The profiles and subscriber numbers of Sirius Satellite Radio and XM Satellite Radio are growing as the companies continue to garner attention for their efforts to attract subscribers, which include their battles for exclusive content deals and to make their equipment standard on various car makes and models.
As the companies make the transition from new and interesting satellite technology to genuine business, they also are facing more financial pressure. Investors would like to see improved cost control and better overall financial performance to stem growing losses. One area that both XM and Sirius have cited as a way to improve the bottom line is advertising revenue.
Commercials are becoming a staple on non-music channels, and Sirius CEO Mel Karmazin is seeking ways to make advertising a larger share of the company’s revenue, including an idea for channels sponsored by advertisers that target dedicated groups such as doctors or pharmacists. In September, XM trumpeted that the launch of its Oprah & Friends channel brought in 13 new, high-profile advertisers such as Acuvue, GE, Snapple and Target.
To date, the music channels have remained mostly off limits to advertising. XM ran commercials early in its lifetime before dropping them, though in March 2006 XM was forced to return advertising to four music channels controlled by Clear Channel Communications.
But commercials could be coming to more of the music channels, as XM and Sirius have begun negotiations with Soundexchange on what the satellite radio providers will pay for the right to play music for the next six years. The non-profit organization collects and distributes royalties from digital music services on behalf of artists and record labels, and in late October, submitted a proposal for a new deal with satellite radio to the Copyright Royalty Board, the arm of the Library of Congress that sets the rates that XM and Sirius pay.
Under the current agreement, which expires at the end of 2006, analysts estimate that XM and Sirius pay 4 percent to 5 percent of their revenues to the music industry. For the next agreement, Soundexchange is seeking 10 percent of the revenues in the first year, and the rate would gradually increase to 23 percent by 2012. “The essence of satellite radio is music,” John Simson, executive director of Soundexchange, said. “Without music, XM and Sirius would not exist. We are asking simply that these companies recognize our substantial contribution to their business by paying a fair price to artists and record labels for their creativity and investment.”
The rate negotiation is in the early stages of a process that could take 12 to 18 months to complete. According to reports, Sirius and XM have proposed a rate of 0.88 percent of gross subscription revenue for the six-year period, plus advertising revenues on the music channels. Soundexchange has labeled the satellite radio proposal “demeaning,” but the part that more satellite radio subscribers would find troubling is the hint that advertising on music channels would be used to pay the royalties.
Neither XM nor Sirius have definitively said they will add commercials to their music channels, but if they do, it would be a relatively small inconvenience for customers to put up with in order to keep the music playing.
The addition of commercials probably would cause some customers to flee, but beyond lack of commercials, XM and Sirius have differentiated themselves from free over-the-air radio by the variety of music they make available. Customers should be willing to help XM and Sirius pay for that ability and help demonstrate to terrestrial competitors that satellite alternatives are viable competitors.