XM and Sirius Merge, Already Obsolete?

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.