By Karekin Jelalian

Top-down or bottom-up, the digital audio radio services (DARS) market looks to be a real winner, perhaps more of a winner than any similar mass-market service or product introduced during the last several decades.

…First – The Positives

DARS’ addressable market–mostly vehicles and, to a lesser extent, household and portable audio units and other miscellaneous markets-is huge. In 2001, there’ll be an estimated 191 million vehicles on the road in 2001, growing to more than 212 million in 2006. We examine just the vehicle market here.

Table 1 breaks out subscriber and penetration rate projections for various target vehicle markets, a bottom-up type of analysis. The numbers in Table 1 show, for example, that DARS penetration rates are expected to be higher in new vehicles than in aftermarket vehicles, and that leased, new vehicles will have a yet higher take-up rate than new vehicles in general.

Target markets, subscriber and penetration projections in Table 1 can be dissected even further; for example, to help determine the number of aftermarket subscribers, we used the percentage of on-the-road vehicles that typically get retrofitted for audio equipment and the percentage of aftermarket installations covered by companies that have agreements with the two U.S. DARS operators.

The second DARS positive is price, particularly subscription fees, which will be a paltry $9.95 per month.

Initially, DARS hardware will add $200-450 to the price of a new vehicle, depending partially on features. Aftermarket hardware prices will cost between $150-300, depending partially on whether the system connects to existing audio equipment or is standalone and on features.

Clearly, hardware prices can come down, and they probably will in a short time. Also, initial hardware prices are still substantially lower than they initially were for in- vehicle navigation systems ($1,300 in 1997), cable equipment (a $150 installation fee, in the early 1950s!) and DBS ($750 in 1994).

Third, both U.S. DARS operators–XM Satellite Radio [XMSR] and Sirius Satellite Radio [SIRI], have alliances and agreements in place with all the right companies, most notably with automobile manufacturers that represent approximately 75 percent of all U.S. automobile and light truck sales.

Fourth, partly due to consumer demand and technology–mass media typically go through at least one phase of significant content segmentation. It happened during the 1970s and 1980s to television via cable then DBS and to magazines during the 1960s and 1970s with the plethora of new, special-interest titles.

That’s not to say that it has to happen to all media, but not since the introduction of FM during the 1940s and 1950s has there been any significant increase in radio programming choices.

…The (Possible) Negatives

The following are possible negatives because they are just that, possible, not certain.

Structural Competition. Structural competition for DARS would be some factor from outside the audio/radio industry that hindered DARS’ growth. An example would be people spending substantially less time in their cars (not likely anytime soon).

Related to structural competition is demand for a driver’s time and attention from within the car. Examples here include cell phones, navigation systems, wireless Internet and fax machines. Too many in-vehicle distractions also could create safety concerns that result in drivers’ voluntarily cutting back on in-vehicle information/entertainment sources, including DARS.

Indirect Competition. Indirect competition to the two DARS operators would be in the form of new, alternative ways of receiving audio programming, such as MP3 and Internet audio streaming. Neither of these appears to be a serious threat to DARS subscriber growth rates anytime in the near future.

Paying for Radio Programming and the DARS Concept. People are not used to paying for radio programming. However, cable and DBS have gotten people accustomed to the idea of paying for increased programming content. Similarly, prospective consumers will have to be made aware of the new service; DARS’ availability in rental and lease cars and on commercial flights should help in that campaign.

…The Caveats

Of course, there have to be some caveats. But, as with the possible negatives, the caveats are more likely, if anything, not to kill DARS but to slow or delay its growth rate.

Successful Roll-Out and Execution of Service. Subscriber forecasts included in this report assume that availability of receivers, DARS technology (repeater systems, satellites, receivers, studios), agreements with OEMs and other factors related to a successful rollout occur without any major glitches.

Service Start Dates. Hitting projected subscriber numbers is, of course, very sensitive to service start dates. As of now, Sirius expects to begin offering service during the first quarter 2001 in selected Ford Motor Co. [F] model cars and XM expects to begin offering service during the second quarter 2001 in selected GM [GM] model cars.

Delayed Purchases. By 2004, Sirius and XM expect to offer receivers capable of getting either company’s programming. This will probably cause some people to delay the purchase of a DARS receiver. Particularly affected will be automobile purchasers during 2002-03 who may not buy another car (or become a DARS subscriber) for several years. Receiver interoperability has been factored into our subscriber projections, as seen by increased subscriber and penetration growth rates during 2004 and beyond.

(Karekin Jelalian can be reached at (301) 340 7788 x2122 or [email protected])