Sirius Xm Radio Canada Case Study

Sirius XM SWOT

by Heather Leach

1. Weaknesses

1.1. Advertisment

1.1.1. When Sirius Satellite Radio and XM Radio merged they decided to cut costs in the advertisement department

1.2. Profit

1.3. Obstruction of signal

1.3.1. There are some complaints that there is obstruction of signal. Sirius needs to find out if they are legitimate and fix the problem.

1.4. Debt

1.5. The subscribers not understanding all there options in what Sirius XM provides.

1.6. Confusion between the difference of XM and Sirius

1.6.1. After the merger Sirius XM has maintained a difference between Sirius and XM.

2. Strengths

2.1. Signal Streangth

2.2. Little Competition

2.2.1. Sirius XM is the only satellite radio

2.3. Exclusive Broadcasting

2.4. 27 hardware partners

2.5. Family plan subscription

2.6. GPS locator

2.6.1. Traffic reports

2.6.2. Weather updates

3. Threats

3.1. Competitors

3.1.1. Internet Radio

3.1.1.1. Pandora

3.1.2. HD Radio

3.1.2.1. ClearChannel

3.1.3. FM Radio

3.1.3.1. Cox Radio- a member of the Cox Media Group

3.1.3.2. Cumulus Media Inc.

3.1.3.3. Westwood One Inc.

3.2. Piracy

4. Opportunites

4.1. Programming Variety

4.1.1. There is still room for more variety

4.2. Going Global

4.3. Strengthen internet service awareness

4.4. More partnerships with car dealers

4.5. 21 advertising partners

4.6. Karaoke

4.6.1. Provide another entertainment opportunity through karaoke on the backseat tv

Xm Satellite Radio Case Study

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Satellite radio is a technology that provides a radically new way to listen to radio. XM’s service makes use of advanced satellite capabilities and elaborates terrestrial receiver architecture to deliver a wide array of high quality radio programming nationwide. In early 1998, Robert Acker, director of strategic planning at XM, needs to develop a marketing strategy for this new radio service. There are several decisions that need to be made by the company in order to finalize the business plan. At fist XM needs to decide which of two business models to pursue, whether emphasis should be placed on charging customers a monthly subscription fee, or whether to rely more on earning revenue through advertising. In addressing this problem, management must consider the value that XM radio could propose for different consumer segments as compared with existing modes of radio (AM, FM) and in relation to its sole competitor in satellite radio – SIRIUS. Besides choosing a business model there is also a need to explore how best to approach and leverage manufacturer and channel partners, considering high unknown and high-risk technology. The purpose of this report is to analyze possibilities and outline possible recommendation on strategies for XM Radio. The following areas will be examined:
• Market and Competition
• Business Model
• Pricing
• Manufacturing and distribution channels

Market and Competition
The primary target market for satellite radio should consist of adults ages 25-50. These are customers that make most money and will be willing to pay extra for the quality entertainment service. This target market can also be divided into the smaller segments. The key segments are:
• Truck drivers and RV owners (approximately 6 million i)
• Commuters driving more than 90 minutes per day
• Business travelers who spend much of their time in the car (like real estate sales agents)
• Workplace listeners, including retail outlets with a need for continuous, non-stop music
• Residents of underserved rural areas.
• Sports fans (for example NASCAR)
These target groups spend an extraordinary amount of time listening to radio, especially in the car, and should be extremely receptive to the XM product due to their constant need for radio entertainment and willingness to pay for it.

As a result of the FCC auction, the only XM’s competitor in satellite radio arena is SIRIUS. But at the same time there other entertainment sources that could be perceived as prospective competitors for XM.
• Traditional (AM/FM) Radio - it is currently free, but only offers a homogenous shallow play lists with medium audio quality.

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• Satellite TV and Cable TV - provides a wide choice of programming, with very high audio quality but only fixed receivers, used mostly at home.
• Internet Radio – potentially provides a wide choice of play lists but at low quality and requires access to internet.
When examining product positioning map on Exhibit 1, one can see that even though audio and video entertainment sources mentioned above do play a role for the potential target market, satellite radio itself has a very good combination of price and quality in addition to the continuous nationwide service to differentiate itself from potential competition.

Business Model
XM’s only competitor in the satellite radio industry, SIRIUS, has chosen a commercial-free format across all programming, announcing the source of their revenue to be solely from subscription fees. However, XM has two possible options to choose from, in addition to SIRIUS’ format:
• advertising on all programming
• combination of commercial-free programming and programming carrying advertising
Option one, chosen by SIRIUS, commercial-free programming on all stations, would allow for significant product differentiation in the radio industry. Traditional radio today typically carries advertising for twenty minutes in every hour , causing listeners to constantly scan stations. A commercial-free format would fulfill the listeners’ need for consistent, interesting programming. However, choosing this format would also cause XM to miss out on the opportunity to raise extra revenue through advertising.
Option two would allow XM to sell advertising time for all stations and programming. This option could provide a large amount of advertising revenue, but at the same would make differentiating the product from traditional radio much more difficult and will not justify paying a subscription fee for the potential customers.
Option three would involve a combination of stations carrying commercial-free programming and programming included with a small amount of advertising time. This option could allow for certain types of programming, such as talk and sports radio, to run advertising while still providing meaningful product differentiation through an offering of commercial-free stations. This option would allow XM to raise some advertising revenue in addition to subscription fees. Even though this model may potentially turn prospective customers away if the concept of offering only certain commercial-free stations cannot be communicated effectively, this option seem to make most sense out of all described above. Many sports events already include breaks for advertising so consumers are used to and expect commercials for this type of programming. Revenues from radio advertising have increased almost fifty percent since 1992i which demonstrates the value advertising can provide to the company. It is also important to keep in mind that XM is still in the position to have to sell the business plan to the investors and manufacturing partners. Having additional revenue source from limited amount of advertising makes the overall strategy look more appealing.

Pricing
Choosing a mostly subscription based service as a business model brings up a question of determining winning pricing structure for the product. Two important decisions need to be made regarding pricing:
• price of the receiver.
• price of the subscription to the service.

In order to determine the best acceptable price for the receiver XM needs to take into consideration the 30% manufacturing and 30% retail markup that need to be added to the $270 cost to produce the receiver.i This brings up the cost for the customer to over $400.
XM has commissioned market research that forecasts demand at different price points for different segments of the population. Exhibit 2 shows that forecasted demand, while drops significantly when increasing receiver price from $100 to $200, does not have that much fluctuation when price is increased from $250 to $400. One might argue that receiver price should be more inline with what consumer would normally pay for a car audio system with CD player in a retail outlet which is in the range of $150-200. But based on the information from the market research it makes sense to price XM radio receivers at around $400 which would minimize subsidies to manufacture the receiver and would not have that much effect on the demand. However, it is expected for the price to drop slowly over the next five years as manufacturing costs drop. The price decrease in the future will lead to higher demand and higher profit.

Pricing for the subscription to the service needs to allow maximizing demand from price-sensitive customers while capturing maximum value from those with high demand and low price sensitivity. SIRIUS has chosen a single price subscription model of $12 however this model does not provide consumers with product choice. XM’s pricing should not be far off from the competition but XM has an opportunity to differentiate itself from competition by allowing customers to choose the number of stations and content they receive, providing basic and premium packages.
Exhibit 3 shows projected monthly revenues based on receiver and subscription price levels. As one can see projected revenues from $10 monthly subscriptions are very close to $12 subscription revenues. By charging $10 for basic service XM has an opportunity to differentiate itself from SERIUS and attract more price-sensitive customers. For customers who are less sensitive to price but are more demanding of the content, XM will be able to offer a premium package with greater variety of targeted programming for $13 monthly subscription. The table in Exhibit 4 lays out possible package offerings by XM.
The Company should also consider promotion strategies such as discounts on receivers and long term subscriptions to gain customer recognition and loyalty.

Manufacturing and distribution channels
Since XM does not plan to manufacture, hold inventory or sell the receivers i, it is important to define strategic partners for manufacturing and distribution channels. To speed up adoption it seems more logical for XM at first to partner with manufacturers of aftermarket car radios such as Sony, Pioneer and Alpine. Potential customers at first are more likely to purchase an aftermarket product then a new car with built in XM receiver. Also the brand recognition that mentioned above leaders in aftermarket car audio systems can offer will increase customer trust in the new product category, increasing the probability of successful introduction into the market. Nevertheless in the future strategic roadmap, XM should plan to partner with OEM companies such as Delphi Delco in order to include XM receivers as “factory-installed” in new vehicles. This will help to reach customers without them having to go out and purchase XM receivers on their own.
When looking at distribution channels the most logical solution should be to use existing distribution chains for car and home electronics. The cost of selling receivers directly by XM will most definitely overweight regular retails markup and increase price of the product, so it makes most sense to use local and national retail stores as distribution channels. Chains like Best Buy and Circuit City have a large number of stores nationwide, great expertises in selling home and car audio systems and advertising techniques. These are trusted store names that hopefully will increase customer’s trust in the product and speed up introduction time. Smaller local audio retailers should also be used since they have historically developed a market for new entertainment products.

Based on the analysis and recommendations above the following overall strategy going forward will position XM to successfully enter the market of satellite radio. XM should offer a tired programming and plan to receive most of the revenue from subscription fees, but still allocate time for advertising during selected talk and sports programs to boost the revenue. XM should also take steps to partner with well known car audio aftermarket manufacturers to produce receivers and with nationwide retail chains to assure stable distribution channels. These steps in my opinion will provide the solid foundation for XM Satellite Radio in the market.


Exhibit 1. Product positioning map – shows relationship of price and quality of satellite radio and competitors


Exhibit 2. Demand forecast for various receiver prices, at no monthly
subscription fee.

Exhibit 3. Projected monthly revenues based on receiver and subscription price levels.

Exhibit 4. Possible package offerings by XM for both home and car use.

Package Programming Subscription Price
Basic Young Adult
General Interest
Seniors
African Americans
Hispanic Americans
$10
Premium Basic package plus other premium programming $13



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