Xm Satellite Radio Case
Value proposition of XM to different consumer segments and primary target segment.
XM had developed the capability to provide 50+ high quality (near CD quality) digital radio channels to cars and homes via satellite throughout the country. Such a service was not available before and has the ability to deliver uninterrupted service without any retuning needed. The value proposition here is high quality and ubiquitous radio broadcast, in addition to the variety of channels which will be of interest to different age and consumer groups and their disparate preferences.
XM radio can also show song titles, artist and can be switched on at an ease of a button on the radio. Another possible value proposition under considerations is commercial free broadcasts, which will allow users to listen to shows and music without the inconvenience of listening to advertisements in traditional radio. Radio listening has increasingly become part of a car-driving activity with up to 31% of radio listening occurring in the car.
XM’s consistent high quality service would be particularly appealing to this segment, which includes young adults, truckers, and commuters in both urban and rural areas.
XM also stands to gain from serving advertisers as its various channels, directed towards specific consumer segments may help advertisers better communicate to reach these certain groups with high frequency. As for the primary target segment, XM radio should target young adults in 18-35 years age group who are forecasted to have a high demand for their service according to Exhibit 10. More specifically, male users in urban areas will have a higher willingness to pay for the product, along with Tech seekers (who have a tendency to adopt new technologies early) as seen in Exhibit 9.
Thus, XM radio should primarily target drivers in the 18-35 year age group, with a particular emphasis on males in urban areas and tech enthusiasts. 2.
Aspects for consideration in pricing of radio receiver and subscription fee. Several aspects factor into pricing. In this case, XM is looking to partner with aftermarket manufacturers to assess who are best fit to produce and distribute the XM radio receivers. Different manufacturers (such as Sony and Pioneer) and distributors (such as Best Buy) have different costs and margins of around 30%, which need to be considered in assessing a viable rice to charge users. Additionally, XM needs to understand the installation costs of these radios to determine the fee of the radio receiver.
As for the price of the receiver, it can be observed in exhibit 9 that as its price goes down more there will be more demand at various price points ranging from $100-400. Since this is a one-off cost in 5 years, XM can possibly charge the minimum price i. e. $100 to capture the maximum number of subscribers and make up for any losses through subscription fees.
This can also reduce the costs of acquiring these additional customers through other marketing efforts. Looking at the subscription fee, using the demand projections from exhibit 9 revenue forecasts for 5 years have been generated and presented in table A of the Appendix.
Revenues for XM are potentially maximized at subscription price of $10 with the radio price at $100. These revenues can also cover their annual operating costs of $200-300mm and $1bn start-up financing. Assuming, that the radio is priced at $100 as mentioned above, $10 might be the optimal price for XM to charge.
Considering that SIRIUS plans to charge $10, XM will be competing for the same customers as SIRIUS and will have to charge the similar price of $10 and may risk losing them if they charge a higher fee. In light of the figures, if lifetime were shorter- higher fees and radio costs may have to charged to earn more revenue and make up for costs. However, this should be done carefully with appropriate due diligence because users may be lost if prices are too high and XM should be wary that customer acquisition is often more expensive than customer retention and it may be more worthwhile to keep fees and costs low.
. Recommendation for price of the service to change over time. XM’s development costs are high as they are introducing a new technology ($1 bn+). Initially, their costs may be high so that can recover some of their investments. However, over time as XM understands the market landscape better, moves up the learning curve and achieves economies of scale, they may be able to operate more cost effectively, which may allow them to charge lower prices over time.
Also, with SIRIUS in the market, XM may have to lower their prices to remain competitive.
However, if SIRIUS decides to keep costs high or increase them, XM may not be pressured to reduce prices. Also, with time if XM’s customers increase, they can continue to earn high revenues while lowering prices. If for some reason SIRIUS leaves the market or XM locks in a substantial number of customers who may find it difficult to switch i. e.
achieve somewhat of a monopoly, they will be able increase their fees. With that said, XM can maximize their 5 years profits with a fee of $10-12 according to Table A. However, the variable market dynamics over time will determine how XM can price their service. 4.
Implications of allowing advertising on XM Advertising may be a double-edged sword for XM.
While it may allow them to increase revenues, it may undermine their ability in attracting customers – especially with SIRIUS in the market who will have a strong point of differentiation by being commercial free. If XM has commercials, SIRIUS may be able to take away many customers who may have potentially purchased XM’s services. XM may hedge this risk by only allowing advertising on some channels, but it still may dampen the value proposition to users. Advertising may make XM seem closer to traditional radio, which has 6-20 mins of advertising.
One advantage of advertising is that it would help finance many of XM’s cost and potentially allow them to charge a lower fee, which may help bring in customers by being cheaper than SIRIUS (Advertisers were willing to pay an average of $6.
50 for CPM and spending is predicted to grow at 9. 3% for the next 4 years) . If XM can generate sufficient or more revenue by balancing the right amount of advertising while capturing a certain level of customers at a low and attractive price, then advertising may be viable. However, this will hinge on how salient the value of commercial free radio is. 5.
Implications of SIRIUS’s launch plans.
SIRIUS will be offering a very similar satellite radio service and it is mentioned that they have a head-start on the launch with their financing and technology in place. This may give SIRIUS a first mover advantage, and may allow them to capture the first and ensuring users of satellite radio and reach that breaking point more quickly where the majority of adopters are captured. Wall Street Analysts predicted that SIRIUS may gain 1. 2 mm subscribers within one year and up to 7. 5 mm in 5 years. These are customers who could potentially be captured by XM if they were to move in first.
SIRIUS also plans to be commercial free, which will be strong point of differentiation for them if XM opts to use advertising. Additionally, SIRIUS plans on setting a subscription fee of $10, which means XM will have to price their service around that level to stay competitive. However, SIRIUS plans on targeting truck drivers, RV owners and people in rural areas with weak radio signals, while XM plans to target young adults and a broader market of tech-friendly users. Therefore, this may suggest that SIRIUS and XM may be competing for different market segments and possibly be able to co-exist. . Revenue model that XM can pursue to capture value from satellite radio and marketing.
XM should definitely emphasize the unique and innovative technology of satellite radio when marketing the product along with the variety of shows offered. Given their research, marketing efforts could be directed towards young adults in urban areas, perhaps with more concerted efforts on men and tech-friendly people. If XM is competing alongside SIRIUS, they can differentiate themselves by appearing as the more hip and young service due to their different target market.
XM should also devote resources and show its potential to companies such as Sony and Best Buy to build strong partnerships with radio manufacturers and distributors to build a stronger product association with their products and have a more competitive presence than SIRIUS. To develop a definite revenue model for XM, more research on the potential advertising revenue XM can earn would be helpful.
Acker is considering tiered levels of programming at different levels of pricing and possible advertising.
This may be viable to capture different market segments with different levels of willingness’ to pay and thus, maximize their value captured in the market. While, this may help users customize their service, it may not offer the simplicity of a single fee that SIRIUS offers and also the value proposition of being commercial-free. Though, XM can capture more users if they do not include commercials, they may earn desired margins by including advertising and offering a lower price to obtain a larger number of customers- then they can consider advertising by offering a lower price than SIRIUS.
However, if advertising makes XM appear too similar to traditional radio, they stand to lose substantial customers to SIRIUS. It would be useful to know whether the survey used for demand projections in Exhibit 9 assumed no commercials (if users knew there would be commercials, projections may be substantially lower) to gauge user sensitivity to commercials.
This information in conjunction with data on advertising revenue potential is needed to validate whether to proceed with commercials or not in the revenue model.
If advertising revenue is insufficient or drives customers away in the long-run, a commercial-free approach should be taken, and it would be advisable for XM to charge a fee of $10 to be competitive with SIRIUS and maximize revenue. With regards to the radio receiver, a low price of $100 is optimal as it will draw more consumers and help maximize potential revenue as seen in Table A. Appendix Table A Projected Revenues at different Price points over 5 years | Subscription Price| | | | Radio Price| $12 | $10 | $8 | $5 | 400 | 26,524,557,920| 27,404,662,000| 24,186,087,200| 19,313,536,900| $300 | 25,277,413,560| 25,673,463,000| 22,374,398,280| 17,338,968,000| $250 | 25,755,561,250| 24,247,159,500| 22,794,485,790| 17,512,492,250| $200 | 28,952,679,680| 24,559,068,000| 25,724,089,240| 20,245,325,500| $150 | 30,995,115,900| 31,185,174,000| 27,781,839,540| 22,099,589,550| $100 | 37,496,092,440| 37,818,731,300| 34,035,829,120| 27,305,098,000| Each box expresses revenue earned by multiplying projected demand by subscription fee in 5 years i. e.
60 months, plus the cost of the radio. Projected Revenues are highest at $10.
