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The Future of Satellite Radio: What Satellite Radio can learn from Motorola Iridium

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The Future of Satellite Radio: What Satellite Radio can learn from Motorola Iridium

Related Articles:

Postscript: Who is the audience for Shortwave Radio?
Global Internet Distribution of Cultural Media: How Internet Radio was oh so 5 minutes ago
Terrestrial Broadcast Radio: The end of an era?

SatRadio_XMSiriusLogo

This is a follow-on to a number of posts on this site on the subject of terrestrial and internet radio.  See references above.

On a Tear

I am on sort of a tear regarding terrestrial radio and internet radio and what might be the future for both.  Looking over some past issues of Fortune magazine there was an article in the March 13′th issue on Satellite Radio.

It begs the question – What is the positioning of satellite radio in the context of conventional terrestrial radio and Internet Radio (Streaming media)?  How does Satellite Radio fit into the picture?  What can Satellite radio learn from similar endeavors?

The state of Satellite Radio today

The March 13′th issue of Fortune on Sirius is mostly about CEO Mel Karmazin and his attempt to rescue XM Sirius from bankruptcy with a $350 million dollar injection of capital.  The Sirius XM stock price has fallen by 98% trading at 20 cents per share.  In addition XM Sirius is saddled with $995 million of maturing debt.

How is Sirius XM Satellite Radio doing these days?

Over the years Sirius and XM have been absolute horror shows for investors. The duo rang up $3 billion in debt, tallied cumulative operating losses in excess of nearly $10 billion, and since 2004 lost shareholders a combined $15 billion in stock market capitalization. As recently as March 2 – before all the i’s were dotted on the Liberty deal – Sirius XM issued an ominous warning. Explaining the reasons it would be late filing its 2008 annual report, the company said it had not yet completed “its evaluation as to whether substantial doubt exists relative to the company’s ability to continue as a going concern.”

Ok, and regarding the up front costs and when investors will see a profit?

This is a company with very high fixed costs,” Karmazin explains. “Before you get your first subscriber, you’ve had to launch satellites, put an infrastructure into place, and get content. You have all of these expenses upfront before you get a single dollar of revenue.” However, once subscriber numbers reach a certain level, the dollars start cascading to the bottom line. “That,” he says, “occurs this year.”

Motorola Iridium Global Phone

SatRadio_IridiumAs I was reading the article in Fortune I couldn’t help thinking about the Motorola Iridium global phone system and how much Sirius XM satellite radio could be following the same path as Iridium.

Just about every product goes through a life cycle of Introduction, Growth, Maturity, and Decline.  Some products and services get cut down in the prime of their youth and never make it to growth or maturity.

This could be the case for Satellite radio as it was for Iridium.  Iridium and XM Sirius have a number of things in common.

  1. Executives and investors fascinated with technology without questioning the viability of the business model.  Plus, long concept to build-out times which exacerbates inattention to the ongoing vitality of the business model over time.
  2. Huge up front capital costs which flow down to the cost of the service.
  3. Not watching your back on emerging new technology and new entrants into the market.
  4. The concept of “escalating commitment” and failure to objectively analyze a position and exit the market when the business model and/or technology is no longer viable against the competition.

There is an excellent analysis of Iridium by Sydney Finkelstein and Shade H. Sanford of the Tuck School of Business at Dartmouth -LEARNING FROM CORPORATE MISTAKES: THE RISE AND FALL OF IRIDIUM

The Rise and Fall of Iridium

SatRadio_IridiumPhoneSome relevant quotes from that article against the 4 items above.

1.  Cool technology, but what is the business model and how do you make money

“We’re a classic MBA case study in how not to introduce a product. First we created a marvelous technological achievement. Then we asked how to make money on it.” – Iridium Interim CEO John A. Richardson, August 1999

2. Huge capital costs and costs of the service.

“On November 1, 1998, after launching a $180 million advertising campaign and an opening ceremony where Vice President Al Gore made the first phone call using Iridium, the company launched its satellite phone service charging $3,000 for a handset and $3-$8 per minute for calls. The results were devastating. By April 1999, the company had only 10,000 subscribers. Facing negligible revenues and a debt interest of $40 million per month, the company came under tremendous pressure.

3.  Watch your back on emerging technology

Cellular build-out dramatically reduced the target market’s need for Iridium’s service. Iridium knew its phones would be too large and too expensive to compete with cellular service, forcing the company to play in areas where cellular was unavailable.

4. RDF (Reality Distortion Field), the fallacy of sunk costs, and inability to give it up.

Motorola’s decision to push Iridium forward in spite of a deeply flawed business plan is a classic example of the pitfalls of “escalating commitment.” The theory behind escalating commitment is based in part on the “sunk cost fallacy” – making decisions based on the size of previous investments rather than on the size of the expected return.

The final comment on Iridium from an analyst:

“Iridium is likely to be some of the most expensive space debris ever.” – William Kidd, Analyst

The similarity with XM Sirius Radio

I can’t do justice to the analysis of  Finkelstein and Sanford here.  The article is only 11 pages.  You should read this article for yourself and then see how this parallels the Fortune article on Satellite Radio.

Here are some obvious connections – quotes from the article in  Fortune.

1. A fascination with technology
2. High capital costs and long concept to build-out

This is a company with very high fixed costs,” Karmazin explains. “Before you get your first subscriber, you’ve had to launch satellites, put an infrastructure into place, and get content. You have all of these expenses upfront before you get a single dollar of revenue.” However, once subscriber numbers reach a certain level, the dollars start cascading to the bottom line. “That,” he says, “occurs this year.”

3.  Watch your back on emerging technology

There has been a huge growth in terrestrial alternatives,” says Rothblatt… “As we move from third-generation to fourth-generation cellular, there’s going to be ever more bandwidth available to distribute content totally via terrestrial cellular infrastructure. And that will leave fewer and fewer unique market attributes to satellite radio.”

Basically, Rothblatt is envisioning a future in which free Internet radio services like Pandora, AOL Radio, and iTunes Radio are ubiquitous on car sound systems and cellphones. Internet radio would become the second new technology to undermine the market for satellite radio – iPods and MP3 players were the first – and Rothblatt doubts that satellite can compete with free services that offer thousands of stations, vs. 150 for Sirius and XM. “Technologies have their ideal times and places, and in my opinion the better time for satellite radio was 10 years ago,” says Rothblatt, who thinks Sirius – which didn’t begin broadcasting until 2002 – would have hit this sweet spot were it not for FCC red tape that delayed its launch.

4. Escalating commitment in the face of an outdated business model.

Indeed, Martine Rothblatt, the entrepreneur who founded Sirius back in 1990 and is currently the CEO of biotech company United Therapeutics, thinks Sirius XM’s entire business model has become dated.

Karmazin doesn’t dismiss the threat posed by Internet radio. In fact, Sirius XM is about to join Pandora and AOL Radio in offering its own Apple (AAPL, Fortune 500) iPhone application, thereby allowing iPhone users to stream Sirius or XM via 3G wireless. Still, he’s dubious that computer-generated song playlists can compete with Howard Stern or Bob Dylan. “I’m starting at a premise that says radio is not just recorded music – radio is discovery of new music,” he says. “Some people would like to be able to hear songs they haven’t heard before and that are not on their iPod. Some want to listen to CNN or Howard Stern, and not just to music. That’s why we have a laserlike focus on getting content – because we think that content is what wins.”

And what of the International Shortwave Broadcasters?

We can also tie in the article that appeared in Monitoring Times that was referenced in a previous posting.  That article was written in 1999 – a decade ago.  Back then International Shortwave Broadcasters certainly were aware of the new emerging technology of the Internet.  But, it is hard to predict the velocity of technological change and the diminishing costs of Internet access and Internet distribution of content.

From the Monitoring Times article in 1999.

The Internet is the newest delivery mechanism on Dr. Elliott’s list… But at this early stage of development, the Internet also has some significant drawbacks.  For one, the equipment to access it is expensive.  In addition, telephone line and access charges can be high, thereby inhibiting use.

Now, in 2009, wireless internet access is ubiquitous and nearly free.

Convergence on what is important

There is convergence among those strategists for Satellite Radio, International Broadcasters, and traditional terrestrial broadcasters on at least one thing.  They all agree that “content wins”.  Content wins over delivery.

This quote was from Dieter Weirich of Deutsche Welle:

It makes far less difference to the station how the listener accessed the content, whether via shortwave, satellite, the Internet or CBC Overnight.  If the listener’s focus is content the station is interested in hearing from him or her.  But if the focus is confined to running up verification numbers [ QSL cards ], that relationship is not likely to be very welcome.

Conclusion

The future is unpredictable.  With all these competitors – Internet radio, Satellite radio, International broadcasters, local terrestrial radio, Internet-only radio, and every new entrant – who will win and who will lose?

I don’t know the origin of the phase “The best way to predict the future is to create it” but whoever said that got it right.  Some people have an uncanny knack to be a game changer – to see things in a new way that radically disrupts the rules of the game.  But correctly envisioning the future is not enough – it also takes discipline in strategy and execution.

Lastly, the winners will have an advantage by learning about failure.  When Oracle CEO Larry Ellison says of Cloud Computing “I’m not going to build the cloud.  It’s the Webvan of computing”  you better know the story of Webvan.  And, if you don’t you will be at a disadvantage to competitors that have learned this history of business failure and profit from this knowledge.

I wonder if XM Sirius CEO Mel Karmazin has seriously learned the lessons of Iridium?

No matter the carnage of the competitors – the real winner are the consumers – you and me.  We have all these options to play with while the competitors battle it out.

Resources

The article from Fortune magazine
Mel Karmazin fights to rescue Sirius
(cached PDF version)

From Tuck School of Business at Dartmouth
Learning From Corporate Mistakes: The Rise and Fall of Iridium

From Monitoring Times 1999
A Tuning Point for International Broadcasting: what does the future hold for shortwave.

Internet Media Providers

http://vtuner.com/

https://www.reciva.com/

A couple (among thousands) of articles recounting  the story of Webvan and why it failed

Success and Failure of Pure-Play Organizations: Webvan versus Peapod, a Comparative Analysis


A Tangled Webvan

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Written by frrl

May 23, 2009 at 7:17 am

4 Responses

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  1. Really good post. Well done.
    One question; Why is it snowing?

    Very distracting and hard to take a really interesting post seriously.

    Brian

    December 5, 2009 at 2:18 pm

    • If you see it snowing on this site – that is an attribute of WordPress.com. It’s winter in the USA and I suspect their servers (WordPress) are outside in the elements. But, for a free site, I can’t complain.

      frrl

      December 6, 2009 at 7:12 am

  2. Great post. Thank you for sharing this. If you have a moment, check out my site as well over at http://seobizniche.com :) cheers!

    Nisha

    October 31, 2009 at 1:05 am

  3. Very good comparison but I am not sure that I can agree with your analyst William Kidd regarding the fate of Iridium. From an insider perspective I think Iridium has filled a much needed niche and is providing a service (emergency communications) to many individuals and corporations that would otherwise be left wanting.

    Chris Hallam

    September 21, 2009 at 2:38 pm


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