1981: Satellite radio is a technology that provides a radically new way to listen to radio.

XMs service
makes use of advanced satellite capabilities and elaborates terrestrial receiver architecture to deliver a
wide array of high quality radio programming nationwide. In early 1998, Robert Acker, director of
strategic planning at XM, needs to develop a marketing strategy for this new radio service. There are
several decisions that need to be made by the company in order to finalize the business plan. At fist
XM needs to decide which of two business models to pursue, whether emphasis should be placed on
charging customers a monthly subscription fee, or whether to rely more on earning revenue through
advertising. In addressing this problem, management must consider the value that XM radio could
propose for different consumer segments as compared with existing modes of radio (AM, FM) and in
relation to its sole competitor in satellite radio SIRIUS. Besides choosing a business model there is
also a need to explore how best to approach and leverage manufacturer and channel partners,
considering high unknown and high-risk technology. The purpose of this report is to analyze
possibilities and outline possible recommendation on strategies for XM Radio. The following areas will
be examined:
Market and Competition
Business Model
Pricing
Manufacturing and distribution channels
Market and Competition
The primary target market for satellite radio should consist of adults ages 25-50. These are customers
that make most money and will be willing to pay extra for the quality
entertainment
service. This target market can also be divided into the smaller segments. The key segments are:
Truck drivers and RV owners (approximately 6 million i)
Commuters driving more than 90 minutes per day
Business travelers who spend much of their time in the car (like real estate sales agents)
Workplace listeners, including retail outlets with a need for continuous, non-stop music
Residents of underserved rural areas.
Sports fans (for example NASCAR)
These target groups spend an extraordinary amount of time listening to radio, especially in the car,
and should be extremely receptive to the XM product due to their constant need for radio
entertainment and willingness to pay for it.
As a result of the FCC auction, the only XMs competitor in satellite radio arena is SIRIUS. But at the
same time there other entertainment sources that could be perceived as prospective competitors for
XM.
Traditional (AM/FM) Radio - it is currently free, but only offers a homogenous shallow play lists with
medium audio quality.
Satellite TV and Cable TV - provides a wide choice of programming, with very high audio quality but
only fixed receivers, used mostly at home.
Internet Radio potentially provides a wide choice of play lists but at low quality and requires access
to internet.
When examining product positioning map on Exhibit 1, one can see that even though audio and video
entertainment sources mentioned above do play a role for the potential target market, satellite radio
itself has a very good combination of price and quality in addition to the continuous nationwide service
to differentiate itself from potential competition.
Business Model
XMs only competitor in the satellite radio industry, SIRIUS, has chosen a commercial-free format
across all programming, announcing the source of their revenue to be solely from subscription fees.
However, XM has two possible options to choose from, in addition to SIRIUS format:
advertising on all programming
combination of commercial-free programming and programming carrying advertising
Option one, chosen by SIRIUS, commercial-free programming on all stations, would allow for
significant product differentiation in the radio industry. Traditional radio today typically carries
advertising for twenty minutes in every hour , causing listeners to constantly scan stations. A

commercial-free format would fulfill the listeners need for consistent, interesting programming.
However, choosing this format would also cause XM to miss out on the opportunity to raise extra
revenue through advertising.
Option two would allow XM to sell advertising time for all stations and programming. This option could
provide a large amount of advertising revenue, but at the same would make differentiating the product
from traditional radio much more difficult and will not justify paying a subscription fee for the potential
customers.
Option three would involve a combination of stations carrying commercial-free programming and
programming included with a small amount of advertising time. This option could allow for certain
types of programming, such as talk and sports radio, to run advertising while still providing meaningful
product differentiation through an offering of commercial-free stations. This option would allow XM to
raise some advertising revenue in addition to subscription fees. Even though this model may
potentially turn prospective customers away if the concept of offering only certain commercial-free
stations cannot be communicated effectively, this option seem to make most sense out of all described
above. Many sports events already include breaks for advertising so consumers are used to and
expect commercials for this type of programming. Revenues from radio advertising have increased
almost fifty percent since 1992i which demonstrates the value advertising can provide to the company.
It is also important to keep in mind that XM is still in the position to have to sell the business plan to the
investors and manufacturing partners. Having additional revenue source from limited amount of
advertising makes the overall strategy look more appealing.
Pricing
Choosing a mostly subscription based service as a business model brings up a question of
determining winning pricing structure for the product. Two important decisions need to be made
regarding pricing:
price of the receiver.
price of the subscription to the service.
In order to determine the best acceptable price for the receiver XM needs to take into consideration
the 30% manufacturing and 30% retail markup that need to be added to the $270 cost to produce the
receiver.i This brings up the cost for the customer to over $400.
XM has commissioned market research that forecasts demand at different price points for different
segments of the population. Exhibit 2 shows that forecasted demand, while drops significantly when
increasing receiver price from $100 to $200, does not have that much fluctuation when price is
increased from $250 to $400. One might argue that receiver price should be more inline with what
consumer would normally pay for a car audio system with CD player in a retail outlet which is in the
range of $150-200. But based on the information from the market research it makes sense to price XM
radio receivers at around $400 which would minimize subsidies to manufacture the receiver and would
not have that much effect on the demand. However, it is expected for the price to drop slowly over the
next five years as manufacturing costs drop. The price decrease in the future will lead to higher
demand and higher profit.
Pricing for the subscription to the service needs to allow maximizing demand from price-sensitive
customers while capturing maximum value from those with high demand and low price sensitivity.
SIRIUS has chosen a single price subscription model of $12 however this model does not provide
consumers with product choice. XMs pricing should not be far off from the competition but XM has an
opportunity to differentiate itself from competition by allowing customers to choose the number of
stations and content they receive, providing basic and premium packages.
Exhibit 3 shows projected monthly revenues based on receiver and subscription price levels. As one
can see projected revenues from $10 monthly subscriptions are very close to $12 subscription
revenues. By charging $10 for basic service XM has an opportunity to differentiate itself from SERIUS
and attract more price-sensitive customers. For customers who are less sensitive to price but are more
demanding of the content, XM will be able to offer a premium package with greater variety of targeted
programming for $13 monthly subscription. The table in Exhibit 4 lays out possible package offerings
by XM.
The Company should also consider promotion strategies such as discounts on receivers and long term
subscriptions to gain customer recognition and loyalty.
Manufacturing and distribution channels
Since XM does not plan to manufacture, hold inventory or sell the receivers i, it is important to define

strategic partners for manufacturing and distribution channels. To speed up adoption it seems more
logical for XM at first to partner with manufacturers of aftermarket car radios such as
Sony
, Pioneer and Alpine. Potential customers at first are more likely to purchase an aftermarket product
then a new car with built in XM receiver. Also the brand recognition that mentioned above leaders in
aftermarket car audio systems can offer will increase customer trust in the new product category,
increasing the probability of successful introduction into the market. Nevertheless in the future
strategic roadmap, XM should plan to partner with OEM companies such as Delphi Delco in order to
include XM receivers as factory-installed in new vehicles. This will help to reach customers without
them having to go out and purchase XM receivers on their own.
When looking at distribution channels the most logical solution should be to use existing distribution
chains for car and home electronics. The cost of selling receivers directly by XM will most definitely
overweight regular retails markup and increase price of the product, so it makes most sense to use
local and national retail stores as distribution channels. Chains like Best Buy and Circuit City have a
large number of stores nationwide, great expertises in selling home and car audio systems and
advertising techniques. These are trusted store names that hopefully will increase customers trust in
the product and speed up introduction time. Smaller local audio retailers should also be used since
they have historically developed a market for new entertainment products.
Based on the analysis and recommendations above the following overall strategy going forward will
position XM to successfully enter the market of satellite radio. XM should offer a tired programming
and plan to receive most of the revenue from subscription fees, but still allocate time for advertising
during selected talk and sports programs to boost the revenue. XM should also take steps to partner
with well known car audio aftermarket manufacturers to produce receivers and with nationwide retail
chains to assure stable distribution channels. These steps in my opinion will provide the solid
foundation for XM Satellite Radio in the market.

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