Get Serious

Capsule:  The culmination of a major 2008 media merger, SiriusXM had a tough 2009, particularly on growth.  The satellite music, sports and talk radio service must find a way to balance falling new car sales, rising subscription fees and customer growth requirements. Can advertising revenue make a difference with a changed product design that places ads into even the ad-less music channels?  Where can a one-way entertainment service for your car take you on today's two-way media streets?  (http://www.siriusradio.com/) 


It's been a tough 2009 for advertising-based media.  Even when advertising has been supported by subscription revenue, growth for many media businesses has been anemic.  Because the advertising business has lost its rate-setting floor in favor of an aspirational web-based currency still missing a few zeros, tons of pressure and pride have been placed onto subscription revenue models.  
 

When subscription revenue forms the core of a dual-stream revenue business, customer growth must be strong and predictable, up to the hundreds, the thousands and the millions of potential subscriber-delivered dollars.  There's a delicate balance between rates and customer growth that can get unglued when growth machinery sputters; or, when there's too much promotional discounting complete with churn-inducing rate increases when the promos expire. It's hard for businesses without a lot of prior subscription experience to get that balance right.
 

SiriusXM lost customers this year, moving from 19 million down to 18.5 million since December, 2008.   The merged satellite radio company points to the collapsed US auto business which is its main sales channel and dramatically reduced new car sales, just as most advertising-dependent media businesses have.  But for SiriusXM, a decline in new US auto sales means more than lost advertising opportunity.  It means a serious dent in new customer additions. SiriusXM, carrying at least two points of monthly churn throughout 2009, needs a healthy annual crop of car buyers to maintain customer counts, no less to grow.
 

The satellite monolith also needs an alternative to entry price discounting, an offer policy that up-ends predictable customer growth performances with serious Year One churn.  The discontinuity of first year promotional churn can be absorbed by a business with a majority of seasoned customers, but not by a relatively new business with a long growth road ahead and few feeder paths.  
  
Today, most SiriusXM customers buy the service along with a new car lease or purchase, enjoying a first free year as a bounty courtesy of BMW, Volvo, Chrysler or any of the participating dealers in the Sirius and XM crowd.  Once that first free year ends, customers who can't afford the service or who don't see its value in a tough economic climate move on.  The attractive satellite radio growth that comes with new car purchases can be bumped by a bad economy into unrecoverable loss territory, forcing a need for even more aggressive growth among the next prospects in the new car buying universe to create the right fundamentals for SiriusXM's growth and health.
  

Since loyalty from the car buying behavioral segment is the linchpin for SiriusXM, one would expect the company to be setting the standard for product marketing and sales inside the new car buying experience.  Given the amount of convincing, informing and educating involved in the typical new car purchase, the sale of SiriusXM is difficult to place.  Satellite radio doesn't have a direct sales presence inside the auto dealership, forcing it to rely on brand and product superiority to justify its price and make and keep its customers.
 

But SiriusXM's large growth objectives seem to anticipate an acquisition machine akin to that of big distribution generally, including cable, satellite, telco tv, broadband and VoIP.  Unfortunately for satellite radio, the model doesn't hold.  The growth cycles of these fundamental subscription businesses have been built on product disruption that competes vigorously with entertainment alternatives.  As attractive a product as satellite radio has been, its disruptive bona fides have been stronger in the world of promotion--where radio rules and Howard Stern holds court--than in its marketing or product definition. 

Perhaps the biggest distinction between SiriusXM and its distribution brethren is a key dedication on the part of the TV and broadband set to sales and marketing machinery and support costs.  Since SiriusXM is embedded in so many high-end new car sales, the company is already paying a premium for acquisition, forcing it to control SAC by being more conservative on marketing and sales than most distribution companies. Without a consistent and major commitment to the operational work that feeds customers into a business at a rate surpassing churn, satellite radio suffers from a non-productive growth cycle, as well as from competition from preferred alternative media.
 

According to SiriusXM's pitch around its earnings reports, its worst economic challenges are ending.  Expenses have been pared and the economic efficiencies of the Sirius XM merger will begin to bloom within the next two quarters.  But SiriusXM's debt load is so substantial as to risk distracting the company from creating the necessary environment for organic growth.  Early in 2009, Liberty Media bailed the satellite radio giant out of its second major debt crisis following the 2008 merger.  Whether Liberty ends up maintaining its substantial stake in SiriusXM or permanently diluting current shareholders in some alternative transaction, the company's growth needs are substantial, requiring dedicated investment to be met.  How can SiriusXM surmount these structural limitations to create the growth stability they need to last?
  

Today's reconstituted SiriusXM products include two sturdy satellite radio line-ups, backseat TV for the kids, an online streaming service that can be played on an iPhone or alternative MP3 player and the portability to move from dealer-equipped cars to any car and to the home through a variety of mobile devices.  It has hundreds of entertainment choices, including major league sports coverage from XM, major celebrities like Howard Stern from Sirius--at least until his contract expires in the 2010-2011 timeframe--and enough alternative news, talk and music formats to fill out a monthly ARPU of just under $11.  Spread across over 18 million customers nationwide, SiriusXM's revenue base is substantial.
  

But to compete in a new digital media universe, SiriusXM will need even more. A complete sales, marketing and service infrastructure akin to the media distribution companies whose growth it hopes to imitate will be a new requirement for a product and service approaching maturity.  The one-year free promotional offers that shoveled customers into the business at its inception might be rethought in favor of an upfront cost and reduced monthly rates for the first 12 to 24 months.  

And, Sirius XM's products will need to evolve as a demonstration of its ability to sustain a growing business beyond its original premise.  To support the operational infrastructure of a thriving business, SiriusXM will have to introduce new ancillary revenue streams beyond its current subscription and advertising loads.  A likely opportunity source: distribution collaboration with satellite, cable and telco broadband services that can take elements of SiriusXM's products and bring them to life inside the home in a way that placing the service on the internet or an iPod alone will not.  
 

Even the most robust new products and improved marketing and sales will have to carry a lot of water to help re-restructure SiriusXM's serious debt load. In today's economy, the company may struggle to rationalize the set-up expenses necessary for a product, marketing and sales transformation.  But there are few good alternatives. We could all wait for the US auto business to fix itself, aided by tax dollars.  It could be a long wait as each major US car brand has steeled us for reduced production and consumption.  It's unlikely that even the healthiest Ford Motors will return to its former numbers anytime soon.  Unless SiriusXM finds the structural resources to support a new product development and organic growth process, the once assumed inevitability of satellite radio may fizzle against the backdrop of a radically transformed media future.