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Turn On, Tune In, Pay Up

How XM and Sirius persuaded millions that paying to listen to a cool technology beats listening to a boring one for free.
November 10, 2004

Satellite radio’s two upstart providers have been leapfrogging each other in recent weeks with a flurry of announcements. XM Satellite Radio’s unveiling last week of a portable walkman-like radio followed closely on its big win of an 11-year contract with Major League Baseball and the debut of shows by former National Public Radio host Bob Edwards and the infamous talk-radio duo of Opie and Anthony.

Not to be outdone, XM’s archrival Sirius Satellite Radio has trumpeted its own expansions, such as shows hosted by hip-hop artist Eminem and cyclist and six-time Tour de France winner Lance Armstrong. In early October, Sirius pulled off the biggest marketing coup to date when it landed controversial radio host Howard Stern, who will move his show–and, it is hoped, many of his 12 million listeners–to Sirius beginning in 2006.

It’s all part of a single-minded marketing strategy: Make pay-for-play radio worth the monthly fee. With a fresh spin on the notion of what’s “local” radio and savvy marketing, XM and Sirius have turned up millions of listeners happy to pay for a service that has been transmitted through the terrestrial airwaves, at no charge to the listener, since the inception of broadcasting in 1920.

The duopoly reign as the FCC’s sole licensees for digital audio radio service. XM was first up with its satellites–it refers to them as “Rock” and “Roll”–in 2001, and the Washington, D.C-based network retains the first-mover advantage with 2.5 million subscribers tuning in to 130 channels. Sirius began broadcasting in 2002, has 700,000 subscribers, and produces the programming for its 120 channels from studios in New York City’s Rockefeller Center. The two companies are alike both for the huge financial losses they’ve incurred and also for their ferocious marketing efforts to attract subscribers.

The companies’ bullhorns have pushed satellite radio ever closer to mainstream consumers: Wal-Mart now stocks its shelves with Sirius radios under the Sanyo name, and customers in 4,000 Starbucks cafes will be sipping their lattes to the strains of XM’s Hear Music channel beginning next year. It’s small wonder, then, that satellite radio’s rate of adoption has grown faster than any new technology except for DVDs, according to John Carey of Greystone Communications, a media research and planning firm in New York specializing in the adoption of new media. One huge draw, of course, is that the programming is commercial-free. You pay a monthly fee of $9.99 (for XM) or $12.95 (for Sirius) and in return get pure music, news, or sports.

Freedom from ads alone probably would not have driven so many people to satellite radio, if ordinary terrestrial radio had been offering compelling content. But the industry has stagnated, serving up repetitious playlists, right-wing talk shows, and a limited range of musical genres. “Traditional AM/FM radio has been so non-innovative over the last 20 years that they’ve almost abandoned their reason for existence,” says Carey, who also teaches at Columbia University. Further, the broadcasters’ emphasis on the local aspects of radio and its integral role within the community fabric rings hollow at a time when conglomerates Infinity Broadcasting and Clear Channel have converted broadcast radio into a national business where many stations are programmed in other cities.

Forbidden by the Federal Communications Commission from carrying the local programming that government regulators left as the turf of terrestrial broadcasters, satellite radio put a contemporary spin on the twin notions of community and identity–proving, in effect, that community transcends geography. “XM can’t talk to listeners at the local level but they can do it on a national level,” says Carey, whose consulting firm has done research for XM. Listeners to channels that play music from a particular decade tend to choose the decade when they were teenagers, Carey says. “People call in from all over. They talk about events that happened. They talk about commercials that aired. That’s how [satellite radio] is dealing with the radio-is-local part. They’re creating community at the national level.”

XM and Sirius root that success in a series of smart marketing steps. Both companies initially bet that salespeople, truckers, and other people who spent a lot of time driving would be some of their first to sign on to the service. In fact, half of XM’s subscribers sign up as part of a new-car purchase. “The automobile market has been a critical part of our business from day one,” says David Butler, director of corporate affairs for XM.

Butler says XM is available on more than 100 vehicle models, including as a factory-installed option on 40 General Motors models and as a standard feature on several by Honda and Acura. Sirius reports that its service comes factory-installed in 40 models and as a dealer option in another 40. Just last week it added BMW to its roster of factory customers.

Boston University marketing professor Frederic Brunel points to such transparency as typical of the seamless integration necessary for the successful launch of a new technology. The installation option eliminates the effort by consumers to acquire the technology–the research, the shopping, the reading of the installation manual. When satellite radio is offered as a new-car option, Brunel says, consumers “don’t even know it is satellite radio. They turn on the car, and they have a satellite subscription.”

But understatement isn’t for everyone. Another breed of satellite radio listeners wants to be perceived as hip technophiles. When the New York firm Smart Design had plans for a satellite radio receiver on its drawing boards, it took careful aim at this type of customer. “The no-commercials aspect of satellite radio was a big pull, but there really needed to be a design element that says ‘this is a new lifestyle,’” says Clay Burns, vice president of Smart Design, which designed the Delphi XM SkyFi radio receiver.

In addition to making the radio eye-catching, SmartDesign grappled with the challenge of creating an interface that let drivers easily navigate among more than 100 stations and that presented textual information, such as song title and artist. To help users tame this flood of information and choices, SmartDesign developed a scrollwheel that’s akin to traditional radio’s tuner controls, but that offers much quicker channel access. The company also added special function keys that perform handy tasks like memorizing the screen display and thus preserving the name of a song and artist for later reference.

It’s unclear whether XM and Sirius’ latest high-stakes marketing bets will pay off for the money-losing businesses. Sirius’ production costs for the Howard Stern show start at $500 million for the shock jock’s five-year contract; XM will pay $650 million for its Major League Baseball deal. Professional sports coverage is labor-intensive programming, cautions Tom Barnes, president of MediaThink, an Atlanta firm that consults on radio marketing strategies. “For a lot of stations, major league sports aren’t that profitable,” he says. “It’s generally viewed as very expensive and a lot of hard work. That’s not to say Howard is going to be a walk in the park.”

Despite the noisy promotion and counter-promotion, it’s the smaller successes that confirm satellite radio’s place for subscribers. Mike Gannon, a 33-year-old Boston resident, was cheering on the Washington Redskins at FedEx Field this fall when he saw a promotional spot for XM on the stadium screen. The Redskins season-ticket holder signed up instead with Sirius, which airs all NFL games. Now, when he’s not attending the ballgames, Gannon, media-relations manager for AIR Worldwide, a risk-modeling company in Boston, watches them on TV with the sound turned down, listening instead to the play-by-play provided by a local D.C. radio station. The pairing, he says, “is the best thing that’s ever happened.”

Gannon says he and his wife appreciate the freedom from commercial radio’s incessant nattering but realized the true value of their subscription one recent evening when, during a drive home, their 15-month-old grew loudly cranky. Gannon says he turned to the Sirius children’s channel, and his son, he says, “immediately relaxed.” As did Gannon.

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