Xm Satellite Radio Case Study

Satellite radio is a technology that provides a radically new way to listen to radio. XM’s service makes use of advanced satellite capabilities and elaborates terrestrial receiver architecture to deliver a wide array of high quality radio programming nationwide. In early 1998, Robert Acker, director of strategic planning at XM, needs to develop a marketing strategy for this new radio service. There are several decisions that need to be made by the company in order to finalize the business plan. At fist XM needs to decide which of two business models to pursue, whether emphasis should be placed on charging customers a monthly subscription fee, or whether to rely more on earning revenue through advertising. In addressing this problem, management must consider the value that XM radio could propose for different consumer segments as compared with existing modes of radio (AM, FM) and in relation to its sole competitor in satellite radio – SIRIUS. Besides choosing a business model there is also a need to explore how best to approach and leverage manufacturer and channel partners, considering high unknown and high-risk technology. The purpose of this report is to analyze possibilities and outline possible recommendation on strategies for XM Radio. The following areas will be examined:

• Market and Competition

• Business Model

• Pricing

• Manufacturing and distribution channels

Market and Competition

The primary target market for satellite radio should consist of adults ages 25-50. These are customers that make most money and will be willing to pay extra for the quality entertainment service. This target market can also be divided into the smaller segments. The key segments are:

• Truck drivers and RV owners (approximately 6 million i)

• Commuters driving more than 90 minutes per day

• Business travelers who spend much of their time in the car (like real estate sales agents)

• Workplace listeners, including retail outlets with a need for continuous, non-stop music

• Residents of underserved rural areas.

• Sports fans (for example NASCAR)

These target groups spend an extraordinary amount of time listening to radio, especially in the car, and should be extremely receptive to the XM product due to their constant need for radio entertainment and willingness to pay for it.

As a result of the FCC auction, the only XM’s competitor in satellite radio arena is SIRIUS. But at the same time there other entertainment sources that could be perceived as prospective competitors for XM.

• Traditional (AM/FM) Radio - it is currently free, but only offers a homogenous shallow play lists with medium audio quality.

• Satellite TV and Cable TV - provides a wide choice of programming, with very high audio quality but only fixed receivers, used mostly at home.

• Internet Radio – potentially provides a wide choice of play lists but at low quality and requires access to internet.

When examining product positioning map on Exhibit 1, one can see that even though audio and video entertainment sources mentioned above do play a role for the potential target market, satellite radio itself has a very good combination of price and quality in addition to the continuous nationwide service to differentiate itself from potential competition.

Business Model

XM’s only competitor in the satellite radio industry, SIRIUS, has chosen a commercial-free format across all programming, announcing the source of their revenue to be solely from subscription fees. However, XM has two possible options to choose from, in addition to SIRIUS’ format:

• advertising on all programming

• combination of commercial-free programming and programming carrying advertising

Option one, chosen by SIRIUS, commercial-free programming on all stations, would allow for significant product differentiation in the radio industry. Traditional radio today typically carries advertising for twenty minutes in every hour , causing listeners to constantly scan stations. A commercial-free format would fulfill the listeners’ need for consistent, interesting programming. However, choosing this format would also cause XM to miss out on the opportunity to raise extra revenue through advertising.