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Saturday, April 07, 2007

SSG Report - Competition

April 6, 2007

SSG Report – Competition

In opening I want to make a few statements. This is a simple report with simple theories and concepts that can be verified with relative ease and common sense. I purposely developed the report in this manner because all to often people get hung up in debate over minute details and the bigger picture gets lost in the shuffle. The purpose of this report is to outline what I feel are the competitive natures of companies, industries, and sectors that all have a common goal. It may well be that my opinions are not shared with some contributors to SSG, and as always, they have the latitude to formulate and publish their opinion as well.


Much is made about the proposed merger between Sirius and XM. What is known is that the competitive landscape needs to be defined. There are claims of vast competition, and claims of no competition. So what is the answer? Which group is correct?

To answer this question we need to first decide on a ROOT LEVEL what the industries, sectors and companies in the field are in business for. That is the most basic level of understanding whether competition exists.

TO MAKE MONEY

This is the very core of all of these companies. They all exist to make money. They all compete aggressively to make money. No one can deny that on this most basic level that these companies are all competitors.

Now that we have this established, we must narrow the field down a bit and determine what the product being offered is.

AUDIO INFORMATION AND ENTERTAINMENT


Once again, this is very basic. Audio programming at a consumable level. People want to hear informative and entertaining programming. All of the companies compete aggressively to fill the consumer demand. Again, no one can deny that all of the companies discussed compete in this aspect.

It is now that we see some separation in how the companies compete. In simple terms, different companies have chosen different paths to be able to offer consumers audio entertainment and information. The differing paths each have their positives and negatives, but in the end, the path involved ties directly to the desire to deliver a similar product.

TERRESTRIAL RADIO PATH

This is a long standing and well established path. The costs to take this path involve buying radio stations, and broadcasting the content. There are no subsidies that have to be paid and the proliferation of equipment that is capable of receiving the broadcast signal is massive. Every car and home have equipment to receive the content, and there is no charge to the consumer to receive the content. Additionally, federal law affords this path access to music for free, meaning that no royalties are paid for songs played.

Terrestrial radio has a limited range. In many cases, owners buy several stations in multiple markets to expand their business. Additionally, these groups of owners get together to act as a single body on a national level via the National Association of Broadcasters. Talent is often syndicated to play in multiple markets, and station names and formats also cross over into many markets.

The terrestrial radio stations make money via advertising and syndication. In an effort to widen their footprint even further, terrestrial radio has entered into a global scale via the internet. This enables the broadcasts to be available anywhere in the world. Many stations also offer download services where listeners can download songs for a fee, or even download radio shows to listen to later.

Terrestrial radio is able to garner a national presence and compete on a national level via their membership in the NAB, via syndication of talent, and via the internet. Even on this level, there is competition with satellite radio for advertising dollars.

Terrestrial radio also makes efforts to compete with the I-Pods and MP3’s via a format known as JACK FM. This format is advertised as “An I-Pod on Shuffle”.

There is indeed a unique aspect to terrestrial radio in that the path they are on differs, but that does not mean that they are not competing with the other mediums. Remember, on the most basic level, they are competing for dollars via the delivery of a common product.

Within this sector there are many companies. These companies all compete with each other for market share and dollars.

There are those that argue that terrestrial radio does not get subscription dollars, and is therefore not competing with satellite. While it is true that there are no subscription dollars, terrestrial radio has a distinct set of advantages:

- They deliver local content.
- They do not pay for the music they play
- The penetration of equipment capable of receiving their content is everywhere.
- They do not have to manufacture, subsidize, or distribute the hardware capable of receiving their content.
- They are well established
- They are currently expanding their reach though HD programming, which promises CD quality.

While many do not see HD radio as mature yet, they should consider these statements offered by David Rehr of the NAB:

“And HD Radio brings expanded program offerings – and less interference. More than 1,000 HD radio stations are already on the air, available to 75 percent of the population. Thousands more will be going digital soon. Like their digital television counterparts, HD radio broadcasters can also offer multiple program streams. More than 350 stations are doing just that – rolling out additional channels with new music formats, local information and local creative content.”

“We at the NAB are working to accelerate the number of HD receivers in the marketplace, to increase the diffusion of this technology throughout the nation. In fact, it is a top priority of the NAB Radio Board of Directors to make this amazing technology commonplace.”

They are doing just that. BMW is now installing HD radios, and other manufacturers are already following suit. Even Wal Mart, the worlds largest retailer is now on board with HD radio, announcing in the past month that they will retail hardware.

Clearly terrestrial radio stations want people to carry a certain belief with regards to the proposed Sirius and XM merger. They want you to act as if syndication does not exist, as if there are not station owners that span many markets, as if programming is not common, as if they are they are like your next door neighbor. However, realistically they are not only planning on expansion…..they are already doing it. More comments from Rehr:

“Another benefit of digital technology is our ability to move content from one platform to multi-platform distribution – to expand our reach. Multi-platform generally means broadcast programs delivered on something other than the TV set or the radio. Not at the expense of our core business – but in addition to all that we do.What makes multi-platform strategies attractive is having more convenient access to our audiences – such as radio on cell phones, and TV on laptops.”

“More than 8,000 radio stations have Web sites, and many of these are being used as portals to stream their stations' audio. Radio stations earned more than $200 million dollars in revenues last year from online offerings alone.”

“Who are the newer competitors? On the television side, in addition to cable and satellite and the Internet, we now have Video on Demand, interactive TV, time-shifting, place-shifting, and much more. On the radio side, we have satellite radio, Internet radio, iPODs, other MP3 players, cell phones and others. How will we compete?Our vision is a broadcast signal on all of these platforms, and on any gadgets yet to be invented. Broadcast signals will not only enhance the experience for the viewer or listener – they will also give the manufacturers that include us an advantage over competitors who do not.This is already happening in radio. Motorola's I-Radio is merging the cell phone, the car radio and the MP3 player. FM adaptors for iPods are in the marketplace. It is no accident that Microsoft has included an FM tuner in its just-launched portable media player “Zune.”Broadcast signals on all devices. That’s our future.”

These statements were delivered by David Rehr only 6 months ago.

Thus, it is reasonable to conclude that although there are unique factors to terrestrial radio, that it is indeed competitive with SDARS on both a local and a national level. Rehr himself states that internet radio represented $200,000,000 in revenues last year, and he clearly indicates that this is just the beginning.

I-POD and MP3 PATH

This path is mostly about delivering to the consumer a permanent copy of content that can be stored on a device and played on demand. The business model differs, but again, the basic and root goal is to make money by delivering entertaining and informational audio content to the consumer.

There is really no advertising on this platform to speak of. True, some pod-casts, etc have advertising, and the websites where songs are downloaded also have adverting. The money is made on the sale of hardware, and in some cases, the distribution of content.

Many download services charge by the song, and also have a subscription. At this point there is even a crossover into the cell phone arena with AT&T announcing a 1 year unlimited subscription to Napster with the purchase of one of their cell phones.

This facet of the competition has unique aspects like the others. A simple MP3 player is capable of storing and organizing thousands of songs. This allows a user to pick their favorites and own a copy of them. The disadvantage of this type of device is that most lack a method of discovery for new songs. Users of these devices need to discover new content via another means.

One advantage is that the auto manufacturers are recognizing very quickly that consumers want the ability to use a non-OEM device in their cars. Aux. Inputs are becoming a standard feature. At this point, it is the OEM driving this via consumer demand. Toshiba is not subsidizing the installation of Aux. Jacks. The Aux jack is a standard size that can be utilized across most platforms and brands.

Additionally, there are scads of aftermarket companies that develop, manufacture , and retail products to make automobile use of these device easy. Again, the vast majority of these devices are not subsidized by the manufacturers in this sector.

Satellite radio, as well as terrestrial radio have recognized that this method is viable. Both XM and Sirius have developed hardware that acts in a very similar fashion to an MP3 player. At this point, such devices either carry an RIAA bounty, or are being litigated by the RIAA.

Auto manufactures are getting in on this segment as well. Chrysler has introduced a stereo system with a hard drive capable of developing and organizing playlists. Clearly consumer demand in this segment is huge. Over 90,000,000 I-PODS have been sold, and the term Pod-cast has become a virtual part of our everyday language.

CELL PHONES


This technology is booming. Each carrier has full lines of devices that are capable of acting as a phone as well as an MP3 player. There are deals with internet radio, deals with terrestrial radio, deals with download services, and that is just the beginning.

Perhaps out of the entire group of competition, the cell phone companies can boast the most capability. A cell phone is a very common device these days. At this point even many children can be seen with a Nokia appendage growing from the side of their head.

A device capable of letting you jam the night away, and make or receive calls is a pretty compelling device. Cell companies have the advantage of an already well established network of customers, and massive revenues which give them extreme marketing power. A day does not go by without just about every person in this country being exposed to a cell phone in one manner or another. In fact, the most recent ad campaigns for cell carriers focus more on audio or video capability than they do the core business of being a cell phone company.

For anyone to insinuate that this medium is not competitive is really not paying attention to what is happening, and how fast it can happen. One only needs to look at the PDA. Devices such as PDA’s have now become part of the cell phone.

This category is perhaps the toughest to define in terms of competition. Many informational and entertainment audio delivery companies are seeking out partnerships in the cell sector, while at the same time, competing against other services. By example, both Sirius and XM have deals with cell carriers, but those same carriers als provide other content. Thus, you are competing against them in one area, and aligning yourself with them in another.

INTERNET RADIO

The participation in this sector is massive. Nearly all of the competitors listed by Sirius and XM participate in internet radio, and on top of that there are thousand more who broadcast over the internet as their primary means.

The internet is global. One only has to do a bit of exploring to find scores of stations in any genre you can imagine.

Internet radio has come a long way over the past few years, and new technology is being developed constantly. One new company, Slacker, enables users to mark favorites, and ban songs from their playlist. Slacker boasts that users can create their own virtual radio station. Even further, they plan are launching a device capable of getting into the car and receiving updates via satellite. Slacker states that they are “A New Kind Of satellite Radio”. Slacker has a free advertising based service, as well as a subscription based service that is advertising free. Additionally, they are also offering a download service for $1.00 per song.

SUMMARY

What we have here are companies, industries and sectors that all have the exact same goals in mind.

These companies, industries and sectors all have some distinct methods by which they want to obtain those goals. They also recognize that while they believe their method is good, and gives them some distinct advantages, that the other methods also have merit. Thus they also bleed into those delivery methods as well.

In the end, they are all trying to satisfy the consumer in the best manner possible, because a happy consumer is a repeat customer. The consumer has many choices. Do they want to own the song? Hear the song without advertising? Pay a fee? Listen for free? Stream it on the net? Stream it on their cell phone? Or use a combination of these methods?

A satellite radio merger does not mean that a monopoly is created. It does not mean that prices will rise. It does not mean that hardware will cease to be innovative. With the numerous competitors in the landscape, the competition is fierce. This level of competition and consumer choices demand that all companies, industries and sectors make efforts to be on the cutting edge. The key here is that a compelling product be offered, both in terms of content and hardware, and the existence of all of these forms of audio information and entertainment delivery dictate that none of these can exercise monopoly power.

This issue rests in the hands of the Department of Justice and the Federal Communications Commission. They have many factors to weigh in coming to a conclusion, but the unavoidable fact is that all of the companies, industries and sectors have COMMON ROOT GOALS. It is the method of obtaining that goal that differentiates them, but even that line is getting blurred each day.

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4/07/2007 10:49:00 PM


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5 Comments:

  • A satellite radio merger does not mean that a monopoly is created. It does not mean that prices will rise. It does not mean that hardware will cease to be innovative.

    Of course it means all of the above. A merger, by definition, creates a monopoly -- there will be one provider of "pay radio" in cars. Trying to redefine competition to support a merger is a fine exercise, but it isn't intellectually honest. The FACTS are that there are only two companies offering satellite radio and if you merger them there will only be one, and THAT is a monopoly.

    It follows that if you create a monopoly, you are going to have higher prices and less innovation.

    A post-merger XM/Sirius will reflect every element of the classical definition of a pure monopoly. (a) There will be a single seller of satellite radio service, and many buyers and (b) there are no substitutes for the satellite radio service. And (c), the single firm will be in control of pricing.

    Not only does it create a monopoly, it creates the worse kind of monopoly -- one in which the development of new competition is either impractical or prohibitively expensive.

    When Ipods, Wimax, and HDRadio begin fulfilling the promises of satellite radio (live [realtime] content, a hundred or more channels available nationally, ubiquity, cost-effectiveness) then it is reasonable to begin considering them as substitutions for satellite radio (and therefore, mitigating its monopoly power).

    Until then, claiming the merger doesn't create a monopoly is simply bending the rules to accommodate wishes of the two companies.

    By Anonymous Anonymous, at April 08, 2007 10:48 AM  


  • You State:
    "Of course it means all of the above. A merger, by definition, creates a monopoly -- there will be one provider of "pay radio" in cars."

    Here is a classic example of someone trying to define the market in very narrow terms. Pay radio is not what matters. What consumers are seeking is what matters. You are aware that many I-Pod and MP3 users play their content in cars I hope. These are songs that are paid for, and many of these users pay a subscription to a service. Cell phones carry a subscription. Users can stream pay radio right over their cell phone and into a car. Slacker is a pay service that will be a big product offering this summer.

    You speak of intellectual honesty, and try to define this merger as a creation of a monopoly.

    Do you acknowledge that all of these businesses carry the same goal?

    Are you saying that prior to satellite radio that terrestrailk radio had a monopoly?

    You state that there are no substitutes for satellite radio. I pose this question to you. Less than 5% of Americans use satellite radio. Do you think that these people are not listening to anything else? There is plenty of substitution. How different is "Hotel California on satellite, vs. FM, vs. Ipod?

    Developing satellite radio in the way that Sirius and XM have is very exspensive. Other means can be used to deliver similar effects. Slacker has found a way for satellite delivery. One Canadian firm had a very interesting and promising concept for satellite in Canada.

    You seem to think that others can not do this, but do not consider that it is already happening, and how fast all of this will grow.

    By Blogger SSG, at April 08, 2007 12:47 PM  


  • Everyone can debate the issue in nebulous terms, but at some point, it must be boiled down to the essential attributes of satellite radio:

    1) Ubiquitous availability in vehicles (the space in which satellite radio competes -- home use is incidental) [rules out Wimax and other Internet-based alternatives]

    2) Ability to receive content in real (or virtually real) time (e.g., News, sports, talk, etc.)

    3) Many channels of content, not merely one or two, all of which are available on a national basis

    4) Subscriber supported, not ad-supported.

    Without these elements, a would-be "competitor" does not fulfill the promise of satellite radio.

    The truth is that the competitive landscape is not radically different from what existed at the inception of satellite radio. We've had prerecorded music in our cars for years -- of course, the Ipod has made it more convenient.

    No other technology is even close to providing what satellite radio is providing today. This irrefutable fact pretty much ends the argument. If you or anyone can counter this remark with responses to all of the following comments, I'll gladly acquiesce in the discussion:

    a) While driving through Montana, I want to listen to CNN, C-SPAN, or Fox News channel in real time.

    b) While commuting from work, I am an out of market NFL or MLB fan and want to listen to a game that interests me and doesn't happen to be available in my locality on terrestrial radio.

    c) I'd like to listen to Howard Stern, Opie & Anthony, Martha Stewart, or Oprah & Friends while driving. Where can I get these and the other exclusive content items on XM or Sirius?

    d) I have an Ipod and I listen to it while driving. But sometimes, I'd like to experience "radio" rather than recorded music (just like I once wanted to have both FM and CDs in my car). But I don't want a subscription radio service so I'm not bombarded with commercials. Where do I get this other than XM or Sirius?

    As can be seen, there are substantive attributes of satellite radio that no other medium provides or is likely to provide anytime soon.

    There is, at this time, no "substitute" for satellite radio, and there isn't any on the near horizon.

    By Anonymous Anonymous, at April 08, 2007 1:44 PM  


  • Some interesting statemnents but you still seem to be approaching the subject from a very narrow stance, and susch a stance is not realistic. Let me address your comment point by point.

    You state that satellite radio has ubiquitous availability in vehicles. This is far from being true. There have been roughly 10,000,000 installs of satellite radio in 5 years. There are roughly 65,000,000 cars on the road.

    You state home use is incidental, but how do you come upon this claim? Home kits are very popular sellers for SDARS, as are boom-boxes. Certainly these devices are not being used in cars. Internet radio has more subscribers and listeners than satellite radio. Terrestrial radio claims $200,000,000 in internet radio revenue last year. That is not an incidental business, and if you define that as incidental, than you would also claim satellite radio is incidental. Look at the revenue streams.

    Satellite and terrestrial radio both give the ability to receive content in real time.

    Subscriber vs. advertising supported reflects the business model. It is not really relative to whether there is competition or not. Terrestrial radio has an advantage of saying that their content is free. Satellite has the advantage of saying they are commercial free. In the end, the consumer gets to decide.

    You state that no technology is even close to delivering what satellite can deliver. Take a look at Verizon wireless http://getitnow.vzwshop.com/index.aspx?id=music_vcast_how2start&cm_re=Global-_-Features%20and%20Downloads-_-Music%20How%20to%20get%20Music Not only do they offer audio….they offer video. Other cell carriers offer similar features.

    Next, you cite an argument that gets very specific in nature, and thus can be refuted from several standpoints. By example, you could have just as easily asked it this way:

    a) While driving through Montana, I want to listen to national news. Your specifics are the downfall of your statement. The definition of competition is not access to one particular program, but programming of a similar nature.

    b) An out of market fan does have access to games outside their market. ESPN broadcasts many games. Many major sports in the country have radio networks that broadcast games of the week. The fact that satellite offers all of the games is a selling point for satellite radio, but what about the talk covering the happenings. A Red Sox fan for example gets the bulk of their red sox new from WEEI in Boston. The coverage is far deeper than that offered on satellite.

    c) You mention talk shows such as Stern, Opie and Anthony, Martha Stewart, and Oprah. Again, you are getting specific. Opie and Anthony are also available on terrestrial radio. Where does one go to hear Rush Limbaugh? He is exclusive to terrestrial. What about Don Imus? What about Mancow, The Grease man, and others? Your stance is weak because you are reaching for very specific pieces rather than acknowledging that it is a format that is important. The fact of the matter is that I can cite far more content that is exclusive to terrestrial radio than you can cite from satellite radio.

    d) Your fourt example simply points out a free service vs. a pay service. Do you place more value on time, or money? That is a decision you can make. Many HD stations already play fewer commercials. You can also use slacker, which gives you the choice of subscription which is ad supported, or subscription, which does not have ads.

    I fully recognize that within the audio entertainment and informational sector there are many paths to take. I also recognize that each method has advantages and disadvantages. Consumers can choose which service or combination of services suits them best. Realistically speaking, what percentage of your time is spent within the range of your favorite terrestrial radio stations? Likely it is most of the time.

    By Blogger SSG, at April 08, 2007 8:14 PM  


  • Man such long drawn-out discussions. Its very easy and simple - You want national mobile radio content that competes with satellite - Pick up your cellphone and you get sports radio, music radio, NATIONAL radio on a subscription basis. Simple, to the point. End of discussion. You can listen to a Red Sox game in your car on a cellphone radio sub. Any questions?

    By Anonymous MUSCLE13, at April 08, 2007 8:34 PM  


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