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______________________________________________________________________________
XM Satellite Radio
Competing in the New Digital World
______________________________________________________________________________
This case was written by Professor Michele Greenwald, Visiting Professor at HEC Paris, for use
with Advertising and Promotion: An Integrated Marketing Communications Perspective – 7th
edition by George E. Belch and Michael A. Belch. It is intended to be used as the basis for class
discussion rather than to illustrate either effective or ineffective handling of a management
situation.
The case was compiled from published sources
Introduction
When Fortune magazine named its product of the year in 2001, the winner was a new technology
that many feel may revolutionize the way we listen to radio. The magazine’s rationale for its
selection stated: “Of all the new technologies of 2001, XM Satellite Radio is way, way, way
above the rest. It’s the first major advance in radio since FM emerged in the 1960s, and the best
thing to happen to mobile music since the dashboard CD player.” After spending more than a
billion dollars for programming and satellite operating expenses, as well as catchy TV
commercials featuring celebrities such as David Bowie, B.B. King and Snoop Dogg;
XM
Satellite radio hit the airways in the Fall of 2001, claiming that it would do for radio what cable
did for television. XM used “Rock” and “Roll,” its two Boeing 702 satellites stationed over the
East and West coasts to beam more than 100 audio channels from the stratosphere to subscribers’
cars. While subscribers to satellite radio can still receive regular AM and FM terrestrial stations
via their car antennas, by 2006 they could get more than 170 XM channels of nearly commercialfree digital radio that includes music, news, talk, sports, and children’s programming.
Many industry observers noted that there was a tremendous opportunity for satellite radio
at the beginning of the new millennium. There had been consolidation in the radio industry
which led to repetitious, cookie-cutter formats in markets across the country. Companies such as
Clear Channel had built large radio conglomerates and were paying for them by increasing the
commercial load, which resulted in less programming and more frustrated listeners. XM’s chief
programmer, Lee Abarams, noted that the company hoped to have the same creative effect as the
FM revolution of the late ‘60s and ‘70s which brought major changes to the radio scene. FM’s
superior sound and lack of commercial clutter triggered a huge audience shift away from AM
radio. However, Abrams argued that FM had sprouted a potbelly, gone gray at the temples, and
become the stodgy establishment – complacent and vulnerable to a hard charging rival such as
XM. “Right now, we live in a very vanilla age, radio-wise,” noted Abrams. “Except for talk radio,
it’s stay in the middle, don’t upset anybody, and play the big hits everybody’s comfortable with.
We’re 180 degrees from that. We want to challenge people.”
XM Satellite Radio first went live in September 2001 with 100 channels that ranged from
commercial free music, to comedy, news, sports, talk radio, kids, women’s, and “old time radio”
programming. After an initial investment of $200-$300 in equipment and installation, the cost of
the service was $9.95 per month. (The upfront costs have come down considerably since.) This
was the first time consumers had ever been asked to pay for a form of entertainment that had
always been available free of charge.
In June of 2002, Sirius Satellite Radio launched a
competitive service at a subscription rate of $12.95 per month.
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Many doubted either service
would succeed. By the end of 2005, XM had 6 million subscribers and 150 channels, and Sirius
had 3.3 million subscribers and 130 channels. XM reached four million users faster than MP3
players, CD players, cell phones, and Internet service providers. Wall Street analysts have
projected the number of subscribers for both XM and Sirius combined will reach between 18 to
20 million in the U.S. by 2010. These projections were based on the huge potential user base as
there are approximately 575 million radios in the U.S., with an average of 5.6 radios per
household. Also, an estimated 95 percent of the vehicles in the U.S. have radios and represent a
major market opportunity for satellite radio.
Programming
With the ability to offer so many different channels, XM Satellite Radio has a wide variety of
programming and a huge potential user base.
As of 2006, XM Satellite Radio offered
approximately 170 channels including:
?
News channels such as CNN, Fox News, BBC World Service, CNBC, ABC News &
Talk, Bloomberg Financial News, Air America Radio, and the Discovery Channel
?
Comedy channels such as XM Comedy, Laugh USA and Laugh Attack
?
Talk radio programming such as Opie & Anthony, Ellen DeGeneres, Dr. Laura
Schlesinger, Bob Edwards on XM Public Radio, and G. Gordon Liddy
?
Sports programming such as Major League Baseball, ESPN Radio, Fox Sports Radio, the
National Hockey League, the PGA Tour, the US Open Golf Tournament and college
football and basketball games for major conferences including the Pac 10, Big 10 and
Atlantic Coast Conference (ACC).
?
Local weather and traffic conditions for 21 major metropolitan markets plus several
interstate corridors nationwide
?
Children’s programming such as Radio Disney and XM Kids
?
Commercial free music of virtually every genre and decade including: Jazz, hip-hop,
classical, rock, Christian, urban, and country as well as music from various decades
?
Original programming hosted by music legends such as Bob Dylan, Quincy Jones, and
Snoop Dogg and live performances by major artists such as Coldplay, Lenny Kravitz, and
Willie Nelson and from venues such as Jazz at the Lincoln Center
?
Women’s programming such as Ellen DeGeneres, Take 5, and most recently, Oprah &
Friends
?
Hispanic programming such as music, sports, and CNN en Español
In addition to the wide range of programming, satellite radio makes the same stations available
from coast to coast which is a major advantage over the relatively narrow geographic coverage of
2
traditional, ”terrestrial” radio stations. For those traveling across a broad geography via truck,
car, or RV the ability to listen to their favorite stations wherever they go is a major benefit. Other
benefits of satellite radio include better sound quality; commercial free music; a digital display
readout of each station, song title, and artist; the ability to receive sports scores and stock quotes;
and ease of use relative to podcasts and MP3 players.
Products/Hardware
XM is
pursuing a “ubiquity” strategy by
whatever form people listen to music.
making the product available wherever, and in
They are implementing this strategy by constantly
improving the product features and reducing the size of the hardware that carries the satellite
receiver chip. The initial satellite radio receiver unit was the size of a small box. However, today
there are a variety of different receiver options including units that are permanent part of a car
dashboard, a “plug and play” option that can be utilized in the car or in the home, and a mobile
unit called XM2Go that resembles an MP3 player and can receive XM satellite service and record
and store up to five hours of programming. While XM’s R&D team developed most of the
technology, the company has also partnered with a variety of electronic hardware manufacturers
including Pioneer, Delphi, Alpine, Samsung, and Sony. In addition to units that play only
satellite radio, XM can also be heard through Direct TV and via Internet streaming on personal
computers. In April 2006, Pioneer introduced a combination XM/MP3 player called the Inno,
and Samsung introduced a similar unit in May 2006 called the Helix. These units give users more
choice than another audio products, as they combine the features of an MP3 player with all of
XM’s programming, and the ability to record from XM stations for later listening.
Creating Awareness and Generating Trial
In developing the marketing plan to launch XM, the company had to identify its potential early
adopters and also determine the best way to convince consumers, who had always listened to
radio for free, that they should now be willing to pay to do so. While men have accounted for 65
percent of the early adapters of satellite radio, the age distribution of listeners is far broader than
was originally expected as show below.
Satellite Radio Listeners By Age
Age Group
Percent
18-34
23%
35-44
23%
45-54
25%
55+
28%
Source: Arbitron Custom Listening Study Spring 2005
3
Some industry analysts suggest that the Satellite Radio category may turn out to have a
development pattern analogous to the Internet, in which men were the primary early adopters, but
usage is now split equally among both sexes.
Mass media advertising was utilized from the beginning to generate awareness and brand
name recognition for XM and start the education process the new radio format. However, XM
soon discovered that like many other ground-breaking new products, it was not easy for
consumers to imagine how great the product was from advertising descriptions alone. Rather to
truly appreciate the product’s unique benefits, one had to experience it. This finding lead XM to
develop trial generating programs that would enable as many target consumers as possible to
experience the product, risk free. XM developed a comprehensive trial program that has left
practically no stone unturned. First, live product demos were made available at point-of-sale in
key electronics retailers such as Best Buy, Circuit City, Sears, Tweeter, Ultimate Electronics, and
mass merchandisers such as Target and Wal-Mart. Satellite receivers were installed on the roofs
of many of these stores at a cost of approximately $1,000 each, and in-store demo booths were set
up so consumers could hear XM’s sound quality difference and sample its programming content.
Automobiles and other types of vehicles were also targeted as an ideal place to demo
XM. Of the approximately 575 million radios in the United States, about 40 percent or 230
million are installed in cars. Sampling programs were developed with car rental companies such
as Avis, National, Alamo, and Zipcars, so when business or pleasure travelers rented a premium
level car they could experience XM Satellite Radio. Most of the car radios were left in the “on”
position in rental car lots, so when the car was started the traveler could not help but notice the
service. Some of the car rental companies even attached an “XM” tag to their key chains.
Promotional literature and XM signage were made available in the rental offices, and XM signage
“wraps” were placed on the shuttle buses from the airports to the rental car lots.
Partnering with automobile manufacturers to get them to install XM satellite radio
systems in new vehicles has been the major strategic priority for the company. Of the estimated
29 million car radios sold annually, approximately 17 million come factory- installed. XM first
contracted with General Motors to install radios in Cadillacs. This has been a win/win program,
as XM has added value to these vehicles by providing a competitive benefit that can be used as a
selling point in advertising as well as on the showroom floor. The promotion of XM as an
accessory in some of its new vehicles was one of the most extensive advertising efforts ever done
by General Motors for a factory-installed option. New vehicle owners are given a 90-day free
trial period, after which they have the option of subscribing to the service. While some customers
never listen to XM during the free trial period, approximately 60 percent of the installations have
4
resulted in a subscription . In addition, consumers who did not purchase a vehicle but took it for
a test drive, often had XM demonstrated to them by the dealer sales person. There is also a viral
component to the promotion of XM as those who have the product installed in their vehicles have
been very satisfied with the service and often rave about it to others.
Factory installations have been a cornerstone of XM’s marketing strategy and the
company has aggressively pursued partnerships with automobile manufacturers. In addition to
General Motors, XM has exclusive deals with Honda (including Acura), Toyota (including Lexus
and Scion), Nissan (including Infiniti), Volkswagen/Audi, Porsche, Saab and Hyundai. XM’s
partners control approximately 60 percent of the U.S. automobile market and XM Satellite Radios
will be installed in most of their vehicles by late 2007. A further benefit of these automobile
partnerships is that quality names such as Porsche, Audi, Cadillac, Hummer, Acura, and Lexus
have lent credibility to XM, a new brand that was formerly unknown to consumers. As with
General Motors, many of XM’s automotive partners advertise XM Satellite Radio as a desirable
feature, thereby further increasing brand awareness.
Another strategic move XM has made to sample its satellite radio service to a captive
audience seeking audio entertainment is partnering with airlines. XM developed a partnership
with Jet Blue Airlines and began offering 150 channels of programming on most flights in early
2006. Jet Blue flies approximately 20 million passengers per year and is experiencing strong
growth, so this sampling effort is significant. A similar partnership was also struck with AirTran
Airways which became the first airline to offer XM Satellite Radio at every seat on every flight.
Yet another trial and awareness generating sampling program involves the creation of a Starbucks
radio channel that airs in 4,000 Starbucks outlets around the country, providing music to the
coffee shops. Sampling also has been cleverly implemented by XM at the PGA golf tournaments
they sponsor. Portable XM Radios are rented to attendees to provide more complete tournament
coverage so they will know what is happening beyond the spot on the course where they are
watching. XM also uses sales promotion techniques to encourage trial and reduce the up-front
investment in equipment. These include mail-in rebate offers and subsidies on hardware
purchases offered through retail outlets.
Advertising Strategy
The advertising strategy for XM initially focused on selling the concept of satellite radio and
establishing XM as the pioneering brand. Prior to and during its launch, XM used a “falling
stars” campaign that was based on a metaphor of things falling from space to introduce the
concept of satellite radio. The television commercials depicted artists and objects falling from the
sky including rapper Snoop Dog, guitarist B.B. King, singer David Bowie, a race car, musical
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instruments, old 45 rpm records, and sports equipment. One spot featured Snoop Dogg crashing
through an office ceiling while another showed David Bowie plummeting onto a motel roof and
landing in an elderly couple’s room – precisely as the satellite radio’s signals fall from space.
The original tagline was “Beyond AM. Beyond FM. XM Satellite Radio. Radio to the power of
X.” which helped position XM as a significant advance beyond terrestrial radio.
The
commercials and tagline communicated the satellite aspect in a futuristic way, and established
XM as “the” satellite brand that is defining this revolutionary, and by implication, superior new
format. The tagline was later shortened to “Beyond AM. Beyond FM. XM.” The $100 million
advertising campaign also included radio, magazine, newspaper, outdoor and online advertising.
As awareness for XM Satellite Radio increased, the advertising focus shifted to
communicating the breadth and quality of programming content. This was done in various ways
such as through the use of a four-page insert that listed all of XM’s channels in a variety of
magazines. XM has also focused on showcasing its impressive roster of talent that includes
musicians, entertainers, news and business personalities, talk show hosts, and sports personalities.
In addition to advertising that focuses on programming content, XM has run spots to feature its
latest product/hardware technology. Throughout the short history of this highly competitive
“two-man” satellite radio race, XM has been the leader in introducing new technology. Thus, it
has been important for the company to advertise each new generation of product to make
consumers aware of the advances that make XM’s satellite receivers ever more portable,
convenient, and easier to use and also to reinforce its position as the leader in category
innovation.
Media Strategy
XM’s media budget, which now ranges between $25-45 million, is sizable but not huge.
Therefore, the company has had to be selective with its media expenditures. Approximately 60
percent of XM’s media budget was initially allocated to television, with the balance going to
Internet advertising, magazines (such as Rolling Stone, Car and Driver, GQ and Entertainment
Weekly) and AM and FM radio. Web banner ads have been placed on music sites and sports
related sites such as baseball, golf and auto racing, sports for which XM has exclusive content
contracts.
Pricing Strategy
XM’s original pricing strategy was designed to encourage trial as well as loyalty and repeat
purchase of the service. XM was introduced in 2001 with a $9.95 per month subscription price.
This price level was maintained for more than three years as the company felt this reasonable
price point (approximately 33 cents per day) would encourage the conversion of new users into
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longer-term subscribers. While Sirius launched in June 2002 at $12.95 per month, XM opted to
continue its penetration pricing strategy to maximize the conversion of new users more quickly
and generate revenue by maintaining subscribers to the service. XM maintained the $9.95 per
month price level until March 2005 when it raised its price to $12.95, the same level as Sirius.
XM has offered escalating discounts for customers who sign up and pay in advance for
one year, two years, or even a lifetime. Additionally, there are family member add-on plans so
that radios can be added to the base member’s $12.95 monthly plan at a cost of $6.99 per radio.
Someone who has a radio installed in their car and doesn’t want the inconvenience of unplugging
it to bring it into their house, may choose this option. This pricing strategy encourages users to
have multiple units: ideally in their car, in their home, and a portable to carry around like an iPod.
The price of the hardware has come down and now ranges anywhere from $49 to $399 depending
on the model, thereby bringing the cost of multiple units within reach for many.
Competition
XM faces competition primarily from four different areas including Sirius, terrestrial radio, MP3
players, and Internet radio. XM’s only direct competitor in the satellite radio space is Sirius
Satellite radio which debuted 10 months after XM. Sirius’ market share has grown to nearly 40
percent with strong gains in the fourth quarter of 2005, in large part due to a flurry of Howard
Stern fans subscribing to its service in anticipation of his January 2006 debut. Sirius paid $500
million to lure the shock jock away from terrestrial radio by signing him to a five-year deal that
began in 2006. Sirius’s programming skews slightly more toward younger males, with
programming such as the National Basketball Association (NBA) and National Football League
(NFL) games. The NFL deal cost $220 million for seven years and Sirius also signed a $107
million five-year deal with NASCAR for the broadcasting rights to the second most popular sport
in America. A 24/7 NASCAR channel will feature live races and launch in the 200 …
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