While consumers may be tempted to sign up for Sirius or larger rival XM based on expanding programming lineups, falling radio prices may be an even more compelling lure.

Share story

WASHINGTON — For Dan McLain of Chagrin Falls, Ohio, there was a compelling reason to buy a satellite-radio receiver: shock jock Howard Stern’s looming move off the traditional airwaves.


“It’s just a show I enjoy. I’m a listener and my wife’s a listener,” he said.


Sirius Satellite Radio is set to boast the arrival of its biggest on-air personality yet when Stern starts Jan. 9.


While consumers may be tempted to sign up for Sirius or larger rival XM based on ever-expanding programming lineups, falling radio prices may be an even more compelling lure. Some radios are selling for half the price they commanded last holiday season.


For the companies themselves, the race is on to achieve profitability as they put hundreds of millions of dollars into new programming. Both XM and Sirius reported net losses of more than $100 million for the third quarter. Profitability is expected in a few years as more subscribers sign up.


A recent check of prices found some radios for the services selling at $50 or less, including rebates. Industry insiders say that reflects the benefit of falling prices of electronic components used to make the radios. It also reflects fierce competition in the two-player market.


For both companies, getting the radio hardware into hands of consumers is the first step toward getting monthly subscriber fees, their key source of revenues. Both XM and Sirius charge $12.95 a month.


Razor and blades


“This is a razors-and-blades business,” said Craig Moffett, an analyst with Sanford C. Bernstein. “Discounting of radios is one of the obvious levers they’ve got to stimulate subscription demand, because over the long term that’s where they make their money.”


This holiday season is viewed as key. XM has said it expects to have 6 million subscribers by the end of the year, while Sirius expects 3 million.


“In our industry, as with other consumer-electronics companies, 40 percent of your growth can come in the fourth quarter, which has been our history over the last few years,” said Hugh Panero, chief executive of XM Satellite Radio Holdings.


Mel Karmazin, CEO of Sirius Satellite Radio, said it is important to have products at the high and low ends of the price range. Sirius is first out with a radio with MP3 capability, its S50 portable, which sells for about $300. XM is due to follow with MP3 models early next year.


“The fact is that the broader the price range, the more appealing it is to different segments of the population,” Karmazin said.


S50 “red hot”


At Crutchfield, a catalog and online consumer-electronics retailer, the S50 is “red hot,” said Rick Souder, executive vice president of merchandising. While the S50 remains in stock, sets sell as quickly as they come in, he said.


It is the unit purchased by McLain, who was concerned about no longer being able to listen to Stern while driving. He also bought a less expensive model for his wife to use.


The hot seller last holiday season was XM’s portable device, the MyFi XM2Go, then priced at $329, Souder said. This year, they’re selling at Crutchfield for about half that, and Souder said most satellite-radio prices are down 30 percent to 50 percent from last year.


Karmazin says anticipation of Stern’s arrival is another selling point for Sirius.


“We believe that as Howard is counting down the number of days that he has left on what he calls old-fashioned radio, that people are interested,” he said. “We think it will be a big item for Howard fans for the holiday season this year.”


Both Sirius and XM are working hard to market their unique programming. While XM has Major League Baseball and the shock jock duo Opie and Anthony, Sirius has the NFL, Stern and a recently unveiled partnership with Martha Stewart.


Panero suggested Sirius is taking a narrowly focused low road, branding it as “raunchy,” but Karmazin countered satellite radio is all about giving listeners a choice and noted it has channels aimed at children.


Karmazin bristled at Panero’s suggestion, saying Stern “is the single biggest personality over the last 20 years in radio. And if the geniuses at XM want to categorize that as ‘raunchy,’ that’s their word.”


The parallel fortunes of Karmazin and Stern mark a transition point for both the traditional and satellite broadcasting realms.


Karmazin moved to Sirius after serving as president of Viacom. He was Stern’s old boss at Viacom’s Infinity Broadcasting and his move to Sirius in 2004 came just weeks after Sirius announced a $500 million pact with Stern.


Stern coup


Analysts believe Stern’s migration from traditional, or terrestrial radio may help both satellite-radio companies.


Stern’s planned move has put satellite radio on the map, said Jason Helfstein, senior media analyst with CIBC World Markets. It will be a test to see how many of Stern’s listeners will be willing to move to satellite, he said.


Bernstein’s Moffett estimates that out of Stern’s 12 million listeners, there are 4 million hard-core “zealots,” many likely to pay the subscription fee.


Moffett said the Stern move “legitimizes” satellite radio by giving it “a big name and giving it a face.” He looks for sales to get a boost through the first quarter of 2006.


Ted Schadler, an analyst with Forrester Research in Cambridge, Mass., said a survey found that 12 percent of households planned to get satellite radio either this year or next. That number is likely to grow as Stern’s move draws more attention, he said.


New-car trial period


Sirius and XM are also relying on demand from new-car buyers through separate, exclusive pacts with auto manufacturers. In both cases, the service is offered free for an introductory period.


Long-term forecasts vary. Moffett looks for 44 million total satellite-radio subscribers by 2010. Forrester’s Schadler expects more than 20 million households, a different measure, for the same period.


In either case, it means Stern will have to settle for a smaller initial audience, expecting continued growth, as he begins his new career on satellite radio.