XM Satellite Radio, Inc. (“XM”) was incorporated in 1992 and is a wholly owned subsidiary of XM Satellite Radio Holdings, Inc. XM is unique in that it employs a new medium of broadcasting – via satellite; aside from AM and FM bandwidths that have been the standard for radio broadcasting since the 1970’s. Currently, the Federal Communication Commission (“FCC”) has only granted two licenses for satellite broadcasting (XM and its primary competitor Sirius Satellite Radio (“Sirius”)). XM currently transmits over 120 channels with unique programming nationwide.
unique programming nationwide.
XM has partnered with several leaders in the automotive and broadcasting industries including General Motors, American Honda and Clear Channel. XM is also expanding into agreements with smaller partners such as Avis, National and Alamo car rentals, JetBlu and AirTran airlines, as well as retailers such as Wal Mart, Best Buy and Circuit City. Operations are based at the corporate headquarters and broadcast facilities in Washington, D.C. Additional broadcasting facilities and offices are located in New York, New York, Nashville, Tennessee, Boca Raton, Florida, Southfield, Michigan and Yokohama, Japan.1
XM is “committed to leading the world into the next generation of radio.”1 To accomplish this mission, they are focused on providing high quality, commercial-free, diverse, nationwide coverage. With over 3 million subscribers to date, and with a 2005 schedule that includes an increase to over 130 digital channels nationwide, XM is on its way to accomplishing this mission.
As will be discussed more fully below, XM is channeling all of its resources into the satellite radio broadcasting market. But how attractive is the radio broadcasting market and what is XM’s competitive position within that market? The use of a GE Business Screen model will assist in determining whether XM’s business model has a chance at success. The GE model is designed to allow for in-depth analysis of a market environment and a company’s relative strength. XM, and the market it operates in, are located in a favorable area of the matrix. Factors that contribute to this score are an incredibly large market size that XM may potentially target, the barriers to entry that inhibits competition, the market share growth that XM is experiencing, and the distribution network that XM has established with the large car manufacturers and retailers. Because of this positioning, the matrix would suggest that there is long-term potential for success and XM should continue to invest in this business model (see Schedule A below for the GE matrix and the market and Company scores). The scoring for the market and the Company are based on the assessment of relative strengths and weakness of XM and its place within the larger market.
In order to assess the strengths and weaknesses of XM’s business model, we refer to Christensen’s RPV framework. The RPV framework provides “classes or sets of factors that define what an organization can and cannot accomplish.”1 The model breaks down the organizations capabilities into its Resources, Processes and Values.
The organization’s resources are its tangible and intangible assets, including “people, equipment, technology, product designs, brands, information, cash and relationships with suppliers, distributors, and customers.”1 A close look at XM’s strengths in this area reveals a Company on the “leading edge” of the industry. XM offers its listeners terrific choice improvements over traditional broadcasting. Traditional radio broadcasters offer the listener a narrow selection of listening styles encumbered by the requirements of paying advertisers. Most markets are characterized by a limited number of stations with few listening types, such as soft rock, country and so forth. XM is able to provide a hundred stations to each local market, each with its own special appeal. The listener gains tremendous selection from a single source.
The traditionally formatted radio station is funded through advertising. Advertising requires a broad reach within the broadcast style, and consequently does not want to “turn off” listeners with evocative content. As a result, advertising supported programming tends to be “middle of the road,” containing generic predictable content. XM radio, with its subscription based funding, is freed from the demands of advertisers. XM can offer its listeners much more progressive and “edgier” programming, appealing to more specific individual tastes. XM offers its listeners new artists and experimental material, not available traditionally to a broad audience. Listeners have been known to call in, having heard a new recording or original performance in XM studios, looking for a retail source for the materials. In addition to music, XM provides sports, talk, and news formats.1
Aside from limiting content, advertising also interrupts programming and is a source of listener dissatisfaction in typical broadcasting. The portion of the broadcast hour devoted to advertising has increased in recent years. During the 1960’s and 1970’s FM radio was the new kid on the block, and had a more music focused format than AM radio. Pressure for revenue caused AM radio to increase advertising time to eighteen minutes per hour. To attract listeners, FM advertising time began at six minutes. In recent years there has been increasing consolidation of radio broadcasting groups, resulting in increasing debt, and increasing pressure to add advertising time within programming. The subscription revenue to XM allows it to offer programming with no disruptive advertising (XM does illicit advertising through other forms, but does not advertise in conjunction with programming).
Broadcasting through satellites provides two advantages over traditional radio. A high power broadcast from satellites gives thorough coverage of the contiguous states. A driver traveling on a long road trip will be able to maintain the signal continuously while moving; an appealing benefit to long haul truckers, vacationers, business travelers and commuters. Secondly, satellite broadcasting will be attractive in small or remote markets. Isolated and rural communities are underserved by traditional radio. They are too small to be practical for advertising to support. Satellite routed service can offer numerous new choices in these communities.1
Market studies commissioned by XM indicate a large untapped market for subscription radio, perhaps as many as 160 million listeners. At this point, XM is operational and its fixed assets are in place; fixed costs are generally well known. The cost of acquiring a new subscriber is about $60, and is coming down as marketing improvements are made. After reaching break even subscription levels in a year or so at about 5 million subscribers, the remaining revenue generating portion of the market is expected to be vast.1
There is presently no other type of broadcast medium that has all of the advantages of satellite broadcast radio. Other media may have some of the advantages, but only satellite radio has the combination of quality, mobility and selection offered by XM.1
Satellite radio broadcasting offers a unique product to the market, and it is likely to remain that way. Barriers to other satellite entrants are extremely high. Presently the FCC has allowed only two licenses for satellite radio. The likelihood of more licensees in the near future is small. At such time as additional licenses are granted, the next hurdle will be capital. XM had the advantage of raising capital during the “high tech” bubble of the 1990’s. Venture capital was available. Today venture capital is difficult to find, especially in the billion and a half dollar scale required for startup of satellite radio.
XM, and its only direct competitor, Sirius, received licenses and began to work toward launch at about the same time. Sirius was first to announce its product and XM was then limited to match the Sirius offering. Sirius then had difficulties getting its satellites operational. XM was able to be first to market, taking advantage of the publicity Sirius generated for its product, but was not able to deliver. Presently XM has approximately twice the number of subscribers of Sirius at 3.25 million.
Current reception equipment has also improved over the first generation. The first generation was an aftermarket product for autos. Today nearly all car manufacturers provide, in most of their models, satellite ready radios. The manufacturers are about evenly split between XM or Sirius equipment. Satellite ready equipment in new cars makes it much less expensive for the consumer to subscribe, since aftermarket receivers had to be purchased in addition to the subscription. This appears to be a successful device so far, with about 70% of purchasers subscribing with General Motors models. New Satellite radio products are now reaching the market. Most recent are a “boombox” model and a “walkman” type model. New product uses and low front-end subscription costs for automobiles should help increase subscriber numbers and accelerate XM toward solvency.1
In contrast to its many strengths, XM is also working through some areas of competitive weakness. As with many new companies, particularly those that are attempting to educate and move their target market into a new product or service, cash availability is a primary concern. As of September 30, 2004 (the date of its most recent published financial information), XM had a working capital deficit. Its primary source of funds was (and is) debt carried at high interest rates (between 10% and 14%) and much of its stock and convertible notes restrict the Company from engaging in certain types of transactions (e.g. additional issuance of debt or equity, dividends, acquisitions, etc.) without the consent of the holders.1 The Company is using significant amounts of cash to attract new subscribers,1 provide for the needed satellite development and implementation to operate the service and contract new programming content (e.g. Major League Baseball has agreed to allow XM to broadcast games beginning with the 2005 season, but at a cost of $650 million over 11 years).1 For the 9 months ended September 30, 2004, the Company used almost $88 million of cash for operations, while its cash reserves at the end of that period were only $119 million. At that pace of use, until such time as sales revenue match costs, the Company will be required to draw from the debt and equity markets. If the Company cannot continue to raise capital or acquire debt in sufficient amounts or at affordable rates, it may be limited in its ability to move forward.1
Another weakness in the Company’s resources is its lack of ownership and control over the technology in which it depends. XM has not acquired the intellectual property rights in the technology used in constructing and launching its satellites.1 While XM has the right to use the technology through agreement, if the agreements were violated through the licensing of the technology to a competitor, or if the agreements were not adequately written to protect XM, XM may be required to expend cash resources protecting its opportunity to use the technology exclusively. In addition, when new technology is required to keep pace or stay ahead of a competitor, XM may not be able to contract the development of the required technology. While the technology is critical to XM’s continued viability, XM does not control its development (or potential distribution).
The organization’s processes include “the ways that products are developed and made and the methods by which procurement, market research, budgeting, employee development and compensation, and resource allocation are accomplished.”1 XM faces the challenge of educating its target market regarding the vast advantages of radio delivered by satellite. This education is required as the Company’s primary source of revenue will be end user subscription fees. Unlike traditional radio, XM is required by its FCC license to offer radio service only to subscribers on a pay-for-service basis.1 Due to the limited size of the market, at least initially, XM will not be able to attract significant revenue from advertisers. XM faces the challenge of convincing sufficient numbers of listeners to pay for “premium quality and content” when radio has always been available free of charge. The other half of this dilemma is delivering the premium content to listeners. XM has been diligent in pursuing content attractive to its listeners, and potential listeners, but the competition with Sirius and the cost of content (see discussion of Major League Baseball above) has made this task challenging. There is still a question as to whether the Company will be able to deliver sufficient content to attract, and keep, a subscriber base sufficient in size to operate.
In addition to content, the Company must provide “premium quality” to listeners. While XM currently has the rights to use two satellites with a third ready to launch in the near future, and a fourth as a backup, the cost, lifespan and dependability of this new technology is a concern and a potential weakness. During its short term of operation, XM has already discovered flaws in its current satellites and difficulty obtaining reimbursement from its insurance providers.1 While it does have backup waiting in the wings, if the satellite capability was damaged or otherwise disabled, the XM service may be jeopardized. Such an interruption in its early stages would be difficult to overcome.
The organization’s values are the standards by which the Company makes prioritization decisions and channel their resources.1 As defined, there are few apparent weaknesses in XM’s values with regards to making satellite radio a success. The Company’s focus, and all of its resources, are targeted towards the successful offering of premium quality and content to its listeners.
XM is not (currently) focused on realizing a huge profit, as seen by its use of financial leveraging. XM is not focused on developing cutting edge technology, as demonstrated by its outsourcing of all hardware development and manufacturing. XM is focused on distributing radio to as large a population as possible, as soon as possible. XM has moved through its market strategy step-by-step, first focusing on the aftermarket automobile installations, then moving into the factory installed automobile market, and now expanding into the home and mobile market. The major emphasis on nationwide coverage and non-exclusive corporate partnerships demonstrate the desire to make the product easily accessible to consumers. XM’s priority is very simple: rapid growth of a high quality product. It remains to be seen whether this emphasis will pay off.
2003 Annual Report, XM Satellite Radio, Inc.
Acker, Robert (former XM Vice President, Strategic Development, 1996 – 2004). Personal interview. January 2005.
Christensen, Clayton M. and Michael E. Raynor. The Innovator’s Solution; Creating and Sustaining Successful Growth. Boston, Massachusetts: Harvard Business School Press, 2003.
Godes, David B. and Elie Ofek. Harvard Business School Case Studies: XM Satellite Radio (A), (B) and (C). Harvard Business School, 2003 – 2004.
Reuters, Key Developments for XMSR: (http://www.investor.reuters.com/Key Developments.aspx?target=/stocks/news/keydevelopments&ticker=XMSR). January 15, 2005.
XM Form 10K (filing with the Securities and Exchange Commission), December 2003.
XM Form 10Q (filing with the Securities and Exchange Commission), September 2004.
XM Internet web site: (http://www.xmradio.com/corporate_info/cor
1 XM Internet web site: (http://www.xmradio.com/corporate_info/corporate_information_main.html).
3 Christensen, Clayton M. and Michael E. Raynor. The Innovator’s Solution; Creating and Sustaining Successful Growth., p 178
5 Godes, David B. and Elie Ofek. Harvard Business School Case Studies: XM Satellite Radio (A), (B) and (C) and personal interview with Robert Acker (former XM Vice President, Strategic Development, 1996 – 2004).
11 Form 10Q, Sep 2004, p 6
12 Ibid., p 26
12 Reuters, Key Developments for XMSR: (http://www.investor.reuters.com/Key Developments.aspx?target=/stocks/news/keydevelopments;ticker=XMSR). January 15, 2005.
14 Form 10Q, Sep 2004, p 42
15 Form 10K, Dec 2003, p 23
15 The Innovator’s Solution, p 183
17 Form 10K, Dec 2003, p 29
18 Form 10K, Dec 2003, p 2e