Post-merger, Sirius XM faces tricky landscape

By Antony Bruno and Ken Tucker

DENVER/NASHVILLE (Billboard) - Now that the two U.S. satellite radio broadcasters have completed their merger, as of July 29, and formed Sirius XM Radio, the combined company will face a host of challenges in navigating the new digital landscape.

Over the long haul, the prospect of widespread broadband availability threatens to consign satellite carriers to technological redundancy, as it becomes easier for cell phones and other hand-held devices to stream music over the Internet.

And in the near term, new rivals continue to emerge, the most recent being Apple's iPhone and its App Store, which offers a slew of free downloadable music applications, including one from streaming music site Pandora that's already a big hit. Sirius XM representatives didn't respond to requests for comment before this article was published.

For the moment, Sirius XM can expect to retain a strong position in the all-important automotive market. But here, too, challenges await.

According to data from Jupiter Research, the automobile remains the most popular place to listen to music, which gives Sirius XM a leg up over its new digital competitors, Jupiter analyst David Card said.

"If they can double down on cars, that could be one of their best bets," Card said.

Leading up to the merger, XM and Sirius had made great strides in adding their receivers as factory-installed options in many cars. But a slowing economy and spiking gas prices have led to a sharp downturn in U.S. sales of new cars. And one of the most significant new offerings to emerge from the combined company -- an a la carte option, enabling subscribers to choose only the stations they want -- will require new receivers available for purchase only at retail, which could limit the number of new customers that option will attract.

ON THE ROAD

Satellite carriers are still far ahead of Internet radio and the iPod in terms of their integration in car stereo systems. Web radio doesn't have any direct input into the car today, other than connecting an Internet-enabled mobile device like the iPhone to the car stereo -- not exactly a common practice. Such radio outlets are also facing uncertainty of their own over exactly how much they have to pay for the music they transmit. If the recently increased performance royalty rates that they pay remain in effect, many would-be Sirius XM competitors in Internet radio claim that they'll be forced out of business.

Meanwhile, the auto industry is still struggling to find an easy integration on a mass-market/factory-installed scale for iPods and other portable devices. Yet even as that becomes a more popular option, iPods are seen as complementary to the radio experience, not competing. "Listening to your own collection versus listening to a programmed experience is still fundamentally different and (there's) still a need for both," Card said.

The biggest competitor to Sirius XM remains terrestrial radio. During the 17 months it took for the merger to secure regulatory clearance, terrestrial broadcasters have had time to fortify a hoped-for defensive position against satellite radio in the form of high-definition radio. But HD doesn't yet appear poised to present a serious challenge to satellite.

Breadth and depth of programming remain satellite's greatest strength and HD's biggest weakness. Edison Media Research vice president of music and programming Sean Ross said HD radio has not made enough significant programming breakthroughs to spike unit sales. "It's still stuck in the same loop of not yet having the volume of content that would spur a sale that would make HD content profitable that would allow broadcasters to create a greater volume of content."

Still, because it's free after the purchase of a compatible receiver, HD radio could cause some headaches for Sirius XM, especially as more car makers make HD a factory-installed option in their vehicles.

Although music channels have accounted for the majority of the most popular programming on Sirius and XM, music isn't likely to determine the fate of satellite radio, Mercury Media Research president Mark Ramsey said.

"Anybody can whip up a music channel -- good or bad -- for nothing," Ramsey said. "But to have Howard Stern you'll have to pay through the nose. And that's because ... Howard Stern is utterly scarce and attractive."

That's not to say music is not valuable -- it's just not exclusive. "There's nothing (in music) that they can play that can't be played by someone else who's willing to pay the rights fees," Ramsey said.

Reuters/Billboard