Looking At A Bigger Picture
July 25, 2006
With satellite radio it is very easy to get caught up in the small picture items. There is endless discussion about new hardware, subscriber numbers, and which service has better content. This is a narrow focus. Investors need to be aware of the small picture, but be open enough to see a bigger picture.
SATELLITE RADIO AS A CONCEPTRegardless of which service you have, or which equity you invest in, you need to ask yourself if you believe in satellite radio as a concept. Do you think it can have mass appeal? Do you think that these services offer a consumer value in return for their subscription dollars? Do you believe that a virtually unlimited music, talk and sports line-up is something that consumers are looking for? Do you believe that the business can grow? Do you believe that satellite radio will become the norm? Simply stated do you believe in the concept?
SUBSCRIBERS
Subscribers are the driver of this business. That being said, it is easy to look at the small picture and ask which service has more subscribers. What you should be asking is much “quality” the subscriber base brings. Not all subscribers are created equal. Subscribers that seek out the service tend to be longer term subscribers, and are essentially the highest quality subscriber you can obtain. OEM subscribers are good, but it has been proven over time that for every two you bring in that you will likely retain one. This makes an OEM subscriber less valuable at this point in time. Looking even deeper, you need to qualify what costs are associated with the various OEM deals. This is because not all OEM deals are created equal either. Simply by the structure of the deals, some OEM subscribers create a much better return on the investment than others. On the retail side you also have the promotional subscribers. There is a place for these types of subscribers. They do help growth, but the retention rate is not as high as the subscriber who seeks out the service.
CONTENT
On average, it would appear that 35% of the subs will choose Sirius by default, and 35% will choose XM. The remaining 30% are the undecided. This is where something like unique content can be the differentiating factor. It may be a big name like Stern or Oprah, or it could be something smaller like a particular show or particular news feed. Unique accessory content is not what gets people to think about satellite radio. It is what helps that 30% that are undecided to make their choice. The big names, and unparalleled variety are the compelling reasons to consider satellite radio. The accessory content offered is what differentiates the services from one another.
Content is a major driver in consumer sentiment with satellite radio. Consumer sentiment can have a rippling effect. Hardware partners, OEM partners pay close attention to where the sentiment is. In the bigger picture you should take an honest look at the content as it applies to the 30% of the undecided people. As discussed earlier, each service has a dedicated following of about 35% each. The likelihood of that loyal following changing horses is not very good unless the compelling reason they are where they are changes. Focus on the 30% that are undecided, and look at which way they are leaning. Always remember that the mindset of this 30% segment can fluctuate month to month.
There are many other big picture items to look at and consider, and in particular the financial stability of these companies and the viability of their operations, cash flow, etc.. This article was about applying a bigger picture to some of the items that tend to be looked at with a narrower focus.
7/25/2006 11:15:00 AM
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