Satellite Radio’s Opportunity

A government ruling on the legality of the proposed Sirius-XM merger is expected soon. The merger will require approval from two government agencies: the Department of Justice must investigate the merger for violations of antitrust law and the Federal Communications Commission must decide whether the merger will serve the public interest. I don’t possess the legal or political acumen to speculate about whether the merger petition will ultimately be successful, but I will argue that the merger should be approved, and if it is, Sirius-XM should embrace a new business model that will allow them to harness the economic and cultural potential of a national radio market.

Within Single Markets, Consolidated Ownership Means More, Not Less, Radio Diversity

Last year, several country music artists, including Porter Wagoner and George Jones, lobbied against increasing consolidation of radio ownership, arguing that the emergence of radio conglomerates has limited the ability of traditional artists to receive radio airplay. They’re right, but condemning ownership consolidation on those grounds demonstrates lack of imagination and economic understanding. Within a single market, radio consolidation means more, not less, radio diversity.

Suppose that Clear Channel Communications buys every station in a market with 20 licensed radio stations. If Clear Channel has any business sense, they’ll launch 20 distinct radio formats. There’s no reason for Clear Channel to launch 3 top-40 country stations because Clear Channel would be competing with itself and triplicating services by running three radio stations with moderate audiences instead of one radio station with a huge audience. Conversely, suppose that Clear Channel only buys ten of the 20 stations in market X and rival Cumulus Media snaps up the other ten. Top 40 country radio is a profitable business these days so both Cumulus and Clear Channel are likely to launch stations of similar format and compete with each other. Apply the same logic to other popular formats and you discover that local media competition more often leads to multiplication of content than diversity.

This reality is ironic given that opponents of consolidated ownership seem much more concerned about the preponderance of one ownership group in a single market than the prevalence of ownership throughout the country. Limit an ownership group to X number of stations in a single market but allow them to buy in as many markets as they you want and it’s no wonder that country music radio sounds remarkably similar from market to market. If ownership groups would be allowed to dominate local markets, even if no actions were taken to prevent them from buying in other markets, the diversity of radio offerings would increase significantly.

Unified satellite radio presents an exciting opportunity to diversity radio music offerings because it creates a truly national, single market under the auspices of one owner. You’ll find four to six country music stations on each Sirius and XM, but what you won’t find is substantial duplication of content from one station to the next, unless you’re comparing Sirius to XM. Unified satellite radio would have no need for this duplication and I expect the country music fan should be able to listen to top 40 country, traditional country, outlaw country, bluegrass, Americana and other subgenres with little to no presence in over-the-air radio markets. Permitting the Sirius-XM merger will increase the diversity of their current offerings by eliminating the need to duplicate content and effectively doubling subscriber base, thus rendering more obscure musical variants economically viable.

Over-the-air Radio is Antiquated, Inefficient, and Non-Local

However, I am not confident about the future of even a unified satellite radio service as long as they continue to take a backseat to traditional radio. There’s no reason that satellite radio has to be subjugated to secondary status because AM/FM radio is an antiquated relic of a more technologically primitive time. On a cross-country trip last year, I marveled at how ironic it is that my GPS navigator can follow me inch by inch from coast to coast yet I have to surf through radio static every 45 minutes to find a new station. Why, in the age of satellites, do we remain reliant on a land-based communication system that requires entirely new infrastructure every 100 miles?

Over-the-air radio is tremendously inefficient. We possess the technology to beam one signal to every radio in the country yet rely on redundant local infrastructure to offer essentially homogenous content.

Defenders of this inefficiency cite the inherent value of local radio: local content produced by local talent. The curious thing is that these qualities of local radio have withered away under the influence of the nationalization trend that has so far spared radio infrastructure. Few radio stations rely on local talent 24/7 anymore, with even the largest stations broadcasting syndicated content at night and on weekends. In small markets, listeners are lucky to hear a local voice at any time of the day, and even most of those voices that claim to be local are studio recordings made by national voice-tracking talent.

All of this suggests that DOJ and FCC should permit the Sirius/XM merger and that the newly unified satellite radio company will have a tremendous opportunity to revolutionize radio. However, I don’t foresee success under the current satellite business model. If I’m the CEO of the new Sirius-XM, I institute a few major changes on day one.

Who Needs Subscribers Anyway?

I’ve never understood why so many people, including most satellite radio executives, presume that commercial-free content is the best thing about satellite radio. It’s not, and in fact, it’s not even very important. I’d venture that almost everyone who subscribes to satellite radio owns an iPod or other digital music player. The iPod provides a fee-free source of commercial-free music that an be perfectly tailored to individual taste. With most new cars coming with mp3 player jacks and $20 transmitters that will adapt the iPod to almost any circumstance, it’s easier and cheaper to listen to a personal music player than satellite radio. So why do iPod owners subscribe to Sirius and XM?

Some probably subscribe for non-music content, including sporting events and Sirius’ Howard Stern. But I imagine that most Sirius subscribers spend at least a significant portion if not a majority of their radio time listening to music stations. My conclusion is that satellite radio stations are not alluring because they’re commercial free; they’re alluring because of the music they play. Satellite offers a vastly larger music library than most music listeners own themselves and Sirius and XM play music that can’t be found on over-the-air radio.

Some subscribers probably like satellite because of the music and the fact that it’s commercial free. But I argue that commercial freedom is more an expectation of the subscription fee than an essential quality of satellite radio. I wouldn’t stand commercials if I was paying a $150 annual subscriber fee, but they become much more palatable when the content is free.

Furthermore, the subscriber fee excludes a large base of potential customers. I’d love a satellite radio subscription but just can’t justify the cost. If satellite radio was free, commercials or no commercials, I don’t think that I’d ever listen to over-the-air radio again.

Most importantly, with the diverse channel selection of satellite radio, commercials need not excessively disrupt the listening experience. If satellite radio started playing commercials, I have no doubt that a listener with anything but the narrowest tastes could always find a station that he or she liked which was not playing commercials. Because satellite radio offerings are so diverse and the same content is available 24/7 around the country, I expect that a free satellite service would quickly replace over-the-air radio. However, additional measures would help to solidify the satellite audience.

If satellite content becomes free, priority number one is improving access to satellite receivers. This starts with contracting with automobile manufacturers to ensure that satellite radio comes standard in every new automobile. The satellite radio companies have already started doing this with rental car companies, and it’s a good strategy. I’ve done most of my satellite radio listening in rental cars and I imagine that more than one renter returned home and bought a satellite subscription.

Drivers account for a massive proportion of the radio audience and satellite cannot hope to become the dominant radio form without cornering automobile listeners. Sirius-XM should labor tirelessly to have satellite radio installed as a standard feature in every new car, and if the satellite service is free, there’s no reason why people won’t listen. Unified satellite radio should also contract with a number of major electronics manufacturers to produce and market innovative and affordable receiver designs, including packaging satellite receivers into stereos, alarm clocks, digital music players and cellular phones.

These changes should grow the satellite audience significantly, but satellite radio will need to localize its content if it hopes to truly replace AM/FM radio. Once satellite attains a sufficient audience, I foresee the emergence of an organization similar to the current television network system. Satellite stations would broadcast national content for most of the day but local affiliates would provide traffic, weather and news updates on the hour. On some stations, a few hours of each day would be reserved for local programs, most likely during morning and afternoon drive time, home to the most successful local programming. Local programming would utilize satellite infrastructure and require significantly fewer personnel than stand-alone radio stations, and the underlying national nature of the satellite programs would preserve the large audience and single market that is conducive to content diversity.

Satellite radio’s content is already significantly more diverse than AM/FM radio fare, and I expect that a unified satellite service with a large audience would be even more diverse. Satellite has the potential to do for radio music what the internet did to retail: make successful product that would be inviable in a local market offering it to a national and perhaps even international consumer market. I encourage the U.S. government to approve the pending merger and hope that satellite radio will recognize the potential of their new union.