Dead 3.0

Paul Colligan announced the separation of Podshow (never heard of them) and Sirius (definitely heard of them) with a post entitled “Podshow And Sirius Part - Satellite Radio Becomes Even Less Important.” The post almost seems angry, as if Sirius did something wrong. In fact, Sirius made a business decision and I’m sure they’ve thought it through. Here’s my take…

First, Sirius is a mainstream brand. Their infrastructure only allows a fixed number of channels. As such, they need to take advantage of every channel to provide mainstream content to their customers. Podcasting has self-defined itself as a niche. That is not a critique of podcasting though. Being a niche is fine. But a niche is not mainstream, by definition. Search Google for “Podshow.” The summary of the first result reads, “Find great podcasts, top podcasts, podsafe music, indie music, fun people and the funniest videos on the PodShow Network.” Immediately, two things popped out to me: the word indie and the continued use of “pod.” Indie suggests counterculture. Pod suggests iPod. Podcasting has succeeded in branding itself as a niche, which can be a good strategy. But Sirius is not going after a niche market. Different business models, different content requirements.

Second, podcasting is inherently limited by the growth of the iPod (in branding and consumer education). The majority of consumers are not tech-saavy. Even my peers and myself (young, educated, early-adopting males), who are supposed to be the target market, are confused. The bewildering array of file formats, media players, DRM restrictions and software bugs are all challenges when introducing new technology and growing beyond an early adopter phase.

Third, awareness is outpacing usage. Look at recent statistics from Edison Media Research. Awareness grew from 22 to 37 percent while usage grew 11 to 13 percent. Tom Webster has some brilliant analysis on the numbers he came up with:

One thing that Podcasters simply have to come to grips with is the difficulty in introducing a new technology or a new medium to the mainstream population… The obvious problem is that far, far more people are interested in podcasting’s central propositions (timeshifting and ad-skipping audio content) than own an iPod–or indeed, will ever own an iPod… For those of you that wonder why a couple hundred million Americans just don’t ‘get’ podcasting, I would humbly counter-propose that you just don’t ‘get’ hundreds of millions of people… Certainly, the mobile phone may be to podcasting what cars are to radio–when it comes installed, standard, on every phone you buy, folks will start to ‘get it.’ Better yet, when all of our radios are equipped with wifi access and RSS readers, few may even realize that they are listening to time-shifted content instead of live radio. That will not happen overnight, this year or even next. But it will happen… Millions of Americans learned about podcasting this year, and the vast majority responded…’meh.’ You can grouse about the numbers, you can grumble about mainstream America’s apparent inability to grasp how great podcasting is, and you can blog about ‘the end of podcasting.’ … Podcasting now teeters at the edge of the chasm on the consumer adoption curve, with mainstream adoption across the other side. The numbers make that clear.

Podcasting has some clear benefit, nobody doubts that. Rich metadata allows targeted content–a valuable proposition to consumers who seem constantly pressed for time. Like Webster says, to move beyond the early adopter phase, podcasters have to focus more on the benefits instead of the technology. Sure it’s cool, but where’s the value? Sell the value (it’s there) and podcasting might break out of its niche.

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.