Introduction
The development of Satellite Radio began in 1991 when a venture capitalist, David Margolese invested $1 million in Robert Briskman’s company. This company had designed the unified S Band. This technology was the core of the future satellite radio. Briskman had a great idea, but lacked the funds to implement it. Margolese fell in love with the idea and set out to commercialize it.
The idea was to provide radio services nation-wide and of high sound quality. This was in contrast to the existing analogue radio that existed locally and faded once one moved out of the locality. This new radio service required the company to put satellites into space to broadcast the signal. Before putting the satellites into space, the company had to purchase a license from the Federal Communication Commission (FCC). This license, together with the cost of satellite installation was projected to be quite high. However, Margolese believed in the idea and was willing to put in the required capital. He projected that this new radio would be operational latest by 1997.
Apart from the cost, there was the question of how to convince potential customers to purchase new radios that could support the new technology. This would be difficult since almost everyone already had a radio at home and in his or her car. Secondly, cable TV companies also provided some form of satellite radio at no cost to their subscribers. It would be challenging to convince people to subscribe to this new radio when they could get the old form free. However, the company did market research and found that customers were willing to pay for superior quality radio.
The company also faced opposition from Association of National Broadcasters, which predicted that this new technology might lead to the downfall of local AM, and FM radio stations. This would lead to loss of jobs and local content that residents relied on. XM radio was the second company licensed to provide satellite radio services.
External Environment
The grand plans for satellite radio faced stiff competition from traditional radio. This radio was already established and relatively free. No monthly subscription was required as opposed to Satellite radio, which required users to pay. In order to counter this hurdle, both XM radio and Margolese’s company –now called Sirus Radio- entered into deals with car manufactures to install their satellite radios during manufacturing. This would force the car buyer to subscribe to satellite radio too.
The second threat was internet radio. This is also free as long as the customer has an active internet connection. Unlike local AM and FM, Internet radio had the advantage of ubiquity. Users could access it anywhere in the world. Satellite radio also promised to provide service to the whole country, thus creating competition.
The third threat was cable radio that came with cable television. Most Americans already subscribed to cable television. Most cable television companies provided cable radio free with the package. Those that charged did not put a high price to the radio. It was almost free too.
Sirus Radio would compete with XM radio for satellite radio subscribers. There was a difference of $2.96 in their subscription fees, Sirus Radio charging the higher fee. Sirus justified this fee with the fact that it aired zero commercials on the music channels. XM radio aired a few commercials and planned to earn money from these commercials rather than charge a high subscription fee. The formats for both radio companies were almost similar, differing in very few respects. Sirus had three motor vehicle companies and XM had two motor vehicle companies as strategic partners. These companies would install their radios in their cars.
Threats and Challenges
These companies needed to install satellites in space to broadcast their signal. Each company planned to install two satellites and have a third one on standby ready to launch in case of emergency. This project would cost Sirus and XM $1.2Billion and $1.1 Billion respectively. They were to be launched in 1999 and 2000. This means that the original timeline for launching the satellite radio was pushed forward by over two years. Margolese’s investment would not pay off as fast as he had imagined.
The companies also needed to install repeaters to amplify the sound since America was full of tall buildings that interfered with its path. In addition, special studios were necessary for transmission. Infrastructure for this venture was proving to be quite expensive.
Sirus and XM both delayed further in entering the market due to technological problems. Sirus had trouble with its receivers while XM had trouble with its satellites. Sirus took two years to resolve its issues while XM took one. In the end, XM launched nine months earlier than Sirus, in2001. This gave XM first mover advantage. By the end of 2002, Sirus had also launched its services. Unfortunately, XM had ten times Sirus’ customers. This trend continued over time. It was enhanced further by the fact that Sirus charged higher subscription fees than XM.
The huge capital requirements meant that these companies would take longer to break even than initially projected. XM, the leading company, hoped to break-even by 2004. This was four years after the initial launch. XM’s lead was also enhanced by the speed with which its automobile manufacturer firm partners installed XM’s radios. In contrast, Sirus’ partners took much longer to install their radios, hence slowing the growth of their customer base.
This delay in launching and long time to break even took a huge toll on Sirus. The company almost went bankrupt in 2002. However, it managed to raise more capital in form of debt and equity to keep it afloat. XM radio also faced cash flow problems in 2003 and sought to raise more capital to survive. The company managed to raise an extra $475 million. This way, it was able to survive the difficult times.
XM radio also has some trouble with its satellites. They are degrading faster than expected. This has reduced their useful life by seven years. This will also be an additional capital expense in 2008.
The huge capital requirements meant that these companies would take longer to break even than initially projected. XM, the leading company, hoped to break-even by 2004. This was four years after the initial launch. XM’s lead was also enhanced by the speed with which its automobile manufacturer firm partners installed XM’s radios. In contrast, Sirus’ partners took much longer to install their radios, hence slowing the growth of their customer base.
This delay in launching and long time to break even took a huge toll on Sirus. The company almost went bankrupt in 2002. However, it managed to raise more capital in form of debt and equity to keep it afloat. XM radio also faced cash flow problems in 2003 and sought to raise more capital to survive. The company managed to raise an extra $475 million. This way, it was able to survive the difficult times.
XM radio also has some trouble with its satellites. They are degrading faster than expected. This has reduced their useful life by seven years. This will also be an additional capital expense in 2008.
Competitive Advantage
Sirus and XM both tried to outdo each other and win more market share. Sirus spent a lot of money signing deals to access exclusive content. The company hoped this exclusive content would motivate subscribers to join its network. The most significant deal was with National Football League and it cost $188 million. Sirus hoped to recover this from increased subscriber numbers. The company also signed Howard Stern for $500 million. This exclusive content was projected to attract new subscribers.
XM did not take these moves lying down. They also sought their own exclusive deals to counter. They signed a deal with Major League Basketball that gave them exclusive rights to broadcast their content. Additionally, they signed a shock jock that had previously been banned from radio. These new additions would cost subscribers some extra money. For $1.99 per month, subscribers could enjoy the channels. The deal with Major League Basketball cost the company $650 million.
These two companies reduced their competition when they signed a deal to develop a common radio that could receive both their channels. This meant that subscribers’ switching costs between the two service providers was now quite low.
Financial Performance
Initially, satellite radio was projected to be launched in 1997. Unfortunately, this delayed until 2001. On launching, the operating costs were still too high and the companies were projected to break even only after 2004. This did not happen. Analysts pushed this broadcast forward to 2007 for XM radio and 2008 for Sirus Radio. The forecast predicted that in 2007, XM would earn a positive cash flow of $51.1 million while Sirus would still make a loss of $154.2.
What had seemed to be a grand business idea that Margolese had planned to invest $500 million in, turned out to be a financial disaster. Over ten years after the original idea was conceived, investors were still pumping money into satellite radio with no tangible returns. This is the mark of a bad business idea. It is evident that neither of the two companies carried out proper market research. They were fascinated by the idea and proceeded to invest in it without doing the groundwork. Unfortunately, it failed the test of time.
Satellie Radio Today
Poor financial performance and inefficient operations led the two satellite radio companies to merge in 2008 to form Sirus XM radio. There was stiff opposition to this move by other stakeholders who believed that a monopoly was not in consumers’ best interests. However, consolidating operations was the only way Sirus and XM would survive.
This consolidation proved successful and the new company, Sirus XM posted a profit for the first time in 2009. The company has continued to pursue growth through deals with automobile, aeroplane and boat manufacturers.
Conclusion and Recommendation
Satellite radio was a noble idea. However, its implementation has cost XM and Sirus much more than the returns. It is unfortunate that so much has already been invested into this idea. The companies, which started out as competitors over ten years earlier, have ended up merging into one. Satellite radios are continuing to be installed in new automobiles. However, drivers are still reluctant to subscribe for this service after the trial period expires.
The challenge for Sirus XM is to continue marketing and target the new, younger drivers who are more likely to adapt to the idea.