Satellite Radio: Seriously, Folks, Are XM and Sirius Serious? Ignoring Marketing Basics Can Cost Big Time

On Aug. 5, 2005, in a column titled, “Dress Codes—Do They Matter?” I described Philadelphia restaurateur Susanna Goihman whose Lexus struck and killed 15-year-old Kayla Peter on June 19 and left the scene of the accident. Goihman arrived

August 2006 By Denny Hatch

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“When both companies were getting going, they seemed to be mastering their biggest challenges: lining up financing, firing satellites into the sky and luring talent,” McBride wrote.

Excuse me?

Finding customers isn’t one of the biggest challenges?

Do McBride and her editors really believe, “If you build it, they will come?”

How to Sell Satellite Radio
When I first heard about satellite radio, it sounded interesting. I like classical music in the background in my home office. I would give National Public Radio $1,000 a year if it would eliminate the wine and travel chatter and the fundraising pitches that keep at me—and at me—and at me—until I’m ready to slash my wrists.

But is $12.95 a month for what I get basically for free worth it? I need convincing.

The Argument/Benefits of Satellite Radio
This is the thought process for the personal message every prospect for satellite radio should receive. If a direct mail package is the medium, this is the letter copy. If a brochure is given away at car dealers (where the XM or Sirius radio is automatically installed), this should be a section designed to look like a letter and signed by a real person at XM or Sirius. If a DRTV effort, it should be an earnest, heartfelt pitch by a believable company spokesperson (or actor).

This is the “you” copy—the intensely personal message that describes the benefits to you, the prospect.

Start with the eight key copy drivers—the emotional hot buttons that cause people to act: Fear – Greed – Guilt – Anger – Exclusivity – Salvation – Flattery – Patriotism.

How do these translate into the benefits of satellite radio?

When my wife, Peggy, and I drive to New York or Boston, we listen to AM news and FM classical music on the Saab radio. As we move from one metropolitan area to another, stations grow weak and cut out. We’re constantly fussing with the dial (ANGER).

If you’re alone in the car at 70 mph, fooling around with the radio to replace a dying signal can be very dangerous, akin to yakking on a cellphone (FEAR, GUILT).

Knowing we can listen continuously anywhere is wonderful (SALVATION).

When we’re in a big city, buildings get in the way of our AM stations (ANGER).

Anybody with half a brain who does serious cross-country driving should love a satellite radio in the car with more than 100 programming choices rather than the limited choices on AM and FM (FLATTERY).

I despise commercials. They interrupt my thought processes. Commercial-free radio means SALVATION without a bunch of venal hucksters yammering at you (ANGER).

With more than 100 choices, when I or my wife or son or daughter-in-law use the car, we’re continually delighted with radio tailored precisely to our tastes (EXCLUSIVITY).

The Features of Satellite Radio
This is the “it” copy that shows and describes “it”—the product or service (as opposed to the benefit copy in the letter). This is what belongs in the brochure:

* Over 100 programming possibilities.
* Huge choice of talk, news, music, comedy and sports for every interest.
* Commercial free.
* Fascinating radio personalities (e.g., Howard Stern, Bob Dylan, Rollye James, Eminem).
* Uniterrupted service as you travel across the United States and Canada.
* Clear, direct-to-you signal, FM and stereo quality.
* Clear signal in big cities; tall buildings don’t interrupt.
* Illuminated dial on the radio set shows exactly what’s playing.
* Radio easily is moved from home or home office to vehicle.

The Offer
* Three months free service.
* Order the radio of your choice. Special intro discount.

Guarantee—This Is a Risk-free Offer
* If dissatisfied, cancel the service any time during your three-month trial and owe nothing.
* Return the radio for a full refund or credit.

Lift Pieces
This is one or more extra little elements designed to shove the fence sitter off the fence. Lift Piece 1: Testimonials from happy users. Lift Piece 2: Some kind of special extra goodie IF YOU ACT NOW (e.g., “Act now and receive a second radio for half price and additional programming for that radio FREE”).

Universe of Potential Customers
Quite simply, tens of millions. Automobile drivers, music aficionados, people in offices, home offices and homes who want continuous, commercial-free, background music; transplants who want local news from their prior communities; and sports enthusiasts who want baseball games from around the country—the audience is virtually limitless.

One obvious market is made up of drivers who operate the 15.5 million commercial trucks on American roads. It’s estimated that this industry will require 300,000 new drivers a year. These folks want company during the long, moonless nights on the road.

A fascinating niche market is made up of married couples in their 40s, 50s and 60s—former RV owners who love to travel—who are turning to long-haul truck driving for fun and profit. Currently estimated at 616,000, these older, second careerists are finding truck stops that stock shelter and women’s magazines, as well as spas and nail salons.

The Marketing Efforts of XM and Sirius
Realizing that a huge part of the potential market is made up of drivers, XM cut an exclusive deal with General Motors—and Sirius did likewise with Chrysler—to install radios in new models. (A Sirius radio cannot pick up XM signals and vice versa.)

What Happened
A ton of car buyers failed to activate the program. XM tried to get GM car salespeople to sell subscriptions. The idea of a car salesman spending time on a paltry $12.95/month extra is preposterous. These people (1) want to sell expensive add-ons and (2) want quick turnaround, so they can sell a car to another customer.

A direct marketer should be converting the new car buyer—not the dealer.

What GM and Chrysler Did
They started activating the radios in the factory and offering free trials—three months up to one year.

Offering a free year of anything—that’s not supported by advertising—is simply nuts.

Many of these free trials will be up soon, and no one has a clue whether the people will start paying for what they’ve been getting free.

What’s the attrition? How many replacement customers will be needed just to stay even? What’s the lifetime value?

This is a direct marketing challenge being handled by amateurs.

For example, direct marketers will work with magazines that offer three months free (or three issues free). But this comes with a barrage of conversion efforts, touting benefits and maybe offering premiums for payment now. And the results are precisely tracked within tenths and hundredths of a percent. A direct marketer who offered three months (or a year!) free with no ongoing follow-up series in place during that time is quite simply no marketer at all.

Retail Sales
Both XM and Sirius are offering huge rebates and discounts on their radios when sold in box stores (Circuit City, Best Buy, etc.), taking a loss on the equipment in hopes of getting the subscription. Many radios are given as gifts (at a loss), but many of the recipients aren’t converting to customers.

Paying for High-priced Content
Sirius paid Howard Stern $500 million with a five-year guarantee to come aboard. XM paid Major League Baseball $650 million for the broadcast rights.

It’s been estimated that Stern had 5 million to 6 million fans on AM radio and that he would bring 1 million of them with him to Sirius. However, as the ubiquitous Sarah McBride reported in The Wall Street Journal last Dec. 15, Sirius took a stroll into the gutter:

A few weeks ago, Stern fans who signed up for a Sirius-oriented mailing list got an e-mail with a raunchy ad featuring a constellation of stars that formed into the shape of a penis to the music of “2001: A Space Odyssey.” Last week, they got an e-mail invitation to take a photographic tour of Mr. Stern’s studio, led by a cadre of strippers and other Stern show characters. To see certain parts of the studio, they had to e-mail the invitation to friends.

This may attract Stern’s coterie of goofball guys who paint their faces at NFL games and wear baseball hats backwards. At the same time it should turn off ladies and gentlemen who are neither sex-obsessed nor pleased with a steady diet of George Carlin’s seven forbidden words and fearful that their kids might get an earful of Stern’s dreck.

High-priced content, plus paying for space shots and radios, is huge money. In addition, since the satellite guys started up, the iPod has come along, enabling drivers to play their vast personal music collections through the car radio. Will they pay $12.95 per month for what they have already paid for? This represents massive competition to satellite radio.

Why Sirius started up a year after XM launched and creamed the market with an unproven business model is beyond me.

I don’t see how either of them will begin to get their money back for years and years—if at all. Priceline.com will never hit the market cap it enjoyed in its heyday, especially in the teeth of such formidable competitors as expedia.com, orbitz.com, hotels.com, cheaptickets.com and travelocity.com.

Currently, Sirius has 4.7 million subscribers while XM ended second quarter 2006 with 6.9 million subscribers. But two ominous clouds hang over the horizon: (1) XM only took in 398,012 new subscribers in the quarter—not nearly enough to make up for attrition, let alone grow—and (2) these numbers sound impressive until it’s understood that a huge percentage is made up of unpaid free trials.

Chrysler’s product strategy director, Mike Kane, told The Wall Street Journal that Chrysler wouldn’t know until the end of the year how many listeners would switch from free to paid.

The markets seem to agree with this gloomy assessment. In terms of stock, on Aug. 24, XMSR was $12.97, down from a 52-week high of $36.91. Sirius was selling at $4.08, down from a 52-week high of $7.98.

My guess is that room exists for one such service, and that the two will eventually be forced to merge.

Meanwhile, the marketing efforts of both companies would appear to be completely out of control, anathema to the art and science of direct marketing, which operates on the premise of precise accountability.