Big Names, Big Challenges for Satellite Radio

Originally posted: January 27, 2007

DePauw University Prof. Jeff McCall

It has been a year since shock radio personality Howard Stern jumped from over-the-air to satellite radio. The highly trumpeted and expensive Stern launch by Sirius satellite radio was supposed to turn around the struggling industry. It hasn’t. Other Sirius personalities such as Martha Stewart and Richard Simmons aren’t going to make a big difference, either.

Satellite radio competitor XM also is wasting resources trying to lure subscribers with personalities such as Oprah, Ellen DeGeneres and Bob Dylan. Oprah’s XM deal is three years for $55 million, and she is seldom heard on her own channel.

The many problems facing Sirius and XM won’t be solved by high-priced personalities. Although prominent personalities brought attention to satellite radio, research analysts largely believe audiences still can’t tell the difference between the two services. One published analyst recently said that many people know Stern is on satellite radio, but most don’t know for which service.

Retail sales of new satellite radios and subscriptions were down in 2006 compared to 2005, and holiday sales were particularly dismal. Satellite radio units don’t make good gifts because the giver is usually sticking the giftee with the monthly $12.95 subscription fee.

Growth projections made by Sirius and XM early in 2006 failed to materialize by year’s end. XM has 7.6 million subscribers, but it had projected 9 million. Sirius has about 6 million subscribers, but even in November had predicted 6.3 million by year’s end. Most new satellite radio owners now come through car purchases with factory-installed sets, but about half don’t continue as paid subscribers once their free trials end. Investors are predictably unimpressed, with stock prices for both Sirius and XM sagging more than 40 percent in the last year, even with the additions of Stern and Oprah. Potential investors are timid partly because of inflated program costs. Stern’s deal with Sirius to receive $100 million a year is a perfect example, along with his recent bonus of $80 million.

The main programming problem for satellite radio is audience fit. Radio’s success over the years has been its local identity. Satellite-delivered programs have no localism. While the large majority of Americans still listen to radio, the question is whether it is important enough in their lifestyles to pay for a receiver and an ongoing monthly fee. Cost is the major factor for nonsubscribers, particularly among young people. Most music formats and talkers are available via free radio.

The industry also has injured itself with engineering missteps. Both XM and Sirius produced satellite receivers that were not in compliance with FCC engineering standards and created signal interference for nearby over-the-air radio listeners. Imagine listening to NPR while sitting in traffic and having the uncensored Stern suddenly come through your car speakers. The production halt of the non-compliant receivers diminished retail supplies last fall as holiday buying began. Another technical mistake resulted in signal repeater towers in some urban areas creating interference, and some towers are located at sites not approved by the FCC.

Sirius CEO Mel Karmazin is floating the idea of a merger with XM as a way to bail out the struggling industry. A merger would save big money in program and marketing costs, but it would remove industry competition, thus potentially harming consumers. A merger would need approval by the Justice Department and the FCC. FCC chairman Kevin Martin recently threw cold water on the idea, saying current regulatory rules don’t allow it. The powerful National Association of Broadcasters, representing traditional radio, opposes a merger, and a Congress controlled by Democrats could also frown on the move.

Apparently unwilling to focus on Sirius’ radio difficulties, Karmazin is now crowing about adding a satellite television service for cars. Thankfully, the service is geared for back-seat passengers. Before spending much money on this idea, Karmazin might observe how few cars have anybody sitting in the back seat. He might also note that kids in the back seat are either going on a short ride to soccer practice or are watching portable DVD players. Even fancy technology needs a reason for being.

Jeffrey M. McCall is a professor of communication at DePauw University

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