Xm Radio

1. Summary and Conclusion

We believe XM Satellite Radio should offer a subscription-based offering of 50+ channels for $10 per month. XM needs to acquire new customers and we recommend using the $100M launch campaign as described in this report to generate significant customer adoption.

2. Situation Analysis

a. Company

XM Satellite Radio was founded in 1992 to provide radio entertainment to the via a satellite-based broadcast system. XM is a very early-stage company.

Primary Issues

* XM must define a business model, manufacturing process, and marketing strategy.

* XM has not yet launched a product, though its product is technologically feasible.

* No company has been able to provide nationwide radio coverage in this manner.

b. Customers

Radio listeners are diverse and can be classified into a range of market segments. Listener characteristics include gender, age, ethnicity, location, and tech-friendliness. Also, listeners have shifted from home listening and to in-car listening.

Primary Issues

* Listeners vary in terms of their price sensitivity.

c. Competitors

XM's direct competition is SIRIUS. Competition is limited by the FCC, which governs which new players can enter the satellite radio market.

XM's indirect competitors include traditional radio companies, radio offered through satellite and cable tv, and internet radio.

Primary Issues

* SIRIUS has the first-mover advantage and intends to launch its service by the end of 1999.

d. Collaborators

XM will leverage relationships with receiver and chipset manufacturers to manufacture, distribute, or sell its own products. Targeted retailers will include major consumer electronics chains and aftermarket car stereo shops.

XM also is dependent on nationwide syndicators and the record industry to produce fresh content to play over the airwaves. The FCC also plays a silent role as the industry is government regulated.

Primary Issues

* XM's collaborator network is complex. The Company must minimize touch points to keep operations simple.

* Manufacturers must agree to produce the technology and retailers need to push the products

e. Context

In 1997, the radio industry had recently completed a major consolidation and FM radio penetration rates had peaked at 77.6%, with flat growth rates over the past ten years.

Primary Issues

* TV has become the choice broadcasting medium and radio stations are turning to advertising to support themselves.

3. SWOT Analysis/Objective

a. Strengths

XM has demonstrated its technical competence by designing a working prototype for its technology. The Company also holds one of two existing FCC licenses to broadcast satellite radio, essentially operating in a duopoloy market.

b. Weaknesses

XM needs to further develop the following business competencies:

* Business model

* Brand awareness

* Distribution channels

* Manufacturing capabilities/relationships

* Access to capital

c. Opportunities

XM can provide a transformational radio experience to over 61 million customers (Exhibit 1). XM's duopoly status implies the companies will be able to protect their profit margins less price competition.

XM's subscription based model means revenues are recurring and can be estimated with reasonable accuracy. Furthermore, customers are required to invest in hardware, thereby increasing their switching costs, which give XM more of an opportunity to lock in customers with high LTVC (Exhibit 3).

d. Threats

The biggest threat is SIRUIS. Once a customer decides what hardware to use, he is locked into a service provider because of the high upfront investment. SIRIUS has the potential to become the dominant firm because it posses the first mover advantage.

The hardware requirement is also a big threat. The receivers are pricey and consumers may never clear the investment hurdle to adopt satellite radio. Or, the manufacturers may not be convinced that they should produce the XM technology.

XM also must raise over $1 billion in capital to fund it business. To date, the company has limited access to capital.

4. Value Chain Analysis

To decide which marketing strategy was best for XM, we split the value chain (Exhibit 6) and evaluated the various alternatives in each section.

a. Radio Design and Manufacturing

* Partner with existing radio manufacturers

- Pros: Manufacturer expertise, brand recognition, and lead-time to market

- Cons: Lose control over product design, pay 30% margin

* XM develops and produces hardware by itself

- Pros: Maintain control over radio design

- Cons: Substantial capital investment to build manufacturing capabilities

* Conclusion: XM should partner with existing manufacturers, rather than bear the costs of producing the radios on its own.

b. Distribution