborated with GM, Clear Channel Communications, DIRECTV, and American Honda. Most of all, XM possesses invaluable human capital such as Howard Stern, a media personality who is known for being “The King of All Media.” He is considered one of the most influential people in the world and ranked the seventh “Most Powerful Celebrity” in the world (“Howard Stern”, n.d).
Internal Analysis of Sirius
Much like XM, Sirius also has the advantage of having very little federal regulation. However, Sirius is much more successful in financial terms as it has technology that significantly reduces costs. For example, Sirius builds only 105 repeaters because its satellites are on orbit. XM, however, had to build approximately 1700 repeaters due to the undesirable position of its satellite (Reuters, 2009). Additionally, Sirius is able to offer 65 commercial-free channels. In fact, one of the channels features a well-known celebrity, Oprah Winfrey. Oprah, signed to a three-year contract, is one of the most influential women in the world. Aside from partnerships with celebrities, Sirius has also collaborated up with car companies such as Daimler Chrysler, Ford, and BMW to install their radio devices onboard (Reuters, 2009).
Benefits of Merger
Given the significant and paralleled problems XM and Sirius faced, there are many reasons why their merger could benefit both sides individually and cohesively. First, the merger eliminates duplicating costs including the redundancies of requiring multiple mainstream programs to stay in business. Second, both companies hold important technological information that synergize with each other, which reduces the cost of technological investment (Banks & Mingarelli, 2008). With all these cost reductions, the merger is also able to bring benefits to consumers by lowering the service fee. Prior to the merger, both companies charged $12.95/month for the basic subscription (Palmer, Hemley and Breyley, 2009). However, after the merger customers are now able to get access to both full services for less than $25.90 ($12.95 x 2). Third, it eliminates all the competition in the satellite radio industry, thereby transforming the industry from a duopoly into a monopoly. Lastly, the merger would allow the company to provide more programming choices such as foreign language broadcasts, children’s programming, minority and underserved population-based programs, and public-safety and homeland security channels (Banks & Mingarelli, 2008).
Detriments of Merger
Despite the aforementioned benefits of the merger, there are also some risks that must be considered, including technical compatibility, customer petition, cannibalism, and Federal Communication Commission (FCC) approval. With the merger, the company is required to develop a radio that is capable of receiving signals from both XM and Sirius’ satellites (Banks & Mingarelli, 2008). This would require more manufacturers to be involved in the technology engineering. In addition to developing the new radio, the customers will be required to buy the new radio set or else the customers will only receive half the services they paid for by using earlier models. In fact, discontented customers started a petition on Facebook called “Anti XM/Sirius merger.” The main reason for this disappointment is that customers have developed brand loyalty. Being competitors for three years, many loyal XM users despise Sirius and vice versa. Therefore, loyal customers view the act of merger as betrayal. Cannibalism is another risk associated with the merger. Some customers use both Sirius and XM and thus the merger will reduce profits since customers originally paying two times will now only need to pay once. Lastly, the merger requires FCC approval, which is especially costly and time-consuming since it grants monopolistic power in the satellite radio industry (Reuters, 2009).
Post-merger Strategic Issues & Problems
Still, the merger came about despite all the aforementioned detriments, and that may result in many issues for the newly named Sirius XM Satellite Radio. The dreadful auto sales during the recession damaged Sirius XM’s revenue heavily (Kharif, 2009).To counteract the decrease in auto sales, Sirius XM decided to offer its services as software for the Apple iPhone. However, the listeners who have downloaded Sirius XM’s iPhone application have been mostly existing subscribers who were able to use the application free of charge (Kharif, 2009).
While Sirius XM faced a decline in subscription from auto sales, the emergence of internet radio services is also cause for concern for Sirius XM. Companies like Pandora are offering customers the ability to stream music into wireless-enabled cars, such as certain Ford models. Moreover, new upstarts that broadcast cheaper mobile content are replicating current Sirius XM programs (Kharif, 2009).
In addition to the growth of imitators, Major League Baseball is offering an iPhone mobile application that stream baseball games live from all 30 teams and offer video clips and score updates for $10 for the entire season (Kharif, 2009). This new mobile phone practice is in turn substituting the traditional outlets of radio broadcasting (Kharif, 2009). According to market research conducted at Barrington Research Associates, Sirius could lose approximately 1 million subscribers this year, ending 2009 with only 18 million overall (Kharif, 2009).
The newly merged company has also retreated to old methods of staying afloat as it recently negotiated $530 million worth of financing from Liberty Media to avoid going into bankruptcy in February 2009 (Mintz, 2009). Despite the ‘bailout,’ Sirius still faces an uphill battle with another $250 million in notes due in May and $228 million in December (Mintz, 2009). Sirius XM’s reliance on performers like Howard Stern will also be jeopardized as his contract runs out in 2010 and he claimed that he might retire afterwards. Amobi calculated that Stern contributes to nearly 2 million of Sirius XM’s 19 million subscribers (Kharif, 2009).
Analysis Subsequent to the Merger
Sirius and XM Satellite Radio were the only two firms in the satellite radio industry. Upon the merger between the two, the industry is presumably monopolized. If Sirius XM were truly a monopoly, it would be reasonable to conclude that Sirius XM has no competitors. However, this is far from the facts. A major reason why the merger into a “monopoly” was approved was that Sirius CEO Mel Karmazin argued that satellite radio is in the same market as conventional AM/FM radio and internet radio, and that satellite radio listeners only account for 3.4 percent of all radio listeners (Broache, 2007). Therefore, traditional radio and internet radio must be considered as competitors of Sirius XM.
Traditional radio has a major advantage over satellite radio: it is readily available and free of charge. Moreover, an FM radio receiver can be purchased for a coffee’s worth of money. Given the low cost on the consumer side, it is not surprising that conventional AM/FM radio accounts for the vast majority of all radio usage. With this in mind, AM and FM broadcastings are aggravating competitors who possess a major portion of the market share.
Internet radio is quickly increasing in popularity in recent years, most likely driven by the booming Internet usage. Aforementioned services like Pandora, Foneshow, Stitcher, and Slacker are expanding quickly, taking up market share in the radio industry. The major advantages of Internet radio include cost-free usage and the diversity in programs available. Hundreds, if not thousands of channels are available 24/7 for the end user, from soft rock to classical, talk shows to news, everything is available. The limitation, however, is immobility, where internet radio requires an internet connection. In essence, the force of competitive rivalry is high.
Threat of New Entrants
If Sirius XM is viewed as a company operating in the satellite radio industry, it is easy to conclude that Sirius XM faces very low threats of new entrants due to the entry barrier of setting up the satellite infrastructure. Prior to the merger, XM and Sirius had four and three satellites in orbit respectively. Currently, cross-compatibility between satellites of the two companies is not possible, but many analysts believe that combining the two satellite networks is inevitable. This upgrade will bring Sirius XM’s satellite fleet to a total of seven; with each satellite worth roughly $300 million, the entire fleet values to approximately $2 billion (“Sirius XM Radio”, n.d). New entrants will be required to launch their own satellites, costing them large sum of money that many would not be willing to invest.
However, it is impractical to include only satellite radio industry competitors in this analysis since it has very little market share in the overall broadcasting industry. In the perspective of the broadcasting industry, Sirius XM faces much higher threats from new entrants. New AM and FM radio stations can utilize pre-existing radio infrastructures, thus largely reducing the high setup costs a start-up satellite radio company will need to spend. In addition, because AM and FM radio stations often have a limited broadcasting area to their local regions, it is difficult to detect new entrants. Internet radio is even easier to setup: all that is required is an internet connection and a network server to broadcast multimedia content to end users. Setup cost is almost zero; in fact, setup is simple enough that tutorials such as “Creating Your Own Internet Radio Station” are available to the public (Creating Your Own Internet Radio Station, n.d.). This is particularly true as computers become increasingly powerful. Increasing numbers of periodic audio programs, including recorded radio programs, talk shows, and recorded lectures, are made available in the form of podcasts, in which end users can download these contents to their electronic device and listen to them later. This is very similar to Sirius XM’s offerings of downloadable content to their satellite radio devices. Once again, the threat of new entrant is high.
Threat of Substitutes
Sirius XM satellite radio offers audio entertainment for the end user; therefore, all audio players can be viewed as substitutes to satellite radio. They are not direct substitutes, as they all lack the ability to receive information directly from satellites. Nonetheless, it cannot be ignored that many consumers enjoy listening to their own selection of music, preloaded into their own music players with songs to their likings. The expanding capabilities of portable music players account for most of the threats of substitutions. Currently, a typical music player can easily hold a day’s worth of music with many currently equipped with an FM radio tuner. In addition, modern versions of popular devices such as the Apple iPod and many mobile phones are equipped with Wi-Fi; this allows users to gain access to internet radio services such as Pandora whenever Wi-Fi is available (Kharif, 2009). Finally, many of these devices also have podcast capabilities, allowing them to download periodic or episodic audio content ahead of time. It is evident that the line between a radio and a music player have blurred, since technological enhancement have pushed the two to converge and be bundled into one device. In this way, portable music players have become an increasingly powerful substitute for Sirius XM. In other words, the bargaining power of substitutes is moderately high.
Bargaining Power of Customers
There are two segments of buyers identified – B2B and B2C. In B2C commerce, the consumers are those who subscribe to the service for the sole purpose of entertainment. For those buyers, the switching cost is low to none because most substitutes are widely available such as terrestrial radio. On the other hand, in the B2B context, a significant amount of Sirius XM’s sales comes from automobile radios. Prior to the merger, it was expected that satellite radio would become a standard component of automobiles (Bussey, 2006). Arguably this is somewhat achieved today, as many higher end versions of numerous car models are starting to have satellite radio included as the standard audio system. However, for those automobiles without the feature built-in, car buyers often have the choice to add this feature as a purchase option. This is where the bargaining power of customers evidently shows to be high: customers have the option to different subscription length, and even the choice whether to subscribe at all. Having a satellite radio reinstalled does not guarantee that the purchaser will subscribe to satellite radio services and utilize that feature. If they decide to subscribe, the consumer can choose a subscription length. What can happen is consumers will subscribe for a short period as their “trial” period, and then discontinue subscription if they find the services to their dissatisfaction. Decline in subscribers in evident in Q1 of 2009, where Sirius XM lost 1.7 million subscribers, gained 1.3 new customers, settling at a net decline of 404,000 subscribers in Q1 2009 (McBride, 2009). Finally, the availability of substitutes gives customers more bargaining power, as Sirius XM knows that customers have a wide variety of options available to them. Combining the bargaining power of both consumers and business users gives united bargaining power that is high.
Bargaining Power of Suppliers
The suppliers to Sirius XM are not limited to but include electronic components of the physical radio. Manufacturers are required to get licenses from both Sirius and XM to make the radio devices, thus the cooperation between the two companies result in high collective bargaining power to press the material cost down. Nevertheless, being responsible for hosting their own radio channels, the suppliers of media content are just as important. Each year, Sirius XM spends millions into acquiring unique content to establish competitive advantage over conventional and internet radio. In 2008, Sirius XM spent $446.6 million on programming and content alone (Kharif, 2009). As previously mentioned, $100 million was paid to radio celebrity Howard Stern and his team, and $60 million paid to Major League Baseball for exclusive broadcasting rights for play-by-play commentaries. Knowing that their content differentiates them from competitors, Sirius XM is therefore willing to spend such huge sums of money to keep these contents exclusive. Other valuable programs included Oprah Winfrey channel, Martha Stewart Living Radio, and Sirius NASCAR Radio, all of which represents Sirius XM’s competitive advantage. Combining the physical asset and human capitals, the collective bargaining power is moderately high.
In order to develop a differentiation strategy, competitors must be analyzed in order to assess the incompetency of the competitors. For example, Apple iPod can be both a competitor and a complimentary asset. While Apple iPhone offers Sirius XM services, it offers other competitors’ services too. Therefore, in terms of network effects, Apple iPhone is considerably a rolling stone to satellite radios. However, Apple iPhone can only replace the music function of the radio aspect thereby allowing Sirius XM to focus on other aspects of radio such as sports or news. Another feature of Apple iPhone is that it offers internet services. Therefore, other internet radio providers may soon be bothersome competitors. In order to prevent future competition, Sirius XM should soon tap into the internet radio market to capture a portion of the growing market shares. Currently, the demand for Apple products is still growing; therefore it is important that the differentiation strategy is used to make Apple products a complimentary asset rather than a competitor.
Another major competitor is FM and AM radio. In Canada, FM and AM, the two conventional approaches of broadcasting are owned by the Canadian Radio Corporation (CRC), a crown corporation. CRC has many subsidiaries located in different regions and provides local services, while the headquarters provides national services (Reuters, 2009). As a crown corporation, the CRC is naturally subsidized by the government and is provided aid and protection when it endures financial difficulties. In other words, CRC is a competitor that cannot be eliminated. Additionally, many people argued that there is an unfair advantage of tax practices for crown corporations. Nonetheless, public media are restricted by many regulations such as content to suit the public.
While FM and AM are owned by the government in Canada, they are mostly owned by private firms in the United States such as Citadel Media. Like Canadian Radio Corporation, Citadel Media has many subsidiaries in various regions in the United States. The company has established many business relations that strengthen their programs and advertisements; some clients include Walt Disney, ABC, and ESPN. However, the company has faced hundreds of complaints due to technological malfunctions. Due to the current economic state, the company is suffering from severe financial problems and a large debt (Reuters, 2009).
Internal Analysis of Sirius XM
Resources and Capabilities
Sirius XM radio differentiates itself from its competitors by providing a variety of programs which are uncensored and some of which are advertisement-free. As previously mentioned, they also ventured into other channels of distributing their programs, such as automobiles, to capture more market share. This allows Sirius XM to focus their competitive advantage of program accumulation rather than allocating resources to manufacturing XM satellite radio hardware. Furthermore, Sirius XM is able to minimize costs by combining programs and human talent after the merging the two companies.
Target Market and Market Shares
With 130 digital channels, Sirius XM radios offer its listeners a variety of programs. The two main groups of customers the company target to are music-lover and sport fans. There are over 70 pure music channels ranging from decades themes to rock music. Many customers enjoy Sirius XMs radio music channels’ because they are commercial-free. Sirius XM satisfies sport fans by offering over 15 sport channels including play-by-play reporting on most teams. They are the exclusive satellite radio provider of MLB and the NHL, and they feature every team and every game throughout each league’s respective seasons (Kharif , 2008). With Sirius XM radios installed in cars, the company also provided programs for family entertainment such as the Disney channel.
With the merger of the two companies, Sirius XM radio eliminated some of the niche programming that made their company unique. Although it helps the company to reduce the costs of production, many fans are dissatisfied with this decision. For example, they have eliminated punk and early hip-hop music channel. Charley Steiner’s “Baseball Beat” was signed off. These changes in programs caused some customers’ dissatisfaction, which has affected Sirius XM radio market share as many listeners decided to unsubscribe after their favorite programs have been cancelled. Rick, a user of Sirius XM radio, posted on The New York Times paper, “If a company were to set out with a plan to lose subscribers they couldn’t have done a better job than what they’ve done to channel 175, especially cancelling Baseball Beat with Charlie Steiner. I too am seriously considering cancelling my subscription, especially now that mlb.com has live games and programming” (Kepner, 2009).
Channels of Distributions
Sirius XM partnered with many automotive manufacturers to install radios to increase awareness of their products and capture a larger audience. With the recent economic downturn, Sirius XM decided to penetrate into the used-car market as well hoping to capture more market share before the automotive industry rebounds. Starting in June 2009, the company has launched “a promotion to offer service to owners of certified pre-owned Volkswagens” (Kepner, 2009). The used-car industry is especially important for Sirius XM as it could potentially offset the loss of revenues resulting from too few subscribers in new car sales.
In addition to the traditional method of listening to Sirius XM programs from a portable or car-installed radio, the company also offers broadcasts of its programs online. Subscribers of Sirius XM radio can listen to their program online free of charge (What is XM, 2009). This has created easy access for its listeners for Sirius XM services. With this feature, customers also have the option to enjoy Sirius XM services without purchasing the XM radio hardware, which is an additional cost for most customers (MarketWatch, 2009).
As Apple iPhones, iPod Touches and smartphones became more popular, Sirius XM launched an application that allows users to streams Sirius XM content on these devices. Subscribers to an Internet-radio package are able to listen to about 120 channels (Gilroy, 2009). However, some of the popular programs such as Howard Stern’s are not available to these users. If users want to enjoy all programs provided by Sirius XM, they must subscribe to the full package.
Pricing and Promotion Strategy:
Sirius XM promotes its subscription by offering one to three months of free service depending on the length of subscription. This strategy helps to secure subscriber for a short period. Aeroplan Miles are also offered to new subscribers, which might be appealing to Aeroplan Members and customers who enjoy travelling. By being a subscriber to Sirius XM, music lovers can also download more than 1.5 million songs from Napster’s catalog with no additional charge (What is XM, 2009). In addition, to attract more subscribers for Apple iPod and iPhone users, the company has offered a 7-day free trial. Free trials can create awareness of Sirius XM product and potentially increase the number of new subscribers (McBride. 2009).
As previously mentioned, Sirius XM has signed top talents such as Howard Stern, Martha Steward and Oprah Winfrey to draw in large numbers of subscribers. These celebrity programs and endorsements have increased the competitiveness of Sirius XM as many customers subscribe to Sirius XM solely to listen to these talk shows and programs. However, these talents come with huge costs. As mentioned, Howard Stern and his team alone cost $100 million for Sirius XM annually (Kharif , 2008).
Sirius XM is at a pivotal fragile stage in the company’s history. Their current position makes their strategy moving forward crucial to their long-term viability in the audio entertainment market. Now that the company has merged management, they must ensure that they maximize all of the possible synergies that are now available to them. This should include an in depth cost cutting analysis as well as a strong marketing focus on the new collaboration of content available due to the merger. Sirius XM must also focus on turning satellite radio from an early growth product to a rapid growth product. Doing so will involve finding a niche market that will eventually influence mass-market appeal. Sirius can do this by forming new strategic partnerships and continuing to focus on those strategies that have been successful in the past.
The merger of XM and Sirius has made way for a number of cost saving opportunities. Sirius XM’s CEO, Mel Karmazin, believes the combined company will realize savings of 400 million dollars within the first year (“Tuning in a Post Merger Strategy”, 2008). While many of these savings opportunities are far more technical than the scope of this report, there are a number of basic opportunities for cost savings. The first of these is in relations to advertising and new subscriber costs. Before the merger Sirius and XM each spent extremely large sums of money in advertising. In the case of Sirius, sales and marketing totaled 12% of their total expenses (Wikiinvest, n.d.). The major benefit of the merger in relation to marketing is that the combined company can focus their marketing dollars on competing with the broader industry rather than each other. By focusing their marketing on competing with one another, Sirius and XM may have been doing a disservice to satellite radio’s ability to compete with other audio entertainment.
The second area where Sirius XM will be able to cut costs is in their programming. Previously, the two companies were competing for the likes of Howard Stern and Oprah Winfrey to join their company; as a combined company, they will now have a much stronger position from a bargaining perspective with their major suppliers of programming. While this cost saving may not be realized until the current contracts expire it is still a very valuable aspect of the merger. Another example of the type of cost saving moves that Sirius XM can now make is the removal of redundant employees. Since the two companies operated in a very similar manner, there are a number of opportunities to retain the most talented employees from each company and release the lesser talented employees performing the same or similar tasks. These examples of cost saving measures that can be taken are by no means exhaustive as the opportunities for removing redundancy between these two companies are nearly limitless. These examples do however give a clear idea of the types of cost savings that the merged company should focus their strategy on.
Collaboration of Content
As individual companies, Sirius and XM spent a great deal of time and money on providing the most popular programming possible. Because of these efforts, the combined company has a very extensive list of extremely popular programming. An important part of their strategy moving forward is how they will combine this programming. The second important factor is the combining of programming bundles. Sirius’ programming is headlined by Howard Stern, Martha Stewart, as well as a full line up of sports programming. XM’s programming includes Oprah Winfrey and a somewhat more limited sports line-up. Sirius XM could also increase their growth by bundling with DirecTV of which Liberty (the company that recently granted them a $530 million loan) holds an ownership interest (Kharif, 2009).
There are a number of benefits that come with combining this programming. To begin, Sirius XM can combine programs that complement one another into bundles, which they are able to charge higher fees for. As an example, it may be advantageous to combine Sirius’ Howard Stern with XM’s Major League Baseball package as it could be argued that both programs appeal to men. As another example, Sirius XM could combine Sirius’ Martha Stewart program with XM’s Oprah & Friends program in a package geared towards woman. The main point is that from a customer’s perspective it is no longer a one or the other situation when it come to their favorite programming but rather they can choose from all of the programming that they may want. Another programming advantage of being merged is that they can simply arrange for each companies original programming to be aired on both networks in order to reach those customers who do not yet have a receiver capable of receiving both signals. This can already be seen in the Oprah programming originally found on XM now also being available on the Sirius network. In addition, Sirius XM can use the internet radio aspect of their business as a way to give customers with old receivers access to the other network’s programming. As mentioned above, internet radio is a fast growing, nearly costless to provide service which provides an easy platform for the initial bundling of content. It is clear that by combining the content originally found on only one of the two networks, Sirius XM can unlock hidden value as well as remove the consumer dilemma related to choosing which companies programming was more appealing to them. By taking these important steps, Sirius XM can become a much stronger business moving forward.
Bridging the Gap to Rapid Growth
Moving forward, Sirius XM will be looking to compete in a much broader industry then has been its focus in the past. The audio entertainment industry is a massive industry with a number of large competitors. As such, an important strategic recommendation is for Sirius XM to focus on their core business, which is providing Satellite radio programming. By focusing on their role as a content provider, Sirius XM can put all of their effort into producing the best quality programming possible. In putting their resources towards programming, Sirius XM will need to shift resources away from other areas like hardware sales. This includes the personal portable radios that Sirius XM sells to compete with mp3 players. As an alternative strategy, Sirius XM should consider building strategic partnerships with firms that specialize in other aspects of their business, for example portable music players. Sirius XM has already begun to move in this direction by creating an application for the iPhone, which allows users to access Sirius XM programming. While this is a great first step, it is important that Sirius XM continue in this direction. An example of this would be if they could have Sirius XM receivers built in to every Apple iPod or any other popular portable music player. In addition, by switching focus towards content, Sirius XM can expand their offering of non-music programming so as to differential themselves from the content already being offered on most people’s mp3 players. In this way they will add value to the both their content as well as the complimentary product (i.e. Ipod). Doing this would further push Sirius XM capable devices in people’s hands which will result in the sale of more subscriptions.
Another very important aspect of Sirius XM’s future is their current partnerships with car manufacturers. These have been extremely important drivers of satellite radio’s growth over the past number of years. The majority of these deals include the installations of an XM or Sirius capable radio in newly manufactured vehicles. Moving forward, it is important for Sirius XM to push for not only the inclusion of the radio but also a subscription (possibly lifetime) in the sale of new cars. By doing this Sirius XM can make their product the standard in the market place, much like the inclusion of an AM/FM radio is standard today. The key to this strategy being successful is the support of the car manufacturers, which can best be achieved through sharing the revenue that is generated from these sales. While in the short run this may have a negative impact on profits, if Sirius XM can become the new standard in in-car audio entertainment it will be more than worth the investment.
Influential Niche Market
From a theoretical perspective, it appears that Sirius XM is at a very important time in any new technology’s growth. This is the period between the early growth stage and the rapid growth stage. During this time, firms have a tendency to do what is called “falling into the chasm” which results in the failure of the new technology to move into the rapid growth stage. Before the recent economic downturn, satellite radio as a technology looked poised to cross the chasm with little trouble. Over the past 2 years however, much has changed. As a result, Sirius XM is faced with the possibility of falling into the chasm with the other side just out of reach.
To combat this, Sirius XM can apply a simple model to their current position. The bowling alley analogy is the idea that a firm must focus their attention on an influential niche market that will then cause a chain reaction until a product reaches the rapid growth or “tornado” stage. In the case of Sirius XM, there are a number of these niche markets that they have attempted to reach but have just fallen short of pushing satellite radio to the next level. Moving forward, Sirius XM should consider using some of the possible strategic partnerships mentioned above to appeal to specific technology savvy people who tend to have a large influence on the broader market. The concept of a partnership with Apple would have the potential to be a tremendous success in reaching an influential group. If that specific partnership was not a possibility Sirius XM could look into a partnership with Microsoft to include Sirius XM receivers in Microsoft Zune music players or even including an application within gaming consoles that allows players to listen to satellite radio while playing their favorite Xbox or PlayStation game. The possibilities are endless but the important thing is that Sirius XM finds a way to reach the influential segments of the market to create the mass appeal that they are so close to achieving.
Sirius XM is currently in an extremely vulnerable state, however as shown above, they are also dripping with potential now that they have complete control over the satellite radio industry. Moving forward it is important that they survive this difficult economic time and then take steps towards their future success. To survive, it is clear that they must take advantage of the significant cost saving opportunities available to them in a timely manner. While moving towards this, Sirius XM must carefully analyze how to best combine each of the individual companies programming in a way that will maximize value for customers. Once all aspects of the merger have been completed and the company is operating in an organized and unified manner, it is important that they find ways to advance their technology over the chasm and into the rapid growth stage. To do this they must focus on their core business and find strategic partnerships. These partnerships will help get Sirius XM devices in the hand of potential customers and develop Sirius XM as the standard in non-mp3 audio entertainment. By following these recommendations, Sirius XM can insure their success for years to come.
Conclusion & Limitations of Analysis
The limited successes of XM and Sirius as corporate rivals and the unrealized success of Sirius XM as a single entity have been a cause of concern over the profitability of the satellite radio industry. Given the costly internal resources and dynamic nature of the external environment, it is evident that XM and Sirius have ventured into an unforgiving market where penetration and retention of listeners has been more difficult than first perceived. With a mission to deliver diverse programming that appeals to a variety of listeners and is advertisement free, XM and Sirius consumed tremendous amounts of debt in signing a variety of artists and talent to attract customers. XM and Sirius’ strategies were not the most effective in integrating and capitalizing on its various tangible, intangible and human resources, including its various technologies, partnerships, brand reputation, and diversity of programming talent.
An analysis of the companies through a Porter’s Five Forces lens provided various insights into the broader broadcast and satellite radio industries. These include a low threat of new entrants due to high set up costs of satellite infrastructure, a large threat of substitutes from other industries, and an overreaching importance of collaboration with competitors and suppliers to expand the current distribution network.
However, this framework is best applicable for analyzing companies in a more competitive and defined environment; thus, given the monopolistic nature of the satellite radio industry following the merger, our analysis includes many presumptions that might not be completely accurate. In addition, the sources utilized in our analysis were compiled mainly through various secondary sources readily available to the public and without tremendous insight from past and current management.
All told, Sirius XM’ business model and strategy has caused the company to become a channel and program aggregator, which has sustained as its primary method of creating and conveying value to customers. Sirius XM is at a pivotal and fragile stage in its history and with the lack of success XM and Sirius have achieved as separate companies, it must ensure that it maximizes all of the possible synergies that are now available to them as a single company in a single industry.
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