XM Satellite Radio: Competing in the New Digital World Teaching Note

Case Overview
This case examines XM Satellite Radio Inc., the leader in the satellite-delivered radio market. XMs founding was romoted !" the radio industr"s first ma#or technological develo ment since the o ulari$ation of %M radio in the &'()s * the transmission of radio signals !" satellite. XM launched its satellite radio service nationall" in +ovem!er ,))& while Sirius, its onl" direct com etitor, launched its service in -une ,)),. The challenge facing !oth com anies has !een to sell consumers on the conce t of satellite radio which re.uires the urchase of a receiver unit and a"ment of a monthl" su!scri tion fee for the service. The two com anies are engaged in a !attle for su!scri!ers and technological leadershi and have s ent large sums of mone" over the ast two "ears to ac.uire rogramming for their satellite s"stems. Man" anal"sts redict that the two com anies will have &/ to ,) million su!scri!ers !" ,)&). 0" the end of the second .uarter of ,))1, XM had 1.' million su!scri!ers while Sirius had 2.1 million. 3hile XM and Sirius continue to com ete with one another, the" also are facing com etition from other digital-!ased technologies including M45 la"ers such as the immensel" o ular 6 le i4od, Internet radio and develo ments that are occurring among traditional terrestrial 6M and %M radio stations. The case rovides a !rief histor" and overview of XM and its rogramming content. There is also a discussion of the integrated marketing communications rogram used !" XM to create awareness and generate trial when its new service was launched, including media advertising and demonstration rograms that made it ossi!le for consumers to ex erience the !enefits offered !" satellite radio. The case also includes a discussion of the com etition XM is facing from Sirius, as well as other digital technologies. It concludes with a section on the current status of XM and the challenges the com an" faces as it struggles to attract more su!scri!ers and achieve rofita!le growth. This case is !ased in art on an interview with Steve 7ook, 8xecutive 9ice 4resident 6utomotive for XM Satellite Radio, who #oined the fledgling com an" shortl" after the launch of the service. The case illustrates how classical consumer ackage goods marketing tactics can !e successfull" utili$ed to generate trial and re eat urchase in a different t" e of industr". The case also shows that as with all new roduct introductions, there is a learning curve regarding integrated marketing communications strateg" and tactics. 3e recommend using the case with 7ha ter && of the text which deals with 0roadcast Media. IM7 4ers ective &&-2 introduces students to the digital revolution that is im acting the radio industr". In teaching the case, the focus should !e on the challenges facing XM in terms of

integrated marketing communications and what the com an" needs to do to continue to attract su!scri!ers and com ete with Sirius. In addition to media advertising, !oth com anies are using a variet" of sales romotion tools such as re!ates, rice deals, s iffs and other tactics to attract and retain customers. The case can also !e used as the !asis for an interesting discussion regarding develo ments in the radio industr" and how satellite, as well as traditional terrestrial radio, is !eing im acted !" new digital technologies. 6 num!er of ads and collateral material used !" XM Satellite Radio are availa!le in the accom an"ing ower oint file for students to examine as the" re are the case. :ou might also encourage them to visit the com an"s we! site at www.xmradio.com for current information on XM satellite radio.

Discussion Questions
1. Which competitors should XM target in the future: Sirius, terrestrial radio, MP3 players and podcasts, or Internet radio? Sirius * Targeting its onl" direct com etitor might !e the smallest o ortunit" strateg" as Sirius currentl", and over the short term at least, has the smallest user !ase of all the com etitive o tions. S ending too much time focusing on Sirius might divert attention from the larger, more im ortant #o! facing XM which is growing satellite radio as a via!le roduct categor". Moreover, targeting Sirius legitimi$es them as an alternate satellite radio form and attacking them could undermine XMs advertising strateg" which has !een to osition itself as the !est o tion to 6M and %M radio. 3hile Sirius is a direct com etitor, the" also are hel ing to grow the satellite radio categor" which is im ortant for !oth com anies if the" are going to survive. It ma" !e too earl" in the roduct life c"cle of satellite radio for XM to focus its attention on tr"ing to take customers awa" from Sirius. Terrestrial Radio- XM has the strongest ackage of !enefits versus terrestrial radio and its efforts might !e !est a lied to ointing out these advantages which include more content and rogram o tions, commercial free music, !etter sound .ualit", and the a!ilit" to listen to the same rogramming an"where in the countr". The greatest otential for new su!scri!ers is in converting the huge segment of the ;.S. o ulation that currentl" listens to terrestrial radio. XMs tagline, used in advertising and on their we!site, <0e"ond 6M. 0e"ond %M. XM.= ositions the !rand as the !est satellite radio o tion and as !etter than traditional radio. M45 4la"ers XMs advantages versus M45 la"ers are rimaril" in the ease of use area, as XM does not re.uire searching, downloading and u loading and there is little change re.uired in radio listening !ehavior. XM is at a disadvantage, however, !ecause it does not rovide the customi$ed la" list and !eing a!le to listen to "our own music whenever "ou want as can !e done with a M45 la"er. XMs advantages relative to M45 la"ers are most

ealing to older consumers who seem to like the element of sur rise radio gives them and

en#o" listening to the ersonalities and genre ex erts XM rovides. 6lso, the" ma" not want to !other s ending the time customi$ing music or other content for an M45 la"er. 6 cam aign following this a roach could !e run in u!lications that target the older segment of the market such as eo le over the age of >). Internet Radio - The ros and cons of XM versus Internet radio are similar to those of the M45 la"er market. ?owever, Internet radio ma" !e even more threatening as the streaming format allows for <real time= communication of content, and doesnt re.uire all the time s ent to download and u load listening material. ?owever, it ma" !e some time !efore Internet radio is availa!le in cars which is where much radio listening occurs. 7om!ination - If onl" one com etitor were to !e chosen, XM might focus on com eting against M45 la"ers !" heavil" marketing its com!ination XM@M45 la"er unit. This would rovide the most !enefits to the most eo le, !oth now and in the future, as the market for M45 la"ers and Internet odcasting continues to ex lode. The com!ination offers the !est of !oth <new age= formatsA the infinite choice of M45 la"ers as well as the ersonalities, ex ertise, live content, and ease of use of XM satellite radio, including the a!ilit" to record audio content for su!se.uent listening. The !est wa" to determine the o timal strateg" is to assessA The si$e of the market segments re resented !" the various forms of com etition The advantages XM has versus each com etitor and determining whether the" are im ortant to consumers 4ro#ected growth rates and trends for each form of com etition +ew technologies on the hori$on that will make XMs oints of difference and advantages versus each com etitor more or less com elling in the future 2. Should XM try to appeal to all demographic groups or target specific segments? If the latter, which segments should they target and why? What types of advertising and promotion tactics can be used to market XM to these groups? The fact that Sirius is becoming inextricably linked with Howard Stern, who appeals most strongly to young adult males, may create an opportunity for XM as Sirius may be boxing itself in from an image standpoint. This young, macho male association is further reinforced by Sirius other deals with NASCAR and the NFL and gives XM the opportunity to position itself more broadly to a wider age male demo as well as to the female demo, which at this point is underdeveloped. Females currently make up 35 percent of XMs users but account for 50 percent of the U.S. population. Another group XM can target with specific

programming and marketing is the Hispanic market. Hispanics currently make up 15 percent of the U.S. population; they have the highest growth rate of any ethnic group, and are above average consumers of radio. Since Sirius has less revenue and a smaller marketing budget than XM, the company may be unable to afford a marketing program targeting this ethnic group. Hispanics also have a tendency to be very loyal if they are satisfied with a product or service. 3. What are XMs options for their advertising creative strategy going forward? Should they focus on their content and programming, digital sound quality, ease of use versus the other alternatives, their innovative hardware, a combination of these factors, or some other attributes? The ke" issue for XM is whether to ursue the same advertising creative strateg" for ever" market segment and demogra hic grou or whether to customi$e the message !ased on each user grou s <hot !uttons= and areas of interest. Becisions also have to !e made regarding oints of difference that should !e communicated for XM versus the com etition. The ma#or oints that can !e used as the !asis of the creative strateg" are that XM hasA a. The !est overall content due to its !readth C!est for families@something for ever"oneD !. The !est sound .ualit" as rated !" o!#ective sources such as Sound & Vision maga$ine c. 8ase of use versus M45 la"ers that re.uire searching, downloading and u loading d. The latest innovations in hardware e. 6 com!ination of these factors The rint ads rovided with the case shows how XM is ositioning itself as the !est satellite radio o tion !ased on a com!ination of attri!utes such as !est hardware C orta!ilit", storage and la"!ack featuresD and !readth of content Ccommercial free music, s orts, news and talk radio, comed", and !usiness rogrammingD. The earlier maga$ine insert that a eared when XM was first introduced focused on the !readth of rogramming !" showing all of the channels. Students can !e asked what the" think of XMs advertising. The" can !e asked what a roach the" might recommend as an im rovement and wh". XM needs to consider

whether it should have one campaign that it uses to communicate with all of its potential customers across various media, or whether it should vary the advertising message by medium. For example, if targeting the senior population, ads might be placed
in Modern Maturity (the magazine of the American Association of Retired People and the largest circulation magazine in the United States). Such an ad might focus on those XM channels that play music from the decades of the 1940s, 1950s and 1960s, Franks Place

(that features songs by Frank Sinatra), and/or old time radio with shows such as The Lone Ranger and Dragnet, as well as news programming. To target females, XM might lace ads in maga$ines such as Good Housekeeping, Redbook, Family Circle, and Opra !aga"ine that feature XMs rogramming for women such as E rah F %riends, 8llen BeGeneres, i9illage, and Take > as well as cooking, fashion, and cele!rit" news. 6ds aimed at the "ounger target audience might !e laced in maga$ines such as Rolling S#one, Vibe, Se$en#een, and Cosmo and might feature XM rogramming that a eals to "ounger audiences such as various music formats and its irreverent talk shows. 6dvertising that focuses on hardware might !e used for s ecific target audiences. The new Samsung, Bel hi and 4ioneer roducts that com!ine an M45 la"er with XM might !e featured in ads directed at the &/-52 "ear olds, touting the !enefits most im ortant to this target - that XM rovides the ultimate in choice . 6d co " might focus on the uni.ue com!ination of !enefits including the a!ilit" to have "our own la" list, the !enefit of XMs hi and cool stations that are the first to feature new artists, and the a!ilit" to record what is heard on XM for later listening leasure. !. "re there any other sampling or promotional programs that XM should pursue to attract ne# su$scri$ers and retain them? XM is doing a thorough #o! of sam ling the roduct at retail through in-store demos and in automo!iles, !oth with re- urchase installations and through rental car rograms. ?owever, there are other o ortunities to allow otential customers to sam le its service in environments where the" will !e s ending a good deal of time and !e rece tive to hearing music, news, or talk radio. Two exam les would !e on the more u scale, Metroliner and 6cela train routes, similar to the -et 0lue and 6irTran 6irwa"s rograms, and in s orts clu!s where eo le are working out. The demogra hics of s orts clu!s are desira!le for XM, as the customers tend to !e "oung, hi , and have slightl" higher incomes. The three rimar" wa"s to im act re eat urchase should !e identifiedA &D Increasing the ercent of free trials through new user romotions that result in conversions or commitments to at least a one-"ear lan ,D 8ncouraging longer contract commitments 5D 8ncouraging users to !u" multi le units for their homes, cars, !oats, and famil" mem!ers Students can !e asked to identif" additional tactics to encourage customer retention. %or exam le, while XM has encouraged customer retention through the ricing of their different lan o tions, the" could develo a !u$$ marketing@tell-a-friend t" e of romotion where!"

current users !ecome evangelists for the roduct. 7urrent users who refer a friend that signs u would get one month of XM service for free. To maximi$e conversion from car dealer rograms, its im ortant to make sure that users who have not activated the units know how to do so and how to use the service. These eo le can !e contacted via hone several weeks after urchasing their new vehicles to see if the" need hel or have .uestions. To encourage longer contract commitments, users whose initial contract eriod is a!out to ex ire should !e contacted via direct mail and hone and given incentives to trade-u in length of commitment, such as a s ecial offer on the latest hardware Clike cell hone com anies doD. %. What type of programs can XM de&elop #ith retailers to increase their share of 'aftermar(et) installations? He" to creating im act at oint-of-sale is the trial@dis la" of units that allow customers to sam le the XMs sound .ualit" and rogramming. 6ttached to these units are marketing materials such as !rochures and signage that communicate XMs mar.uis rogramming. 4roducts should also !e dis la"ed out of the !ox, as im ulse urchase decisions are affected !" the look of the roducts Cas with 6 le i4ods, where the sleek@st"li$ed look of the roduct has !een a ke" featureD. Its nearl" im ossi!le to re licate the factor" installation trial rograms through retail outlets, since consumers would have to urchase the hardware and a" for the installation to tr" the roduct. If consumers choose not to su!scri!e, the" would !e una!le to return the hardware. To create excitement at oint-of-sale, romotions could !e considered such as roviding a free 7B with the urchase of a unit and@or a 7B with commitment to a one-"ear su!scri tion. This would !e a win@win for retailers, as it would !oth drive users into the store for the romotion and would encourage them to visit !oth the satellite radio de artments and 7B music de artments of the store. The" might also consider using a swee stakes where!" eo le who urchase an XM s"stem would automaticall" !e entered, or ros ective customers might !e encouraged to visit the com an"s we! site to enter. The swee stakes ri$es might include a car with a factor"-installed XM satellite radio s"stem, the o ortunit" to !e a guest on the show of their favorite XM radio channel host, or other ri$es such as a orta!le XM receiver or com!ination XM receiver@M45 la"er. 0oth XM and Sirius currentl" use re!ates as an extra incentive for retail !u"ers of their satellite radio s"stems. Sirius has !een offering re!ates of u to I&)) while XM reduced its re!ates to around I,) to I5) in the summer of ,))1. XM has indicated that it wants to continue cutting the costs of its com onents to reduce rices rather than rel" on re!ates. ?owever, the use of re!ates has !een a ver" effective for Sirius as the sales romotion tactic hel ed the com an" win nearl" 1)J of retail sales in the second .uarter of ,))1. XM ma"

have to reconsider its osition on re!ates if it continues to lose sales to Sirius !ecause of the difference in the re!ate offer. 7onsumers ma" !e attracted to Sirius !ecause of the larger re!ate and retailers ma" find it easier to sell the !rand over XM !ecause of the cost savings. This ma" result in retailers ushing Sirius over XM and ma" continue to !e a ro!lem unless XM can clearl" differentiate its roducts and rogramming or lower its e.ui ment costs. 6nother trade romotion tool !eing used !" XM and Sirius is ush mone" or spi%%s, as the case notes that !oth com anies a" !etween I&) and I,) to retailers each time someone !u"s a satellite radio in a store and activates it. 6s long as the incentive fees are e.ual, neither com an" will gain a com etitive advantage !" using them. ?owever, the" ma" find themselves in a romotional tra where!" neither of them can eliminate the use of s iffs unless the other does so. *. +o# can XM $est com$at the momentum Sirius gained from the ad&ent of +o#ard Stern? To maximi$e the !enefit of signing ?oward Stern, Sirius focused much of their advertising !udget in the four months rior to his coming and the two months after his arrival on romoting his show. 6 great deal of the advertising for Sirius continues to focus on Stern which means there is less em hasis on communicating the !readth of their rogramming. Moreover, Sirius has !ecome inextrica!l" linked to Stern. 3hile ?oward Stern is en#o"ed !" man", the <shock #ock= is o erceived negativel" !" erha s even more. XM has the ortunit" to differentiate itself from Sirius, seem like a !etter value, and a ear more

<wholesome= !" focusing on its !readth of content. ?owever, XM ma" have to !e somewhat careful here as their line u includes E ie and 6nthon", whose rogram also includes irreverent content. ,. Is there a cooperati&e ad&ertising message -such as Intel Inside. that XM can further promote #ith its distri$ution partners to increase the synergy and a#areness for the $rand and its uni/ue $enefits? XM ma" !e a!le to work with automotive com anies to deliver a t" e of ingredient@com onent !randing message a!out the !enefits of having its satellite radio s"stem as an accessor" in a vehicle. XM !enefits greatl" when restigious artner !rands such as Kexus, 7adillac, Infiniti, 6udi and others advertise that the" offer XM Satellite radio in their vehicles. Since XM has 1) ercent of auto makers as exclusive artners, it should receive the ma#orit" of automotive advertising that romotes satellite radio. XM might further encourage its automotive artners to romote the availa!ilit" of its satellite radio s"stem as a factor" installed o tion !" roviding a coo erative advertising allowance. XM might also co-

s onsor research that demonstrates the value of having XM in a new vehicle and how it increases urchase intentions. 8ncouraging XM roduct mentions in advertising done !" its automo!ile artner will also hel increase awareness and restige due to favora!le associations with these !rands. LLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLL This teaching note was prepared by Professor Michele Greenwald, Visiting Professor at HEC Paris, as an aid to instructors in the classroom use of the case.