The Bridge Ratings Q1 2007 Satellite Radio Update

 

Wednesday March 28, 2007

Demand for Satellite Radio Off Significantly

Through the first three months of 2007, retail activity for satellite radio has returned to the sluggish environment we saw prior to the 2006 holiday season. While there are several factors contributing to this continued weakening market, consumer interest continues to wane and is a major factor in many of our findings in this the Bridge Ratings First Quarter 2007 Satellite Radio Update.

In September 2006 Bridge Ratings began conducting "brand stimulation" studies with potential satellite radio consumers. In initial results from this study, consumer interest in satellite radio had cooled considerably from earlier in 2006. A primary reason for softer 2006 sales can be attributed to the softening interest in the technology. From our interviews with consumers this slowing interest is due to three factors the mass radio audience considers important:

1. "What's in it for me?" - A clear and unique benefit - why do I need it?
2. How strong are the negative attributes of the current 'brand preference' - In the case of satellite radio, 'brand preference' refers to the emotional use attachment to and the comfort the consumer has with traditional radio.
3. The "level of demand" created by the degree of attractiveness of the brand's product line.

A fourth component may be added as the year progresses. While it is unclear what impact on future subscription sales the proposed merger may have, initial Bridge Ratings data indicates that 45% of potential subscribers will wait longer than previously expected before subscribing. This 'wait-and-see' component is likely to negatively affect subscription numbers going forward until XM/Sirius clarify and market how the consumer will be affected.

Bridge Ratings measures each of these first two attributes which generates a "level of demand" quotient that we can track over time. For satellite radio as an industry, brand and product interest has seen a significant downtrend in brand stimulation since April 2006. After a slight upsurge in interest during the last quarter of 2006, interest in satellite radio among all consumers is at its lowest point falling below the 5.0 point for the first time ever. (see chart). A Brand Stimulation Score of 4.8 indicates that as a group, those we interviewed were just as likely not to consider subscribing to satellite radio as were. For the entire time we have conducted this type of research, this number has always been above 5.0.

For the first half of 2006, the average Brand Stimulation Score was 7.3 on this scale. Between July and December This slowing "brand stimulation" slid to 6.0 reflecting very soft consumer interest during the middle part of 2006. First quarter 2007 average score is just over the critical 5.0 point on our scale.

This consumer apathy is at the heart of the sector's current marketing challenge which we don't see improving anytime soon especially with the advent of a merger possible.

For the purposes of this study, Bridge Ratings interviewed consumers at retail outlets who have purchased Satellite radio. Telephone surveys were also conducted between January 1, 2007 and March 25, 2007. Calls were placed to both current and potential subscribers to satellite radio.

I. Consumer Interest Index (CII) :

Since 2003, Bridge Ratings has conducted Consumer Interest surveys in order to project the potential size of the satellite radio subscriber base. Over time marketing by both satellite radio companies has heightened awareness and interest in the medium.

This chart compares actual and projected subscriber growth for both XM and Sirius through 2006 with Bridge Ratings' Consumer Interest in satellite radio. Consumer Interest is determined by asking potential satellite radio subscribers at any point in time if they are "Very Likely", "Somewhat Likely", "Not Likely" to consider subscribing to satellite radio in the next sixty days.

II. Consumer Expectations - Not in the Public Interest

Following is a follow-up to the original data received from current and potential satellite radio subscribers about a series of customer-related benefits or impacts that are likely to occur should a merger of Sirius and XM occur. Consumers rated as "Very Likely", "Somewhat Likely", or "Unlikely" the following developments. This chart shows original scores recorded right after the merger was announced in February compared to perceptions at the end of March.

The press coverage and press release clarifications from both satellite radio companies have clearly had an impact on original perceptions. While the majority of the total satellite radio consumer group still believe that increases in monthly subscription rates will occur in some form, the number is down significantly. Down as well, but not as significantly, are perceptions related to Increase in hardware cost, Improved programming quality.

Areas where scores increased include perceptions that monthly subscription rates will decrease due to the merger, that there will be an increase in available channels to the average subscriber and an increase in the number of commercials on music channels.

Consumer Profile Total Consumer Group
March 28 2007
Feb 28 2007
Increase in Mthly Subscription Rate
          75%
87%
Increase in Hardware Cost
          67%
72%
Decrease in Monthly Subscription Rate
         15% 
10%
Increase in No. of Available Channels
         20%
18%
Decrease in No. of Available Channels
78%
82%
Improved Programming Quality
         25%
35%
Reduction in Programming Quality
         70%
65%
Fewer Commercials on Music Channels
10%
9%
Increased No. of Commercials on Music Channels
        97%
86%
Able to Use Current Radio
         65%
57%
Required to Replace Current Radio
33%
43%
Better audio reception
40%
50%
Worse audio reception
45%
49%

When isolating potential satellite radio subscribers, those who indicated they were they would seriously consider subscribing to one of the two (or both) services within the next six months, we asked: "XM and Sirius have announced they intend to merge the two companies together into one some time before the end of 2007. How does this news affect your interest in subscribing?"

 

Comparing this month's results from those in February:

  March 07 Feb 07
Will Wait Up to 3 months before deciding
23% 21%
Will Wait to see if the merger happens
58%
55%
Will subscribe within 60 days anyway
19%
24%

 

III. Howard Stern

Bridge Ratings estimates that 2.5 million of Howard Stern's terrestrial audience (20%) were Stern's most loyal listeners and that Stern has converted 52% of them (1.3 million) specifically to subscribe to Sirius to hear him. Bridge Ratings views the unconverted 48% of Howard Stern's core fan base as the prime group to pursue for further growth as they will be less costly to acquire than the 80% of Stern's terrestrial audience who were categorized as those who "listened occasionally" or "listened frequently".

With the possible merger of Sirius and XM, a new opportunity opens for building Stern's audience. However, in Bridge Ratings' analysis of satellite radio consumers, those who have chosen XM do not consider Stern to be a high priority and therefore have indicated to us that they do not miss him. But with 7.6 million+ XM listeners potentially available to hear Stern in a merged company configuration, Stern will benefit - it just won't be as significant as one might think.

As part of this satellite radio study, Bridge Ratings surveyed 1000 current XM subscribers. Random telephone calls were placed to this national sample. As with all of our studies, this was a representative sample of XM consumers between the ages of 18 and 72. The following chart reflects the responses to the question: "If the Howard Stern radio show were available on your XM satellite service for no additional charge, how likely would you be to listen on a regular basis?" Very likely, Somewhat likely, Not likely at all.

Based on these full-sample results, 12% of XM's current subscriber base is Very likely or Somewhat likely to listen to Stern's channel on a regular basis. Applied to the subscriber base of 7.6 million, there is a potential of 912,000 additional Stern listeners in the current base of XM subscribers.

IV. First Quarter Retail Growth

We don't believe that retail sales ever equaled expectations for Q4 of 2006 despite the holiday season. The soft fourth quarter of 2006 has not only carried over into 2007, but first quarter 2007 retail activity and interest is below that of Q3 2006 which Bridge Ratings noted in our year-end report was the softest quarter of the year for the sector. Again, it is worth noting that 83%-87% of the sector's shortfall in 2006 was due to XM's shortfall in additional subscriptions and this percentage held true in Q3 2006.

In light of the recently announced merger intentions of these companies and the findings in the most current Bridge Ratings study, we are inclined to reduce our pre-merger-announcement (PMA) subscriber numbers for full-year 2007. For the moment, we will hold with our estimate of 17 million by the end of 2007 until additional consumer feedback is accumulated over the next few weeks.

Some revised industry estimates put 2007 subscription gains for the two companies at between 5.3-5.6 million more subscribers bringing the industry total by year-end to approximately 19 million with first quarter gains coming in at around 1.1 million new subscribers. Bridge Ratings' estimates at the start of 2007 were closer to 17 million by year-end but we are now preparing to lower these numbers based on the first quarter information reported here.

Based on Bridge Ratings January-February-March retail interviews and measurement of retail activity, Q1 2007 retail subscriber activity was approximately 661,000. This compares with our original estimate of 720,000. This compares to a sector total of 726,101 during Q3 of 2006. This number does not include OEM, or car-installs at the dealer level. Our best estimates show that with new car sales first quarter "subscriber" counts are near the 750,000 mark. However, a large percentage of the OEM "subscriber" count included in that number represent trial or "free" subscriptions.

The following 'thermometer graph' represents quarter-by-quarter subscriber growth estimates for the satellite radio sector. To date, subscriber growth projections have achieved 17% of our annual projection of approximately 661,000 additional subscribers since January 1, 2007. If the sector is to hit our conservative estimate of 3.9 million new 2007 subscribers, first quarter has proven to be behind pace.

Estimates of added subscribers are based on Bridge Ratings consumer interviews and projections. This chart will be updated on a monthly basis or as data is received.

The Satellite Radio Consumer

Discover satellite radio consumer sample profiles. Click here.

 

V. Brand Awareness Tracking

 

"Can You Name a Satellite Radio Service?"
Wk Ending:
Mar 07
Feb 07
Jan 07
2006
2005
XM
35%
41%
39%
45%
50%
Sirius
65%
59%
61%
55%
50%

 

"Which Satellite Radio Service Did You Purchase Today?"
Wk Ending:
Mar 07
Feb 07
Jan 07
2006
2005
XM
44%
40%
35%
40%
52%
Sirius
56%
60%
65%
60%
48%

 

Satellite Radio Consumer Index: Branding vs. Purchase
 
Mar 07
Feb 07
Jan 07
2006
2005
XM
1.26
.98
.90
.89
1.04
Sirius
.86
1.02
1.07
1.09
.96

 

The above table measures strength of brand against actual retail purchase. An index above 1.00 indicates positive retail strength compared to brand awareness.


Bridge Ratings will continue to release updates on our retail interviews through 2007.

*Based on telephone interviews and point-of-purchase interviews conducted at retail outlets between January 1 and March 26, 2007. Retail outlets vary by week but may include Best Buy, Circuit City, Sears, CompUSA, Target, Staples and Sam's Clubs stores.

Markets surveyed: Los Angeles, San Diego, Phoenix, Boston, Detroit, New York, Boston, Chicago, Dallas. On average 11,617 listeners 18+ were surveyed during the month of March.

 


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