David Arnerich
09/01/2005
There is a revolution going on in radio, or at least that is what satellite radio pioneers XM and Sirius would like us to believe. To date, roughly 6 million listeners have signed up with these two purveyors of drive-time distraction and 2 million more are expected to by year’s end. For a modest monthly fee, satellite radio offers listeners hundreds of diverse channels featuring news, sports and almost every musical genre imaginable. While such playlists are impressive, the real selling point—the thing that seduces listeners to pay for what they can basically get for free on traditional AM and FM stations—is that XM and Sirius are, for the most part, commercial free. That’s right: They have few, if any, commercials.
If the basic value proposition of this “revolution” sounds too good to be true, rest assured, it is: Commercial-free satellite radio won’t last. As its penetration into the American media landscape increases, this new medium will eventually sell commercial time to advertisers on its popular music channels. This is not bitter, wishful thinking from someone heavily invested in traditional broadcast media; rather it is the history of a specific business model repeating itself once again. Since the advent of the penny press in the 1830s, all mass media in the United States have eventually accepted advertising dollars, and satellite radio will be no different.
For the most recent example of this dynamic, one need look no further than the cable television industry. When it was trying to expand in the 1970s and 1980s, it could not compete with traditional broadcast TV in terms of distribution, so it attacked the established giant’s content model by offering shows that were not regulated by the FCC. What’s more, these shows were presented without commercials. Loyal broadcast viewers quickly demanded their MTV and signed up for cable in droves.
Like sirens luring commercial-free sailors to the rocks, advertisers began to offer increasingly large amounts of money to those cable programmers that could deliver targeted audiences. As the subscriber bases of XM and Sirius grow, the same thing will happen. Unfortunately, neither XM nor Sirius is currently in a financial position to resist the advertisers. Both are struggling to grow and compete, and despite their widening subscriber bases, both are operating in the red. More importantly, however, both are publicly traded companies beholden to shareholders who demand profitability.
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. |