Dead 3.0

Google Apps is taking the plunge and selling bundled services. They’ve priced it at $50 per user per year, relatively cheap. For that price you get Gmail, Google Talk, Google Calendar, Docs & Spreadsheets, Page Creator and Start Page. You also get a 99.9 percent uptime guarantee for your 10gb (per account) email. I personally think this is a great offering. The ZDNet SAAS blog makes some good points on the long-term implications of Google’s move into the market (emphasis not mine):

Well, I don’t see this eating into Microsoft’s core Office user base, not until the functionality improves closer to parity, which will take a year or two yet. Several people have commented that Microsoft’s customers will be able to use Google Apps as a negotiating ploy to get better prices out of Microsoft… Customers will now think twice whether they really need to stump up the full cost of Office when they can make do with Google Apps or some other alternative. A lot of the early adoptions will be tactical, short-term implementations that will gradually and imperceptibly turn into long-term commitments. Ultimately, if Google Apps can insinuate itself into replacing Microsoft Office as the no-brainer, don’t-have-to-think-about-it option, then that is when Microsoft will really have something to worry about.

This hits the nail on the head. Companies are going to give Google Apps a try and, if they like what they see, they’ll think twice before renewing their contract with Microsoft. VentureBeat is correct on the timing of the release. Google is stealing press from Vista’s launch and giving businesses an alternative to spending boatloads of money to upgrade. Google also brings credibility to the SAAS movement. While the offering doesn’t compete directly with Microsoft Office’s dominance, it is a first step. Could enterprise apps be Google’s second act?

Two final points: First, this open API is going to generate some interesting innovation. Second, Google made a smart decision signing on some big-name customers such as Salesforce.com and Procter & Gamble (the videos are great) and featuring them in the launch.

(Via Consumerist) I hadn’t heard, but evidently JetBlue customers encountered some pretty significant delays last week on Valentine’s Day. These delays led to some pretty angry customers. JetBlue’s CEO, David Neeleman, has been working hard to rectify the situation. Besides making the rounds (e.g. Letterman), Neeleman also posted a video on YouTube regarding their new Passenger Bill of Rights. Companies are beginning to realize that the Internet can be leveraged at a lower cost to reach consumes. The YouTube video was only one component of the PR blitz JetBlue issued, but with over 33k views already, I’d say it’s a success (it probably cost next to nothing to produce). On a side note, I found an interesting quote from Neeleman on America’s 25 Most Fascinating Entrepreneurs (on Inc.com): Neeleman says he doesn’t compete in the aviation business, JetBlue is “in the customer service business.” Considering airlines today, this hits the nail on the head. Watch the video.

Earlier I wrote about why the XM/Sirius merger made sense in a lot of ways. I was reading Mark Evans’ opinion on the merger and I left a comment disagreeing. I tried to sum up my position using some actual numbers. Digging into “My Documents” I found a final exam from last year on the satellite radio industry. It was a pretty thorough (strategy, finance, marketing, communications, etc.) look at the industry and Sirius in particular (and I did well on it). I’ve copied the text of the comment and added some links:

Mark,

I took your advice and dug into the subscriber numbers. In fact, I recently took a B-school final exam on the satellite radio industry, SIRI in particular. First, the business model has heavy fixed costs, meaning scale is the key to profitability. Second, adoption has been faster than any previous consumer tech trends. Third, per subscriber acquisition costs are dropping (2004: $177 from $491; XM 2004 = $62). Fourth, average revenue per customer is rising (2002-04: $7.47 to $10.02). Fifth, XM reports trial subscriber retention rates of 50% (via OrbitCast). Sixth, in 2007 27% of new vehicles will have satellite radio; OEMs will grow this to 55% by 2010. Seventh, economies of scale due to the merger will help spread out fixed costs over a larger subscriber base. Eighth, they have a large amount of cash on hand and relatively low debt.

In my opinion, this merger makes sense. You say, “But just because you build something, doesn’t mean people will come” but I’m going to go with the Field of Dreams mentality on this one. The content and the technology are valuable to many consumers, valuable enough for a low monthly fee (compared to cell phone and cable bills). It’s not satellite radio, it’s entertainment. Americans spend a lot of time in their cars, they want to be entertained.

On a side note, SIRI is up 6.76% and XMSR is up 13.09% at the moment–someone must agree with me…

Update: One last point. Doc Searls made several claims that irked me. I take issue with his comment about “monoculture” and homogeneous content. It may seem like an odd parallel to draw, but think about the beer industry. The big guys like Budweiser produce a mass market beer. It’s not particularly exciting but it appeals to a lot of people. Then take a beer like Pilsner Urquell. Many consider it one of the top beers in the world. It has a very distinct flavor but it doesn’t appeal to the majority of beer drinkers. If I gave my sister a Pilsner Urquell, she’d probably take one sip and grimace. My point is, satellite radio is a mass market product. The content they produce is homogeneous for a reason. It’s meant to appeal to the masses of listeners out there who demand it. People who demand other diverse content aren’t necessarily the target of the content. Hope that made sense…

Another update: I’d like to respond to Doc Searls’ other points. First, antitrust. I think the merger will get approved because XM and Sirius will prove that they are not in the satellite radio industry. They’re in the radio industry and, more generally, the entertainment industry. They compete against other forms of entertainment (e.g. HD radio, iPods, CDs) consumers demand in their autos. Second, program quality. If anything, the merger will create better program quality. As a combined entity, XM/Sirius will be able to focus more effort on improving programming to compete against Clear Channel and other radio operators. The merger will not remove the economic incentive to create better content. Third and fourth, monoculture and obsolescence. I responded to monoculture above and the same argument applies to obsolescence. Satellite radio is a mass market product that demands mass market content. Right now, I have 200 channels of TV programming through Comcast, that’s more than enough to last me (and my roommates and I watch at least several hours of TV per person, per day, every day). Same story with satellite radio. It works because it isn’t a niche offering. Fifth and sixth, costs and revenues. I agree that there is inherent risk in businesses with high fixed costs (read: satellite failure). But the merger helps to create the scale necessary to achieve profitability. I’m sure satellite radio will have a lot more competition in a few decades from other wireless entertainment products. But for now, the business model is viable and sustainable. See above for more on specific numbers.

Usually TechCrunch is one of my favorite blogs, but a post on the XM/Sirius merger made me cringe. The title says it all: “XM and Sirius Finally Merging; Will it Matter for Long?” Steve Poland is of the opinion that it will not matter. If you haven’t caught on yet, I disagree wholeheartedly. There are two main issues at work, let’s take each in turn.

First, the satellite radio industry. Satellite radio is a relatively new industry with relatively low awareness. It is also the fastest growing consumer technology of all-time, with the possible exception of DVDs. It’s important to understand the satellite radio distribution channels (outside of retail). Over the past several years, XM and Sirius have teamed up with the largest auto manufacturers (OEMs) to preinstall satellite radio head units in new vehicles. In 2007, 27 percent of all new autos will have satellite radio preinstalled. By 2010, that grows to roughly 55 percent. XM is reporting conversion rates (from free trials to paying subscribers) of 50 percent. This will likely drop over time as penetration increases, but that is still a very impressive number. The timing of the merger is interesting as 2007 is the first year OEMs will make a noticeable dent in subscriber acquisition rates. (See my source for more interesting facts.)

Now that we understand the business model, I want to quickly comment on the merger’s significance. In any business with high fixed costs (viz. satellites) the key to achieving profitability is scale. Subscriber acquisiton rate is the key metric here. The combined XM/Sirius entity will go a long way toward achieving profitability as costs are spread out over a wider subscriber base.

I mentioned there are two main issues at work–the second is the Internet’s ability to replace satellite radio. While the Internet is great when you’re sitting at home in front of your computer, that’s about all its good for right now. The overwhelming majority of Americans’ broadband isn’t anything to write home about. And even in the places where wireless coverage is excellent, throughput isn’t always constant. There are many problems related to WiMax and other technologies regularly touted as the key to ushering in an age of ubiquitous access. It just won’t happen. Period. Not for another decade or two at the very least. That’s not a prediction, it’s a technological and financial reality.

I’m not a pessimist, but I also do not let optimism eclipse reality. Statements like “The satellite monopoly won’t matter at that point” miss the bigger picture. Unfortunately, I do not have the luxury of blanket statements. Until then, I will be expectantly waiting for the day when satellite radio disappears.

Disclousure: I own XMSR.

Update: more on the merger.

It all started last week when I was reading BusinessWeek about some new Internet startup. The “challenge” BusinessWeek identified was “eyeballs.” I don’t know about you but that word makes me cringe. Eyeballs are interesting, but eyeballs aren’t a business. This morning, I was disappointed with a post I read on TechCrunch. I’ve decided to rebrand my blog and bring a little common sense to the Web 2.0 feeding frenzy–just like Dead 2.0 did before it disappeared.