WASHINGTON — Competition in the U.S. satellite radio industry heated up considerably in 2006 as Sirius Satellite Radio of New York finally began closing the subscriber gap with rival XM Satellite Radio of Washington.
The year began with investors in both companies disgruntled about the amount of money they spent on subscriber acquisition in 2005, particularly in the fourth quarter.
Both companies closed 2005 spending heavily to woo subscribers — perhaps too heavily. In March investors learned that XM had spent around $20 more per customer than it had the previous year during the fourth quarter in order to counteract the arrival of popular radio personality Howard Stern in the Sirius lineup .
Sirius continued to spend more than its competitor on advertising and marketing as well.
Some XM shareholders went as far as filing a class-action lawsuit alleging that the company mislead investors when it relayed its financial strategy, and that insiders had sold stock with prior knowledge that spending would be significant.
“The main story of 2006 has unfortunately not been particularly positive,” said Jimmy Schaeffler, chairman and chief security officer for the Carmel Group of Carmel, Calif. “But the substantial upside is that as we move into 2007, both companies have done a pretty good job taking care of those concerns.”
Both companies managed to rei n in spending by the time the third quarter of 2006 rolled around, citing narrower losses than in previous quarters. XM had ended 2005 with 5.9 million subscribers, compared to Sirius’ 3.3 million. But by December of 2006, Sirius had considerably narrowed the gap. XM had 7.18 million subscribers while Sirius had 5.10 million. Sirius is predicting it will have between 5.9 million and 6.1 million subscribers by year’s end; XM is projecting between 7.7 million and 7.9 million, numbers that reflect one revision by Sirius and two by XM after previously higher expectations.
Sirius and XM each maintained during their most recent conference call with investors that they would be cash-flow positive by the end of 2006.
“I think that satellite radio begun to transition this year as an industry, from a hyper-growth period to stable growth,” said Shaun Parvez, an analyst with New York-based Cowen & Co. “It’s maturing from both a subscriber growth perspective and a financial reporting perspective.” In other words, the companies are concentrating less on obtaining and broadcasting big subscriber numbers, and looking at rei ning in spending and thinking about the bottom line.
Throughout the year, satellite radio clashed with the recording industry. In May, XM was sued by a group of record companies seeking $150,000 in damages for every song that can be recorded using XM’s Inno portable device. Sirius’s device did not receive the same scrutiny, because the company had worked out a previous deal with the record companies before releasing its portable player.
The record industry also took the satellite radio firms to task over the royalty fees they pay, agreements that expire at the end of 2006 . Analysts have estimated that the companies pay around 7 percent or less of their total revenue in such fees, but the industry group SoundExchange is pushing for between 10 percent and 23 percent. The issue will go to arbitration in 2007.
Looking ahead to 2007, Sirius likely will receive a boost when it gains exclusive control over NASCAR content next year.
XM, meanwhile hopes to see many of the deals it has struck over the years with the automotive industry come to fruition, as more cars with factory installed XM radios start rolling off production lines. XM also will be able to depend on its newest satellite for capacity, XM-4, which launched in November. The companies also might reveal what direction they will take with offering video content to customers.
“That evolution will be necessary for them to remain competitive,” Parvez said, with heightened competition coming in from other forms of music delivery, such as the iPod .
Parvez expects 2007 to demonstrate where the real retail demand is in satellite radio, as most of the big marketing drives for Stern and other popular programming such as Oprah Winfrey and Martha Stewart will be over.
This year was also the first year of operation for the Canadian divisions of both XM and Sirius. By December, XM Canada had announced it had 147,000 subscribers, trailing Sirius Canada, which boasted 200,000 paying subscribers at its last announcement Nov. 20. Analysts attributed the difference to programming, particularly citing Howard Stern as a likely draw for early adopters of satellite radio in the region.