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April 25, 2005
Satellite Radio
In the Tuesday, April 17 edition of the Wall Street Journal, in the “Advertising” column by Brain Steinberg and Christopher Lawton, a headline screamed, “Satellite Radio Latches on to Ads” with a sub-head, “Martha Stewart Living To Launch Sirius Channel; Pitches to Be Part of Shows.” Neither the headlines nor the column tell the whole story.
The three lead paragraphs were: “Yesterday’s announcement that Martha Stewart’s Living Omnimedia will launch a 24-hour radio channel on Sirius Satellite Radio wasn’t just a sign that Ms. Stewart has been busy since she got out of jail.
It’s also the latest indication that Sirius—which along with its rival XM Satellite Radio started life as a refuge from the constant blare of commercials on traditional radio—is becoming more and more dependent on advertising.
In announcing the four-year agreement, Sirius Chief Executive Mel Karmazin said, ‘Martha Stewart Living Radio will have a great appeal to women who are completely underserved by terrestrial radio.’”
What Karmazin didn’t announce was that Martha Stewart first approached Sirius’s arch competitor, XM Satellite Radio, with her offer of doing a Martha Stewart Living channel for $7.5 million a year for four years. Martha would record some musings as she drove in from her estate in Westchester County to her office in New York. XM passed, thinking it wasn’t worth $7.5 million for an hour or so a day of unscripted Martha musings and that it wasn’t enough to fill an entire 24-hour channel, even though Stewart proposed filling in with other typical Stewart content.
Sirius paid $100 million a year for five years to Howard Stern for his program, so Martha understood the greater fool theory and went to Sirius. Sirius also overpaid for NFL Football—paid more for 20 weeks of once-a-week pro football (including playoffs and the Super Bowl) than XM paid for 162 games of MLB. MLB is a much better deal because baseball is more suitable for radio than pro football is and the season is much longer—more inventory.
The fierce competition between Sirius and XM for content is good for consumers, because it will cause them to keep commercial loads down on their talk channels, keep their music channels commercial free, and not to charge premiums for popular personalities such as Stern and Stewart. I predicted at the time of the Stern deal that Sirius would follow XM’s lead in charging a monthly premium for Stern like XM was doing for their morning personalities Opie and Anthony. But in the face of subscriber protest, XM stopped charging a premium and in the heat of battle, Sirius will not be able to charge a premium for Stern.
Also, Sirius’s strategy is not to charge extra for Stern, but it will use Stern to drive subscriptions and listening so it can sell advertising in Stern’s show. Karmazin figures there is more money to made selling advertising, one of his specialties (kindness isn’t).
Karmazin has overpaid before. When he was building Infinity Radio, which took over CBS Radio and Westinghouse Radio, he paid too much for major-market radio stations. In order to service the huge resultant debt, Infinity added commercials and cut expenses to the bone, hurting the stations’ growth. This year Viacom wrote down the value of the Infinity radio station a whopping $10.9 billion—Karmazin’s legacy at Viacom in addition to a huge amount of ill will.
When Karmazin became President of CBS, he would over-estimate the upfront market and arrogantly demand unreasonable price increases, which CBS later had to back down on. In the April 11 issue of Advertising Age, in a front-page interview, Karmazin pulled the same old trick. Scott Donaton, Advertising Age’s editor conducted the interview with Mel and wrote, “Sirius Satellite Radio’s ad revenue will rocket from $1 million to $100 million by 2007, CEO Mel Karmazin predicts…” Increase by a factor of 100 in just two years?
In the May 2 issue of FORTUNE, about Viacom’s CEO Sumner Redstone titled “The Sumner of Love,” Redstone said of Karmazin, “You can’t run a company that way…penny pinching, starving the company, and making people unhappy.” Marc Gunther, who wrote the FORTUNE story, like a good reporter should, obviously asked Karmazin for his reaction. Always the respectful gentleman, Karmazin was quoted as saying, “Sumner Redstone is full of shit.”
Well, after seeing the recent deals and predictions he’s made for Sirius, I think it’s not only safe but also appropriate to say, “ So are you, Mel.”
Posted by Charles Warner at April 25, 2005 12:29 AM
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Comments
Charles Warner at April 28, 2005 07:09 PM writes:
Baseball is more profitable for XM to sell because there a lot more games over a longer period of time, which gives XM more time to sell. XM can't sell spots within the games (they will be carrying local feeds) but in a hub-type scoreboard and highlights program. Also, by having MLB, XM will be able to attract more subscribers for baseball than Sirius can for football, I think.
You're right, satellite radio's biggest competition for music listening are iPods. However, there will enough of an audience for the two satellite radio services even to get a shard of the fragmented media pie. Advertisers will invest in satellite radio in order to reach an upscale, younger audience as they continue to flee from terrestrial radio.
Chuck at April 27, 2005 10:15 AM writes:
I'm a little confused about the football argument. Yes, baseball has more games and probably more audience (although the audience is older -- does this matter as much in radio as much as in television?). But Sirius and XM aren't only competing against each other. They're competing against I-pods. I mean, if you can have 20,000 tunes arranged however you want, what do you need a radio for?
It seems to me that both stations are looking for unique programming. Football (sports in general) is worth a lot of money not because it is better than baseball, but because it is something that you can't do with a podcast. And with baseball gone, football becomes more rather than less valuable to Sirius. That's probably the Martha Stewart thinking as well.
As you say, XM and Sirius will both survive because they are congressionally mandated to survive, so they aren't exactly competing with each other. And I'm not convinced that satellite radio has enough of an advantage over other forms of media to really make much of an imprint on the landscape. But I'm usually wrong about media matters -- I'm happy to be convinced otherwise.
They're competing will all other media.
Helen Johannesen at April 25, 2005 12:24 PM writes:
Great blog! I think it is going to be very interesting how this whole Sirius/XM is going to play out. I recently saw an XM radio for the first time in person, and frankly I was not that impressed. Sure you can curse and use profanity, and listen to any baseball game, but between the categories and sub-categories of the stations, the "box" if you will, I wonder how extrodinarily different it is. The whole concept seems to have a split marketing strategy towards either people who can't pick their own music. Who need stations like 117 called "eclectic" (WHAT does that mean??) and other people who may want to escape ads (not for long) but also enjoy some sort of perversity. Or I am wrong? And then there are people who get tickled pink that they can get traffic reports from anywhere in the coutry and sports from any city.
Charles Warner at April 25, 2005 12:15 PM writes:
Yes, the two are playing chicken. Game theory suggests that the way to win a game of chicken is for one combatant to convince the other that he (a he, not she, because only testosterone-laced males are dumb enough to play the deadly game) is irrational and won't make the rational decision of backing down to avoid death.
But Sirius's irrational exuberance won’t scare the rational XM out of the game. Here’s why: 1) The FCC approved only two satellite signals to cover the US with footprints. So there are and will be two and only two competitors in the game and they can’t merge, because the FCC wouldn’t approve it—the government wants two competitors (and no more). 2) They won’t merge for business reasons because Sirius has taken on too much debt with its programming costs and there would be no reason for XM to take on that burden, especially when it will become profitable sometime before 2007 (a rational estimate, as opposed to Karmazin’s irrational estimates). 3) There is too much bad blood between the two to ever get along (look what happened to AOL and Time Warner). 4) They have two totally different strategic views of the world. Sirius will sell based on an old-fashioned radio-based CPM approach and XM will sell on a modern sponsorship and integration approach—never the twain will meet.
I think there will be room in the future for two satellite radio services because people are tuning out of terrestrial radio because of cookie-cutter programming, lack of innovation, and, mostly, too many commercials (a movement largely led by Karmazin at Infinity—ironic, eh?). Sirius can hang on for a couple more years, but I think its end game is to sell to a large media company—a company who can afford to sustain the losses for another five years until the medium reaches maturity and it can cut back on its programming costs after current, bloated contracts have expired.
Jesse Kornbluth at April 25, 2005 11:16 AM writes:
This seems like a game of "chicken." Hard to imagine both companies surving such a spending frenzy.
Do you see a merger in their future?
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