With the year coming to a close, it's time for that obligatory "end of year" prediction and some fine words of wisdom (with hindsight being 20/20 of course). So here's one of them: 2007 will be the year that the OEM subscriber growth will truly begin to shine.
In 2005, we were obsessed with retail. With good reason of course, because the satellite radio retail market was skyrocketing due to the buzz that Stern generated (as well as the seemingly weekly on-air celebrity contract announcements). So it's no surprise that the focus for 2006 was on retail as well. We were still high off of 2005, with noses-sniffling and teeth-grinding, we were jonesing for just another bump to recapture that feeling from the prior year.
And in the beginning of 2006, retail was doing great (thanks again to the aftershock of Stern's move to Sirius). But then the heavy hand of the FCC came down, causing halts in production for both companies (XM's occured prior to Father's Day, while Sirius' after Father's Day; Sirius clearly benefiting from this maneuver). A combination of this, and the drop in Stern-influenced subscribers, caused the retail market to wane. Anyone who was tracking NPD Group numbers clearly saw that XM was feeling the ill effects of this drop in retail more than Sirius, but the overall effects to the industry as a whole were real. This is no better illustrated than the seemingly weak reaction to satellite radio products this holiday season (though the jury is still out on exactly how bad this month will be).
The reason why the retail market has a significance in this industry is because it theoretically is a measurement of consumer interest in satellite radio. This is true to a degree. When people know they want XM or Sirius, they go out and seek it out at retail. So the obvious example is with Howard Stern fans - they knew they wanted to hear him, so they went out and purchased a Sirius. But satellite radio is an interesting product in that many people don't realize that they want it. They don't "get it" until they experience it. The reason why Stern fans wanted Sirius so bad is because they've been experiencing Stern for 20 years. It's already familiar. A softness in retail doesn't mean that there's a loss in interest in satellite radio, it's an indication that there's not enough familiarity with the product.
So that brings us to the outlook ahead. This year is all but done with (though both XM and Sirius still have a few days to aggressively encourage activations before Monday), and now the focus is on what is to come.
But first, a quick note about year-over-year comparisons. (I'm not stalling, I'm bringing it all together. Keep reading.)
While all this doom-and-gloom seems depressing, it's partially driven by unrealistic expectations and skewed comparisons. Last year was a break out year. An anomaly. The retail numbers simply cannot be considered a baseline that we should compare year-over-year results to (though the tendency is to do so, since this is such a young industry). This year was doomed to "drop" in retail because last year's conditions were simply impossible to recreate.
By this same thought, though with an opposite result, we're going to see rapid year-over-year growth in 2007 for OEM-driven subscriber additions - especially when looking at the percentages. Auto manufacturers are very slow to react to 3rd party changes, with no better example of this than that of Toyota (who likes things to be "just right" for factory installation). As a result, many of the OEM partnerships who signed contracts in the previous years will begin to come to fruition next year, and ramp up steadily for the years to follow.
For Sirius, DaimlerChrysler has promised a 40% overall penetration rate in 2007. Mercedes has promised over 50%, and Audi/VW is targeting over 80% next year. Let's not forget the 21 Sirius-capable models from Ford, BMW's increased penetration and the fact that KIA is going standard with Sirius in 2008.
XM is no slouch when it comes to OEM either. Honda has promised over 650,000 XM units, GM has slated 1.8 million XM units and Nissan has promised 500,000 XM units in 2007. XM will be factory-standard equipment for Acura in 2007, while Hyundai too will offer XM as standard equipment in 2007 (~500,000 units). Oh, and let's not forget about Toyota.
Many of these OEM partnerships have yet to see the light of day, so with the initial phases rolling out in 2007, year-over-year OEM driven subscriber additions with undoubtedly show growth. This translates to "good news" in those easily swayed investment media outlets (translating to stock price increases as the easily swayed investors react to this news).
It's not all peaches and cream of course. As penetration increases, the conversion rate will decrease. XM reports just over 50% of OEM free trial subs subscribe to the service. Sirius doesn't report their conversion rate, but it's most likely similar. As the number of new cars with satellite radio increase (from about 27% this year to around 55% in 2010), you can expect that conversion rate to go down. Craig Moffett, analyst at Berstein, expects the conversion rate to decrease to about 44% by 2010. Still not a bad number, all things considered.
So what of the effect on retail? Retail shouldn't be discounted, but the focus will shift in time. As OEM penetration increases, the need for plug-and-play receivers will drop. Think of plug-and-play receivers like the CD players of yesteryear. Before CD players were integrated in vehicles (a process that took about seven years to reach the same installation rates that satellite radio has achieved in three years), everyone was driving around with their portable CD players plugged into their tapedecks. The Discman was the CD equivalent to the satellite radio plug-and-play receiver. Eventually, as satellite is integrated into cars, we won't need them.
The retail market, over time, will shift to handheld receivers like the Stiletto and the Inno, to home tuners and to more hybrid devices like the XM Mini-Tuner. Inclusion in other devices, like as part of home entertainment systems, will help keep retail subscribers aloft and going strong. Perhaps both companies will start using an OEM-style strategy for retail (i.e., a free 3-month subscription with the purchase of a satellite-enabled home entertainment system). And let's not forget about the fabled "convergence" of satellite radio + MP3 player + a cell phone (which I'm skeptical about). Who knows what's around the corner for retail - innovation will be a key driver - but it's inevitable that retail's focus will drift away from the vehicle as OEM penetration increases.
So while this fourth-quarter doesn't look to be the bearer of great news, take a look at 2007 and focus on the much larger OEM market. Consider that from a percentage basis, OEM growth will be significant (resulting in good press). Even with the most conservative of estimates, there's still a huge opportunity for both companies in 2007, and the doom-sayers will quickly change their tune.
(...now, about that churn issue.)
just naming those 3 announced numbers from XM partners gets them to 3 million new units without the others(toyota missing too)
I know there will be churn, deactivations etc. but 3 million from the big three is HUGE and once again retail shouldnt be discounted, even though is way down--A fair comparision for retail wont be available until after the 2007-2008 season because the Stern effect was still working in the first Q of 2006---Yes, OEM will be important going forward in 2007 and im hoping for BOTH companies to get a fav ruling in the RIAA bullshit/greed issue, maybe some new breakthrough products(newer chips) new business partners/ventures, some OEMs declaring they are aggressively going to offer sat as standard(hello Ford??)and overall CFBE positive to proof the business model to the street--I would also hope the sat industry finally gets it right with commercials--Most dont know why sat is better so they need to be educated in a very basic way(KISS)
Have a great new Year everybody!
Holy shit, you should be an analyst Ryan.
THIS IS WHY I READ ORBITCAST EVERY DAY. Great observations and a very realistic outlook. 07 will be a breakout year and we will prove the losers at TMF that they are wrong!
HAPPY NEW YEAR AND HAPPY INVESTING
I understand the OEM impacts for 2007 and I am also anxious to see these results in 2007. But that said, I think Sirius and XM need to get the Retail moving again - and they can do this with 'better' retail marketing. Just think of how many people have never been exposed to satellite radio !
IMO ... Oprah and Stern have not 'marketed' their product at all - XM and Sirius need them to get out there and push it.
XM & Sirius need to find the "Top 10 reasons people don't want to try the service" for 6 months. XM needs to target these late-adopters (vs. early-adopters) and start by with demonstrating that $13/month is damn cheap when you compare it to other junk out there: one movie ticket, one crappy CD or one unhealthy lunch. XM & Sirius deliver a solid 30 days of music fun & discovery for a measley $13 for crying out loud ! Plus comedy, news, sports & talk! It's a no-brainer once you've tried it out for a few months.
They must get more creative on how to get them in people's hands.
OEMs will take care of themselves at a fixed rate based on car sales (car sales are outside of Sirius & XM's control).
Sirius & XM - you control your Marketing budgets. Don't give up on retail - just change your message !
You've got to figure out how to convince people to put a $50 sat radio in their car - and try $13/mo for 6 months!
We're talking 125 bucks. People are spending this kind of money on cell phone replacements without a thought. $13/mo won't even put a dent a normal beer budget!
Great job Ryan, enjoyed the read and I looking forward to seeing both Sat. companies having a better public image in 07. I love satellite radio in general and only want to see it grow.
3.0 million is 1.5 million in XM math when hitting 50%. They did 1.0 million in OEM's for 2006. The extra 500,000 subs add 50 million to the bottom line.
Hugh spends that in legal fees.
When you subtract their ( XM's ) 2007 loss in retail which is only now about 30% of market, 2007 promises to be up a whole whopping 300,000 subs YOY. Abysmal.
Don't pee on yourself, the numbers look impressive but so did the original business plan.
Just so many oppurtunities for both these companies its sickening. I don't doubt them either...here are my immediate and long term ideas:
Integrate sirius into every product from handheld devices like cellphones, ipods, and psp's to gaming consoles. (Once any company in any industry picks them up...a competitor will have to do the same simply to compete with the competetive advantage the other holds on them)
Create a channel or a database linked to the satelite with downloadable content such as Audio books and Language Learning. (Want to learn spanish? simply download file and learn as you drive...)
Market to those kids who constantly waste money on hooking up their cars! (People spend like 1000 bucks on a dvd player and screen....why?!?) Create better in car sat/stereo systems like Pioneer or Alpine does and push product to racing stores.
Market to college kids!!
GPS or Google Earth type technology...Traffic and driving directions, etc, etc.
More interactive features - like the ability to browse through albums/lyrics/musician background/etc
-Or when I save music it recomends other artists similiar to the music I like. (POSSIBLY GIVE ME THE OPTION TO PURCHASE CDS RIGHT THROUGH THE HANDHELD...if i can buy ringtoes on myy cellphone maybe i can purchase things through the sat radios.)
Maybe Even program a list of artists into the system so whenever a song by them plays it automatically saves them for me next time I logon.
Right on Mike. It also amazes me to hear people don't understand why I would pay $13 a month. When you put things into prospective it is very easy to understand. People complain about gas prices it is even harder to do this but it is still nice to try. Just look at how much money people waste on the air conditioning in their cars which hurts their gas mileage and god forbid they wont give up (cut down) their over priced coffees every morning.
If Sirius/XM don't market themselves properly it will only hurt them. Every time I go into BB or CC or see someone talking about how great mp3 players are I just can't help but ask why is paying for 13 songs better than getting a months worth of programing not to mention the time saved messing around with loading your information. If programing an mp3 player was as easy as syncing my PDA to my computer I might be able to understand but it just isn't.
IMO ... Oprah and Stern have not 'marketed' their product at all - XM and Sirius need them to get out there and push it.
Oprah hasn't done a ton of marketing, but it was never expected she'd be a salesman - which is different than bringing in subscriptions. I have no idea what effect she's had if any, so don't jump all over that.
Stern does nothing but market though. He regularly goes off on a tangent about how great Sirius is. He spent all of December in 2005 doing print, TV and radio interviews and did three late night shows this past December.
During one show (in a rant after he read a negative news story) he said his job was to sell radios.
Leave it to one person to pick one side in a fair and balanced article. Good job pockpie.
The interesting thing about Oprah and Howard Stern is that you already know what their about and what they do and you already know whether you want to hear them or not. The only marketing you can do there is to their core audience, since your not really going to alot of NEW audience from them.
I know someone is going to pick into this very fast but both companies should promote smaller shows and events to peak NEW customers interests. People like O&A are still not household names and XM could do much more to try and peak the interest of someone that hasn't heard of them before.(They're just starting to promote them now)
Sirius shows could also benefit from the same treatment also, ex. Bubba.
While doing this wouldn't necessarily effect OEM penetration, it could effect the conversion rate and might increase retail penetration slightly at the same time.
Nice read Ryan, and Happy New Year! Good to see most of the comments are following your lead by not attacking one side particular. Except for that one of course.
i see what your saying ahigee, but i think it comes down to the core business models that are obviously lousy. its like these two are getting lazy and throwing 3 million factory installed radios out to try to get a few hundred thousand to bite. fix the way you conduct your business. if it costs a hundred plus to add a sub, fix it. i know its not easy, and if there was a fix, they would do it. i think what you pointed out ahigee is a good start; do small things to keep existing customers, lower churn.
What I meant about Oprah is ...
Oprah needs to start occassionally mentioning the XM radios and service, give a few away to her audiences, tell them how cool they are, maybe even show how quickly (in 5 minutes) you can have one working in your car.
She has plugged IPODS this way "twice" in December.
She has barely mentioned XM during the Christmas season.
If I was Panero, I would be livid.
My point Ahigee was/is that while this is an excellent article, that when we look at OEM's, the loading for both sides are not enough to drive real profitability. The reasons..... cost to install, 50% update, and slow OEM adaptation.
I do think Sirius is getting more units installed faster and I do feel that their OEM subscription rate is better due to what I'm seeing at the retail level, but they by no means have a glorious picture either.
What they ( Siri ) DO have is 65-70% of the retail which is more profitable ( especially as an internal sale ) than XM does.
I just say a NYT piece that says merger talks may be underway. If it is true, it's not going to matter.
Help us oh FCC you are our only hope.
I agree as well. They are not maximizing their marketing capabilities. Thats the beauty of something like Sat radio...they can reach every market! Examples: Market to the gay community, Underground music like house/techno/Garage bands, Older generation individuals(they definately would benefit from terrestrial considering they would never find anything on the radio from their time 50-80's - Elvis - JAzz - etc), Spanish community, Children entertainment, Even relgious folks.
Think they are lazy...
A bit off topic, but Ryan...why don't you rub that crystal ball of yours up there and tell us your predictions for CES. Only a week away after all!
Pockpie,
Your point was to try and bash XM. You then go on in your 2nd post to do it again. I think we all realize both companies have the same OEM adopter levels, around 50%. Nowhere has it been reported that Sirius has 70% of retail or even close. And you also forget to mention that retail is a dead market right now. It certainly isn't the most profitable. In fact, @ retail is where both companies lose the most money adding subs. It costs much more to get a retail sub than an OEM. There is not going to be a merger and if it happened, many comsumers would leave. I just dumped my Sirius after a year. If Sirius bought XM and I had to pay for their service again I wouldn't. I had it for a year and didn't like it. Same with many Sirius users. If XM bought Sirius, how many of those customers would just bail out altogether? What if XM bought Sirius and dropped Howard? Would you keep the service? There need to be two companies because many consumers prefer one over the other. They prefer one's equipment, programming, reception, sound quality, etc., over the other and a merger could just drive people away from the product instead of towards it.
PFreak lets not forget that some consumers would just leave because they will not like another monopoly driving up costs like the cable companies do. (Come on Verizon get moving on bringing cable to more and more communities)
Good point, that could definitely happen. I also don't see anyone considering how on earth the two companies would get 15 - 20 million incompatible receivers already sold to work. I'm not buying 3 more radios to replace the ones I have should the companies merge. I'm also not sending them in to XM or Sirius for any upgrade to make them work with both services. They may kill my FM transmitters if they get their hands on my units.