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| Opportunities & Exposures: Media |
Siren Songs
David Arnerich
09/01/2005
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The Limits of Growth
The economics of satellite radio today are fairly
simple: XM and Sirius derive revenue from monthly subscriptions, equipment sales
and advertising (from nonmusic stations). For both companies, more than 90
percent of revenue is generated from subscriptions with another 5 to 6 percent
coming from equipment sales and advertising.
However, there is a fundamental
cap on the potential growth of new subscribers and sales from satellite radio
receivers. This is the end reason there will be more advertising on satellite
radio, even on music stations. Eventually, subscription revenues will suffer
because of slowing adoption rates and competition for exclusive content.
Ultimately, there is a finite number of potential subscribers.
The revenue
stream from equipment sales (approximately $7.2 million for XM and $2.9 million
for Sirius in 2004) will also dry up. Subscribers only need to receive a signal;
after they buy a receiver there are only so many additional offerings of
flexibility and convenience that will tempt them to purchase additional
equipment.
This naturally leaves only one area for revenue growth:
advertising. XM finished 2004 generating $8.5 million in revenue from
advertising on nonmusic programs; Sirius earned approximately $900,000. Although
subscribers expect that the music they hear on XM and Sirius will be commercial
free, both companies are currently reaching the saturation point for advertising
on their news and talk channels. To deliver acceptable returns to investors,
they will soon find it necessary to include advertising on music channels as
well.
If you currently subscribe, enjoy the uninterrupted strains of
satellite music while you can. XM and Sirius may not sell your ears to the
highest bidder just yet—they have a lot more early adopters to seduce first.
Eventually, however, they will. The history of mass media in the U.S. demands
nothing less. | David Arnerich is a media analyst and writer based in Los Angeles. |
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