Snapshot

At the end of Aug-02 the Wall Street Journal Europe announced that US satellite radio operators are failing to attract subscribers. XM with 137K subscribers needs 4M to breakeven, while Sirius with 7K subscribers, needs 3M. Both companies are facing major cost and return on investment issues and are under pressure to seek additional funding. Both are relying on automotive OEMs to promote subscription rates by increasing installation and activation of receivers on their vehicles.

Analysis

XM Market Development

In September 2001 XM launched 100 channels of digital-quality audio coast-to-coast in the US; 71 music channels (more than 30 commercial-free) and 29 news, sports and talk channels, for US$9.99 a month. XM recently announced the launch of its first premium channel, Playboy Radio, for an additional US$2.99 monthly fee. Receivers fitted on new vehicles cost from US$300.

Consumer electronic retailers, including Radio Shack and Circuit City Stores, have signed up the majority of XM’s subscribers so far. However, in April 2002 GM announced the optional fitting of XM receivers on 25 2003 MY vehicles across all its divisions, including the entire Cadillac line and Buick, Oldsmobile, Pontiac and GMC models. GM expects to offer XM on all of its vehicles within the next few years. Consumers also have the option of including the monthly XM subscription fee as part of the lease or finance of a new GM vehicle through their dealers or GMAC.

XM and Delphi have been targeting the commercial vehicle market as a potential source of subscribers. At the March 2002 Mid-America Trucking Show Delphi offered professional installation of an XM receiver to truck drivers for US$399. The system comes with a Delphi digital antenna, designed specifically for XM satellite applications and commercial vehicles, and an XM receiver. This offer was for the duration of the Mid-America Trucking Show only, applied only to units purchased at the show and did not include the radio.

At the beginning of September 2002, Honda Motor signed an agreement with XM under which the latter's audio service will be made available as a dealer-fitted option in Honda Accord, Acura MDX and pilot models, with effect from October 2002.

Sirius Market Development

After originally planning an end 2001 launch, Sirius’ 100-channel music, news, sports and talk radio was launched in July 2002, a month before the latest scheduled date. Sirius has been aiming to have 9000 retail outlets for 300K units of receivers by end 2002.

Sirius radios will be available with plug and play capacity, allowing the radio to be used in the home as well as the car, but does not plan any significant emphasis on in-home use until next year.

In August 2001, BMW announced the option of a Sirius radio service to new car buyers beginning Q2-02. Sirius radios will be available in select 3, 5 and X5 Series vehicles. BMW centres across the US will also offer subscription activation services. DCX and Ford have also both announced the fitting of Sirius receivers in their vehicles, but this will not happen until late 2002, early 2003.

Market Positioning

Sirius’ monthly fee of US$12.95 is higher than XMs, but all of Sirius’ music channels are commercial free, as opposed to 30 out of 71 of XMs.

Sirius launched three satellites and was broadcasting live demonstrations at conventions before XM had any satellites off the ground, yet XM took eight months to launch a national service.

Both operators are targeting the trucking industry as a major source of subscribers, by selling radios at truck stops across the country. Digital radio will have more appeal to truck drivers and others who drive long distances, as they will not have to search for a station to listen to as they travel.

Shares in both XM and Sirius have been falling over the last year, due in part to investor concerns over the additional funding needed by both companies. According to the financial press, XM needs to raise US$275 Mil to be able it to continue operating to end-2003. A further US$275 Mil is required to go into 2005. Sirius needs to raise US$300 Mil to be able to operate through to end-2003. A further US$300 Mil is required to take the company to 2005 – the company’s expected breakeven point.

A survey of US car owners showed conducted by Strategy Analytics showed that +20% of respondents in the US had a ‘high interest’ in ‘dedicated content radio’. There were stronger interest levels for other in-vehicle features and systems, most notably multiple CD players, in-vehicle cellular phone kits, and in having a range of in-car audio system options when buying a new vehicle.

Implications

Far faster OEM installation and service activation are required to increase revenue growth and reduce cost pressures on XM - and particularly Sirius.

At current planned OEM receiver installation rates significant adoption of XM and Sirius services cannot be expected before mid-2003. Initially, new mid-high end vehicle ranges have been a key target market for the satellite players. But slow subscriber and revenue growth is increasing the need to extend fitment of receivers across a far wider range of vehicles.

Having satellite radio OE fitted can be included into the vehicle leasing payments, something both operators say would boost sales. With GM promising to option fit XM receivers in all their vehicles in the future, Sirius is at a serious disadvantage. In addition to OE fitment on some Ford ranges, Sirius has announced deals with other OEMs in North America including DCX and BMW, although announced fitment rates will be slow.

As well as increasing subscriber levels, it is expected that XM and Sirius will also need to raise funds to continue service into 2003 and beyond.

Well defined and executed marketing strategies will also be key to stimulating satellite radio adoption.

Although the business model for satellite radio in the US is not yet proven and the market is currently supply-led, the Strategy Analytics user survey indicates that there are consumer opportunities.

The commercial vehicle sector and the aftermarket also provide significant satellite radio opportunities – although there have been major costs associated with developing distribution and product promotion plans for these target markets, and the aftermarket for entertainment systems is highly segmented.

Satellite radio pricing needs to be carefully positioned versus other competing in-vehicle products particularly multiple-CD players, and in-vehicle cellular phone kits. ‘Audiophile’ consumers seeking very high quality audio will be a key target market for XM and Sirius but satellite radio is competing with other emerging technology in-vehicle audio products such as MP3, multiple CD and CD-R/W systems.

As early market adoption will be closely aligned to OE receiver fitment, dealers are a key element in satellite radio distribution strategies. Dealers are focused on selling cars and not services and therefore a range of incentives and product education must be developed to promote satellite radio adoption.

For more detailed information about US Satellite Digital Radio please refer to ‘Digital Radio Market Status 2002’, July 2002.

Contact Information
The author of this Insight, Clare Hughes, can be reached at chughes@strategyanalytics.com

Other Contacts
ITMS Director: Joanne Downie; jdownie@strategyanalytics.com