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Thursday, April 26, 2007

Terrestrial Radio:The Old Dog is Resilient

How is satellite radio doing? Judging by Bridge Ratings' just-released data covering the first four months of 2007 - not too well. And now XM has issued their first quarter report by announcing that though they had a losing quarter financially, subscriber growth surpassed the 8 million mark.

XM, which agreed to be bought by rival Sirius, reported a loss of $122.4 million, or 40 cents per share, narrower than $151.4 million, or 60 cents per share, in the year-ago period.

Revenue rose 27%, to $264.1 million, from $208 million last year. Makes it sound like XM's making progress.

The company ended the quarter with 7.9 million subscribers, up from 6.5 million a year ago. Last year, XM forecast that subscribers would exceed 8 million by the end of 2006, but scaled back that target significantly as retail sales of its radios waned. XM now expects to have 9 million to 9.2 million subscribers by the end of 2007, with subscription revenue for the year around $1 billion. Bridge Ratings estimates that subscriber number will be closer to 8.9 million - but, wait, we still have the summer months to get through.

Summer '06 was a comparative dead spot for consumer interest in satellite radio in general and that was before a merger of the two services was announced. Typically, merger news tends to send a 'caution' sign to consumers and it's either that or something is terribly wrong with the public's opinion of satellite radio that is causing a lull.

How can I say that when XM reports Q1 growth of several hundred thousand subscribers?

XM announced that they had passed 8 million subscribers adding 868,000 paying subscribers. But they lost 584,000 who did not renew their subscriptions! Is this a good sign? I think not. So, XM's net gain in Q1 2007 was 285,000 subscribers and that's why the true number of XM subscribers comes to around 7.9 million.

Based on past quarters when Sirius has grabbed a 60 share of subscriptions, it's possible that we'll see a net gain for Sirius in the 427,000 range for a total sector quarterly net gain of around 712,000 subscribers which is comparable to satellite radio's worst 2006 quarter (Q3).

What's interesting is that these companies continue to sign subscribers but it's getting much more difficult as time passes. 67% of XM's hard-earned first quarter subscriber gains were wiped out by consumers who did not find the value in retaining their subscriptions.

Actually, this is not all that far off from the typical performance for new companies with sharp growth curves like those that have existed in the satellite radio space for the last three years. And while there are those in that industry that underscore the fact that satellite radio growth is the fastest new media introduction ever, we are now seeing that its growth is also flattening faster than any previous new media play. Satellite radio as an industry is maturing faster than one would expect from such a new technology. This is what Bridge Ratings has been projecting for the last few years. And while 2006 was a turning point for the sector, 2007 will be a more difficult year for satellite radio.

Only HD radio can make satellite radio look good at this point. Our latest study indicates that just about every consumer whom we asked whether they were interested in purchasing an HD radio in the next six months said they weren't because they couldn't see the benefits of it.

HD radio is almost still-born and the radio industry continues to invest heavily. Good news this week was that Best Buy would stock HD radios in all of their nationwide stores. That's a positive step. Only one problem: no one cares.

So, we're experiencing the flattening of satellite radio which will continue to experience growth but at a much slower rate than previously expected and we're seeing almost non-growth for HD radio.

Terrestrial radio continues to be challenged for its time-spent-listening by other new media such as MP3 players, Internet radio and cell phones, but if trends hold, satellite radio will not be the grim reaper it was once thought it would be.

Terrestrial is far more resilient than many on Wall Street thought. It will still have its challenges but because of its purest benefits it will stick around for quite a while longer: It's free. It's easy to operate. Everyone has one. Everyone knows its benefits. And the public doesn't seem to mind paying for it with commercials.

To paraphrase Charles Dickens "these are the best of times - these are the worst of times" for media consumers, but at least there's plenty to choose from and most consumers are the real winners.

1 comment:

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