Xm Satellite Radio Case

Executive Summary

XM Satellite Radio (XM) is faced with four key issues as it enters the new market of satellite radio: a need for $1 B dollars in start-up capital; delayed competitive position relative to SIRIUS; required technology support from radio manufacturers; and a lack of positioning strategy in the new market. Strategic analysis indicates a recommended solution of a multi-phased implementation using a tiered-offering business model (limited selection of free-to-air advertising-supported stations; a basic paid ad-free subscription selection; and a premium ad-free selection) to capture and maintain a profitable and competitive market share, as well as to address the key issues.

Problem Definition/Key Issues

After an initial investment of $89.9 M required for the operating frequency range license, XM is committed to FCC imposed deadlines and facing considerable pressure from the only other competitor in satellite radio, SIRIUS. SIRIUS maintains a significant lead in the amount of capital raised and has a publically-communicated business model. XM is therefore confronted with the following key issues (please see Appendix I for SWOT analysis):

1. Capital: an estimated $1 B dollars is required to cover start-up costs. XM has not yet decided on a funding strategy for its capital intensive business. All business functions, including satellite and receiver development and production, rely completely on raising this money. Investors will also require a functional business plan before betting on XM.

2. Competition: SIRIUS has already raised almost half a billion dollars and currently trades on the NASDAQ. They have a committed business plan and expect a launch date that significantly precede the imposed FCC deadlines. In a market of two competitors, if XM does not progress quickly, SIRIUS will capitalize on the advantages of first movers.

3. Manufacturers: as a new, unproven technology with a non-existent market, "frugal" manufacturers of receiver technology are reluctant to invest their research and design in satellite radio technology. XM is challenged with bringing the right manufacturers on board to develop the consumer components.

4. Communications Strategy: $100 M in marketing budget is expected for XM's launch; XM must choose between a manufacturer/retailer and a consumer-directed strategy. How this money is directed will greatly influence the consumer adoption rate, and hence the success of XM.

Alternatives

The following important decisions must be made to address the key issues: developing a business model (subscription vs. advertising-based revenue, and choosing a target market), developing a strategy to garner R&D support (i.e., to subsidize manufacturers or not), and a comprehensive marketing and communications strategy. The following alternatives have been identified for XM:

Alter-native Business Model R&D Strategy Marketing and Communications Strategy

1 Subscription-based only Subsidize manufacturers Emphasize consumer-directed advertising/promotions

2 Free-to-air with ads No subsidy to manufacturers Sales effort directed at manufacturers/retail

3 3-Tiered: Free with advertising that can be upgraded with subscription fee Subsidize manufacturers Emphasize sales effort directed at manufacturing/retail

Recommendation

As a result of our analysis (Appendix II and III), our recommended course of action is to pursue alternative 3, for reasons detailed below.

Recommended Business Model

Target Market: XM's market research identified a couple segments worth pursuing, and specific channel offerings have already been developed for these groups. Considering that SIRIUS is heavily targeting car listeners, XM will target a yet untapped market for satellite radio: home listening and others (i.e., workplace listening). Market research indicates that car listening, while growing, occupied only 31% of total radio listening in 1996. In contrast, 39% of listening occurs at home, and the remaining 30% occurs in places "other than home or auto". In addition, while SIRIUS would require customers to purchase an adapter without replacing their car radio, XM would require consumers to purchase a new XM-enabled radio, making XM weakly positioned to compete in the car listening market. By targeting home and other categories of listening, XM can reach 69% (39% + 30%) of radio listeners that SIRIUS' strategy overlooks .

Tiered Programming: The new technology that XM employs puts it in a position to differentiate its product from SIRIUS' services. XM receivers can be uniquely addressable, allowing XM to provide different services to specific customers. This lends itself to a three-tiered approach in structuring XM services, such as offering: basic (free), basic plus ($7.99/month) and premium ($9.99/month) radio listening packages (see Appendix IV for the product mix).

Advertising or Subscription: Despite criticism from the public about advertising in radio programs, potential advertising revenues