Behind the Music

American Demographics, April 1, 2001

When people are exposed to the idea of satellite radio, more than 35 percent express interest and 28 percent say they'd buy it.

Through XM or Sirius, marketers will have a national reach of consumers through a single broadcaster.

Imagine being able to drive anywhere in the country without losing your connection to your favorite radio station.

By year's end, two companies will likely give consumers that option. New York City-based Sirius Satellite Radio and Washington, D.C.-based XM Satellite Radio each have announced plans to begin broadcasting 100 channels later this year. For $9.95 a month, drivers can travel anywhere in the country without losing the ability to tune in to any of 100 stations. Sirius and XM have invested billions of dollars in satellite technology. General Motors, Ford, and several other major car manufacturers - some of which are strategic investors in XM or Sirius - are poised to offer three-band radios (AM/FM/SAT) in select high-end 2002 models as a first step toward making them available across their entire lines. Sears Roebuck, Best Buy, Circuit City, and other consumer electronics chains have signed on to market satellite-compatible car radios through their retail outlets. Satellite radio signals the most widely anticipated change in the industry since the introduction of FM some 30 years ago. But the question remains: Is it a niche or a mass product?

For now, truck drivers are among the few to inquire about satellite radio directly. At Tommy McKenzie's electronic supply store in Columbus, Georgia, for example, only tractor trailer drivers appear to show any interest in the new product. But because the technology is easy to understand (you simply tune it just like any other radio), and the car radio market is so huge - 17 million new cars are sold every year, with 11 million car radios installed in the after-market - satellite radio has the potential to become "the fastest-selling consumer product of all time," contends Ryan Jones of the Yankee Group, a Boston-based consulting firm. Jones projects that the fledgling industry will rocket from nearly 1 million subscribers after the first full year of introduction to 21 million after five years.

Satellite radio turns the established radio business on its head. Unlike traditional "terrestrial" radio, which is 100 percent advertiser supported, satellite radio will depend on advertising for only 10 percent of its revenue at the outset, rising to perhaps 20 percent after the first five years, estimates Sean Badding, senior analyst at the Carmel Group, a Carmel, California-based consulting firm. Badding projects that the industry's subscription fees could grow to as much as $3.3 billion by 2007.

Jones and Badding's optimism relies on so-called "heavy-use listeners" becoming satellite converts. These heavy users tune in their car radios for more than an hour a day, and account for an impressive 49 percent of the total radio audience. What's more, these captive listeners are spending more time in captivity. A recent study in Los Angeles by the Southern California Broadcasters Association, Arbitron, and Edison Media Research found that 62 percent of respondents reported spending more time in traffic than a year ago.

And while there are certainly other listening options in most cars, radio is the overwhelming favorite. A study by Arbitron, the New York City-based media research firm, found that 87 percent of drivers say listening to the radio was their most frequent in-car activity; only 13 percent listed cassettes, CDs, and other options. Arbitron also found that 17 percent of Americans say "their local radio options do not serve their music tastes." Additionally, the company reports that when people are exposed to the concept of satellite radio, more than 35 percent express interest - and at a price point of $9.95, 28 percent say they would buy it.

Perhaps that's because commuters have more money to spend on their cars. Commuters, Jones notes, have an average annual income of $52,500, compared with the national average of $38,885. Yankee Group's Digital Home Entertainment Survey also confirmed that this well-heeled audience is looking for change: 46 percent wanted "fewer commercials," and 33 percent wanted "more variety."

More variety and fewer commercials are exactly what XM and Sirius plan to provide. At least half of each company's offerings will be commercial free; the balance will run six minutes of commercials per hour, compared with the average of 20 minutes. While the actual channels are still under development, those already in the works are undeniably intriguing. Among the niche-oriented musical channels mentioned so far: Boleros (Latin standards from the 1930s to the 1960s), reggae, blues, jazz, and emerging country stars. Talk channels will include content provided by C-SPAN, Sports Byline USA, A & E, Biography, Bloomberg News Radio, and Asia One. (In most cases, Sirius will swap content for carriage, occasionally splitting ad revenues with the content providers.)