OUTSIDE THE BOX: Turning the Corner

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From our friends at SkyReport.com

By Steve Blum

Eight quarters and a few days after it began operations, XM Radio had 930,000 subscribers. At the same point in its history, DirecTV had 1.6 million subs. Even though lower, XM's number is the more impressive. Most new DirecTV subscribers, then and now, are simply changing the name on the monthly check they write for pay television services. XM had to convince consumers to write a new check for something they'd received for free for the past 80 or so years, an accomplishment the dot-commers promised was right around the corner even while they filed for unemployment.

XM and DirecTv had help, of course. Thomson, PrimeStar, USSB and EchoStar spent hundreds of millions of dollars on advertising and retail distribution in the first two years of the current satellite television era. Sirius' efforts have likewise built demand, but the real boost has come from Apple Computer, Napster and, as much as I hate to admit it, the music industry's predatory litigators.

Until this year, record store customers thought they were paying for a physical object, but not the actual music (or the spoken word: who can forget John Wayne's hit vinyl, "America, Why I Love Her"?). Song swapping, via tape or the Internet, didn't even register on the naughty meter.

Enter the legal sharks. They eviscerated the first incarnation of Napster, then chowed down on kids trading MP3 files. People quickly concluded that it was better to pay Apple 99 cents for a song than to live with the fear that lawyers might be hiding under rocks in the front yard.

Results came fast. Apple has sold 17 million songs since April, Napster The Sequel sold 300,000 in its first week, and Microsoft and Wal-Mart want in on the action. Growth is accelerating: Jupiter Research predicts the online share of the music market will grow from 7 percent to 26 percent in five years.

Originally, year-end company guidance was 1 million subs for XM and 300,000 for Sirius. XM hit the mark two months early and bumped expectations to 1.2 million. It will likely do even better. Sirius is in the six-figure range and just has to do as well in this year's fourth quarter as XM did in last year's to hit its mark. When the New Year begins, the satellite radio category should stand right around 1.5 million subscribers.

If satellite radio only continues doing as well as it looks to do in 2003, it'll be right at the 5 million mark in three years. But if you believe that the factors driving satellite radio's market penetration are at least as compelling as the factors that drove DBS during its first full five years of operation, that figure is significantly higher.

The Tellus Venture Associates model, which is on track for 2003, projects 2 million more subscribers in 2004 and a total of nearly 10 million satellite radio subs by the end of 2006. If ARPU stays close to $10, that puts the sector in the $1 billion a year range.

XM, Sirius and the online services have succeeded in diverting existing revenue streams, and creating new ones. The corner has been turned.

Steve Blum is a consultant specializing in DBS market research and analysis, and business development. He can be reached by e-mail at SteveBlum@TellusVenture.com, or via his company's website at www.tellusventure.com.
 
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