Thursday, June 08, 2006

A Shuffle in XM Management???

June 8, 2006

It is well known that XM satellite Radio has seen a whole series of woes in the past 6 months. Every time you begin to think that there can not possibly be any more bad news, something seemed to happen.

The slide became known when board member Roberts resigned citing what he termed a "Looming catastrophe". Since that time, it has been one shoe dropping after another for the satellite radio company.

It seems that lately there has been a ground swell of blame being placed on marketing at XM satellite Radio. While that seems to be an easy target, perhaps a deeper look into the root causes of recent events would be worth noting.

The problems actually started in Q2 of 2005, but were not glaring. Sirius actually outdid XM at retail in the most important month of the quarter (June - with Fathers Day) , but it was a special promotion by General Motors that brought in the good subscriber numbers. The problem of course was that 6 months later 45% of those GM subs would elect to not continue the service.

The third quarter also saw big numbers from the GM promotion in July, and was also bolstered by the Family plan promotions that XM did. This made the subscriber numbers look impressive, but were they quality subscribers?

The fourth quarter was all about Sirius and Howard Stern. XM slashed prices, and ran heavy promotions on the family plan. The result was a miss on subscriber guidance, and a huge jump in family plan subscribers. In fact, the family plan made up over half of the retail number reported by XM. The OEM number was dismal, but it was not related to poor GM sales as much as it related to the 45% who deactivated from the June and July promotions. In an effort to get respectable subscriber numbers, XM spent huge sums of money, and chased the family plan very hard at $6.99 per month. Family plan subs are an important asset to satellite radio, but using these types of subscribers as your main retail growth vehicle can only take you so far. At the end of Q1 the family plan represented 20% of XM's subscriber base. If the family plan segment grows any more, it could negatively impact the ARPU. The other problem is that before you can get a family plan subscriber you need a regular subscriber. The result of this family plan push has now come home to roost, and is likely at least a part of the 500,000 subscribers XM trimmed off of their 2006 guidance. Simply stated, it would be dangerous for XM to continue to have the family plan as the main growth factor at retail.

This brings us to January, and the resignation of Roberts. Stern was about to launch on Sirius, and Sirius had all of the momentum. Sirius sales were brisk, and XM was fresh off of telling shareholders that the mistakes they made by spending so heavily in the previous quarter would be rectified.

The end of the first quarter saw Sirius still dominating the retail channel, and putting up respectable OEM numbers as well. Shareholder Law Suits followed, then the WCS deal fell apart (which we here at SSG saw as a positive development given all of the questions surrounding it), the FCC and FTC issued complaints, and then the RIAA hopped into the mix with a law suit of their own.

The second quarter is not yet complete, and another shoe dropped. XM halted shipments on many radios, and put themselves into a position of being short of supply during the most important of the summer months.....Fathers day.

There has been a lot of debate about what Howard stern has meant to Sirius. What people also need to look at is what it has meant to XM. As the debut of Howard Stern got closer, the management philosophy at XM shifted. Instead of getting creative and showing the public the content that XM had to offer, XM chose a route of giving free receivers away to family members of existing subscribers. That money would have likely been better invested showcasing the XM talent. Now, it is to late. The Stern Effect grew and grew, and XM allowed it to grow unabated. While Sirius and Stern were on every television show and in every magazine and newspaper, XM was asking current subscribers to sign up their family members.

Now, all things considered, is this all a marketing problem?????

NO.....At least not entirely.

Marketing does not decide to set guidance. Marketing does not decide to manufacture a product without a deal with the RIAA. Marketing does not get involved with the manufacture of hardware. Marketing is not selling shares only weeks before the subscriber number is missed with an executive appearing on Jim Cramers show assuring everyone that the number would be hit.

The root cause has very little to do with marketing and more to do with the corporate philosophy.


There is a stark difference in owe Sirius and XM market their services. XM tends to concentrate on the hardware in their marketing. By contrast, Sirius concentrates on the content. This is a fundamental difference in approach. Is the XM approach wrong? Perhaps. Satellite radio is all about a vast array of listening options. It is that array of options that satellite radio needs to sell. The hardware is important, and the functionality of it helps, but at the end of the day, it is the ear that these companies are trying to satisfy.

XM has not really promoted Opie and Anthony, and they can be heard complaining about that on their show. Of course, it would help if Opie and Anthony stopped finding it necessary to compare themselves to Stern, or reference him so often. The guys have talent. They should simply forget about Stern and go on with their own show.

Oprah is only months away, and the airwaves are silent. Ellen has a show, and no one knows about it. Dylan is on the air, but 85% of the people think it is a show where he plays his own songs.

Yes, there is a marketing issue at XM, but it is not the root cause of XM's woes. It may well be that the marketing executives at XM will become "fall guys", but the problem is deeper than that, and if XM thinks a shake up in the marketing department will be enough to change the tune of the street, they are mistaken. New marketing will not erase the shareholder lawsuits, it will not scare away the RIAA, and it will likely not be enough to satisfy the bond holders of the recent refinancing. Investors feel a strike at the heart at this point, and a bandage on the hand will not erase the pain.

We are not necessarily saying that the management needs to be changed, but we are saying that at a minimum the philosophy of management needs to change. The question at hand is whether shareholders are willing to be patient enough to see if a real philosophical change is happening.

We predict a shake up to some extent is in the cards at XM, but we also predict that the street is looking for more than a token "fall guy". The street is looking for positive evidence of substantial change in philosophy, and desperately want to be able to TRUST management.

The "HARDWARE" of management may look nice, but the "CONTENT" of management is lasting.

6/08/2006 11:01:00 PM

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