Thursday, October 05, 2006

Has Satellite Radio Peaked?

By now you're probably over the initial shock-and-awe reactions from today's Q306 announcements by XM and Sirius. The basic question on everyone's minds is whether or not the satellite radio industry has peaked?

Looking forward, in order to reach guidance SIRIUS needs to add 1.18 Million subscribers, and XM needs to add 515,000-1.01 Million subscribers, in Q4 of this year.

If we look at last year (aka "the Golden Age") as a comparison, SIRIUS added 1,142,640 net subscribers and XM added 898,315 net subscribers, in Q405. But that was when The Messiah of Radio was at his peak of publicity and hype, and XM was practically paying you to buy a radio. Can Sirius or XM expect to see similar results this year? And in Sirius' case, can they actually beat last year's Q4 numbers in order to reach guidance? It seems doubtful right now, and probably a reason why analysts are skeptical.

When I talk to analysts about this, I always try to stress that 2005 was essentially one big anomaly. Stern really messed up everyone's trending. The massive amount of interest, and the number of subscribers he generated, is simply not sustainable. That time is over, deal with it. Howard now is essentially a halo vehicle for Sirius - his influence will continue, but we will never see the growth we've seen in the past.

Production cuts from the Big Three auto manufacturers. Word that the retail channel has peaked (though I'm still not sold on that theory). These play against the numbers. And don't forget the number of returns we are possibly going to see when people realize the FCC-mandated restrictions make plug-and-play receivers even harder to use (as if they weren't hard enough).

The good news is that I truly don't think we've reached a plateau in interest for satellite radio. Not at all. OEM vehicle installations are the cash-cow, but they're a slow to move herd. Until more vehicles include satellite as standard-equipment we're just not going to see the penetration needed to sustain the growth investors seem to be expecting. That said, in the long-term, standard-equipment is definitely coming.

What both XM and SIRIUS do have control over is the retail channel.
The early-adopter phase is over, but that just means that there's more growth potential ahead. Both companies need to get more creative. They need to simplify plug-and-play receivers (or just get rid of them). They need to kill the FM modulators. They need to remove the wires.

They need to stop asking us to wear antennas on our heads. They need to embed SDARS chips everywhere. The early-adopters are willing to put up with wires and messy installations in order to be on the forefront of technology - but the critical mass is not.

OEM growth will keep satellite radio in the mix, but it's receiver innovation will keep satellite radio retail growth moving. Oh, and marketing... we need to make satellite radio cool again, but that's a post for another time.


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