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December 21, 2005
Satellite Radio—Another Threat to Advertising?
 

Some subscribers describe it as a “music lover’s paradise.” Like TiVo users in the TV arena, those few million people who have picked up satellite radio over the last three years are genuine enthusiasts.

The business press dwells on the stock price valuations of XM and Sirius, the two main players, who are both publicly traded. To us, the larger issue is how satellite radio will begin to change our world of media.

As TV has fragmented over the last two decades, most of us have adjusted our media planning and buying accordingly. First, the growth of independent stations started the decline in network affiliate shares. Cable subscription growth came next but the effect on viewing was not that big. Then along came FOX. The scrappy upstart was first shunned by ABC, CBS, and NBC. Then FOX was embraced as a major network as cable finally began to get an increasing share of total viewing. The WB, UPN and PAX networks moved fragmentation of viewing even further, and in recent years, the growth of ADS (Alternative Distribution Systems), which is largely satellite transmission of signals, has picked the pace up again.

Through all this radio was a rock of Gibraltar. Certainly popular formats shifted and evolved; FM dwarfed AM but AM came off the ropes and found a place as the home of talk radio. Listening levels; however, were predictable and local oriented copy, weather and sports, flexible promotions and tie-ins were all the norm. It seemed to be a safe haven as TV fragmented and reinvented itself every few years. Our opinion at FME is that such stability is about to disappear.

How does satellite radio work? Simply put, it is very much like satellite television. Five satellites circle the earth in a stationary orbit above the NAFTA partners (Canada, U.S. and Mexico) 24 hours a day, every day. An earthbound unit accepts their signal, translates it into analog and turns it into music or talk.

The precise subscription level of satellite radio is difficult to track. Current projections place it at about 2.6 million with just over 2.1 million for XM and approximately a half million subscribers to Sirius. By January 2005 the subscription base could bounce as high as 4 million.

In brief, both services offer over 100 different channels to subscribers. Most channels are commercial free. At some point, it might make an interesting national advertising vehicle if they keep the commercial load down vs. local stations.

Why does it have such potential? Both companies used the same shrewd distribution tactic at launch. Each partnered with automakers to make sure that many new cars were equipped with satellite radio service. XM hooked up with General Motors and Honda while Sirius partnered with Ford and DaimlerChrysler. Now both companies have deals with all the leading major auto manufacturers. Approximately 60% of consumers who buy new cars equipped with satellite radio sign up for it. If these numbers hold, close to 20% of U.S. autos will have the service. The companies, now both awash in red ink, will be very profitable if penetration gets that high.

In addition to talking to the automakers, both XM and Sirius have made major inroads with retailers such as Circuit City, Best Buy and Radio Shack among others. This can kick growth into high gear especially since many will no longer wait until they get a new car to subscribe.

But think of the long-term effect satellite radio can have on the advertising business. Right now in tough traffic cities such as Atlanta, Washington, DC, Los Angeles and Dallas-Ft. Worth, radio provides a wonderful opportunity to reach light TV viewing upscale customers with your advertising message. Satellite radio has great appeal to those with a long commute. Programming is breathtakingly diverse.

Some examples are:

Recently Bob Edwards, longtime host of National Public Radio’s “Morning Edition” was demoted to roving reporter. After a tour to launch his new book, Edwards jumped to his own show on satellite radio. Rumors abound that “shock jock” Howard Stern might do the same thing. Stern, always a headache for advertisers, would have a loyal following and could thrive in a commercial free environment.

You can drive from coast to coast and never have to change the channel. Transplants have a field day. As a native New Englander, I can listen to every Boston Celtics game and hear the local announcers while listening in Atlanta or Phoenix.

There are over 2 million songs in the companies’ music libraries. They offer specific content to people who have asked for it and are willing to pay for it. Theoretically, they listen to all the music they really want at that time and none of what they don’t want. Compare that to conventional radio. Do you really like all or most of a station’s offerings? Do you like the DJ chatter and the clutter of the commercials?

Is it expensive? No way. XM is $9.99 per month while Sirius is $12.99. Sirius has some excellent packages that really lower the cost. Their one-year plan is $142.45, two-year is $271.95 and a lifetime subscription is $499.99. It sounds like a lot but the lifetime subscription pays for itself in several years. (Not many people bite because they worry about the survival of the services.)

Another feature is that it is portable. For a modest fee you can buy a small device that you take from the car and can run satellite radio through your stereo at home. Some can be run through a boom box that you can take to the beach or the mountains. You are given a password so you can listen to satellite radio over the internet at home or at work.

So, how does satellite radio affect our business? Not much at present. The current base is so small that Arbitron, the radio rating service monopoly, has yet to report declines in listening levels to local commercial stations. And local radio stations, much like TV stations reacted to cable 20 years ago, are tending to ignore it which may prove to be a big mistake.

Satellite radio will be one more tightening of the noose around the necks of those who think only in terms of conventional media options. The affluent consumers that we in media and marketing so desperately wish to reach now watch little TV, are abandoning newspaper in droves, and may be PVR subscribers to boot. Satellite radio may largely take them out of the radio reach equation as well. And it is growing faster than PVR vehicles such as TiVo! There is another parallel to TiVo type services that is striking and a bit chilling. Just as 97% of PVR users say they love it, fragmentary research on satellite radio subscribers indicates that almost to a person, they say they will never willingly go back to conventional radio stations. This does not bode well for radio stations over the long pull. And media strategists need to start thinking now about what to do about it. With PVR’s the pundits talk about product placement as an alternative to a decline in commercial viewing. That is fine for very large national spenders. But the problem is greater in radio than TV because many smaller advertisers use the radio medium as their primary communications vehicle. Lose 20% of your audience in five years and there will always be problems. But such a scenario is especially touchy if the people you lose are well educated, affluent, and constitute a disproportionate share of your prospect base.

Just last week Sirius made an announcement that may have solidified their position in satellite radio and given the medium the jumpstart that it needs. Shock jock Howard Stern was signed to a five year contract beginning January, 2006 with Sirius at a stunning $100 million per year! Incredibly the math works. Stern averages 11-12 million listeners per day, most of whom are young men. If only 8-10% of his current audience defects to satellite radio to hear Howard, they will cover his enormous salary. Also, once these folks try satellite radio, they will likely be hooked on it. It was a bold, and we think, brilliant move by Sirius.

The sleepy medium of radio is awakening and is about to give us all a Tylenol headache. Fletcher Martin Ewing is getting ready with a fistful of alternatives to traditional radio. Are you?

  • Rock (16 different versions from different eras)
  • Country, Bluegrass, Folk, Jazz, Big Band with interviews from artists and a minimum of announcer talk
  • News -- CNBC, Headline, Fox News, BBC World, C-Span
  • Audio of TV -- Court TV, Biography, The Word Network
  • Sports -- ESPN, deep package of pro sports teams, 7-year deal with the NFL (Sirius)
  • Talk -- conservative to liberal. Even a National Rifle Association show and a Truckers Channel
  • Original programming
  • Local news and weather

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Don Cole puts his 30 years of media strategy and negotiation skills to work as Corporate Media Director for Fletcher Martin in Atlanta. Over the years, he’s worked on clients such as BP, Eckerd, Arby’s, AARP, and McDonald’s. He’s seen it all in the media landscape, which makes him the perfect person to ask about where media is heading.
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