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(Solved) Final PDF to printer CASE 11 Sirius XM Satellite Radio Inc. in 2014: On Track to Succeed after a Near-Death Experience?


No plagiarism more than 10%. 

2-3 pages required. 

Read ch. 5 and sirius xm case study to prepare it. 

2-3 references required. 


Questions:


1. What are the key elements of Sirius XM's strategy? 

2. Which of the Five Generic Competitive Strategies in chapter 5 is the company pursuing? It is working well or not? Based on what evidence?

3. Finally, include some comments on the company's financial performance during the 2010-2013 period based on information in Exhibit 2.  {Note: You can use Table 4.1 as a guide for assessing the company's financial performance]


Answer it properly as asked in question. 

check both files. 




Final PDF to printer CASE 11 Sirius XM Satellite Radio Inc.
in 2014: On Track to Succeed
after a Near-Death Experience?
Arthur A. Thompson
The University of Alabama I n February 2009, the outlook for Sirius XM Satellite Radio was grim. Despite having 2008 revenues
of nearly $1.7 billion and some 19 million subscribers, the company’s stock price had dropped to a low
of $0.05 per share, and the company was mired in a
deep financial crisis, with debts totaling more than
$3 billion. Years of big spending and annual losses in
the hundreds of billions had depleted the company’s
ability to secure additional credit to pay its bills, and
the company lacked the cash to make a scheduled
debt payment of $171.6 million due on February 17.
But hours before filing for Chapter 11 bankruptcy (in
order to avoid defaulting on the scheduled debt payment), Sirius XM got a lifeline from Liberty Media,
a $2 billion company with business interests in the
media, communications, and entertainment industries; Liberty was headed by cable TV pioneer and
financial tycoon John Malone, who not only owned
a controlling interest in Liberty Media but also was
known for making big investments in troubled or
undervalued companies having what he believed
were good prospects for long-term profitability. Liberty agreed to provide an aggregate of $530 million
in loans to Sirius in return for (1) 12.5 million shares
of Sirius XM preferred stock convertible into 40 percent of common stock of Sirius XM and (2) seats
on the Sirius XM board of directors proportional to
its equity ownership. Two of these seats were to be
occupied by John Malone, Liberty’s chairman, and
Greg Maffei, Liberty’s CEO. Many outsiders viewed
the terms to be a sweetheart deal for Liberty Media.
Headed into 2014, Sirius XM had 25.6 million
subscribers, 2013 revenues of $3.8 billion, operating tho20598_case11_C158-C177.indd 158 income of $1 billion, net income of $377 million,
and cash flows from operations of $1.1 billion. The
company’s stock price had rebounded nicely and
traded mostly in the $3.50 to $4 range during the last
three months of 2013, equal to a market capitalization of $21 billion to $24 billion. COMPANY BACKGROUND
Sirius XM Satellite Radio was the product of a
2008 merger of Sirius Satellite Radio and XM Satellite Radio. The two predecessor companies had
begun operations in 2001–2002, spending hundreds
of millions to launch satellites for broadcasting signals, arrange for the manufacture of satellite radio
receivers and other equipment, install terrestrial
signal repeaters and other necessary networking
equipment, develop programming, conduct market research, and attract subscribers. The primary
target market for satellite radio service included
the owners of the more than 230 million registered
vehicles in North America and, secondarily, the
over 120 million households in the United States
and Canada.
Market research done in 2000–2001 indicated
that as many as 49 million people might subscribe to
satellite radio service by 2012, assuming a monthly
fee of $9.95 and radio receiver prices of $150 to
$399, depending on the car or home model chosen.
A 2002 market research study conducted for XM Copyright © 2014 by Arthur A. Thompson. All rights reserved. 10/25/14 10:48 AM Final PDF to printer CASE 11 Sirius XM Satellite Radio Inc. in 2014: On Track to Succeed after a Near-Death Experience? concluded there would be a total of about 15 million satellite radio subscribers by the end of 2006.
Considering that in spring 2005 both XM and Sirius
raised their subscription rates to $12.95 monthly, the
forecast turned out to be fairly close to the actual
13.6 million satellite radio subscribers in the United
States reported at year-end 2006.
Both Sirius and XM employed a subscriptionbased business model to generate revenues. Subscribers received discounts if they had multiple XM
or Sirius satellite radios (for different vehicles or for
home and office use) or if they signed up for prepaid
plans of two to three years. Both companies did not
expect to cover the high startup costs and become
profitable until acquiring at least 8 million to 10 million subscribers. Competition between XM
and Sirius Quickly Becomes
Spirited and Expensive
Early on, the two companies became embroiled in a
fierce market battle waged on multiple fronts: • Creating a programming lineup that was more
attractive than its rival’s programming lineup.
• Convincing automakers to factory-install its brand
of satellite radio (the radios of the two rivals were
incompatible—XM radios could not receive signals broadcast by Sirius, and vice versa).
• Gaining broad retail distribution of its various
satellite radio models and equipment for use at
home or in used vehicles.
• Building brand awareness and stimulating consumer demand for satellite radio service.
The Race to Differentiate Programming
Content While each company’s programming
strategy was to offer a diverse, appealing selection
of digital-quality radio programs that would attract
listeners willing to subscribe to mostly commercialfree programming, each company recognized that
the key to gaining a competitive edge was having differentiated programming content capable of attracting and retaining the greatest number of subscribers.
Each company quickly moved to create one or more
channels for almost every music genre and a big
assortment of channels devoted to news and commentary, sports, comedy and entertainment, family
and health, religion, politics, traffic, and weather. By tho20598_case11_C158-C177.indd 159 C-159 2007, XM had a programming lineup of over 170
channels that included 69 commercial-free music
channels; 5 commercial music channels; 37 news,
talk, and commentary channels; 38 sports channels;
and 21 instant traffic and weather channels. Sirius
was broadcasting on 133 channels that included
69 channels of 100 percent commercial-free music
and 64 channels providing sports programming,
news, talk, information, entertainment, traffic, and
weather. To achieve differentiation, both companies
spent large, sometimes lavish, sums for contracts to: • Obtain broadcast rights for the audio portions
of programs on National Public Radio and such
cable TV channels as Fox News, CNN, CNBC,
MSNBC, ESPN News, and ESPN Radio.
• Gain exclusive rights to air live play-by-play
broadcasts of various sporting events (Major
League Baseball games, National Football League
games, National Basketball Association games,
National Hockey League games, college football
and basketball games for all major conferences,
professional golf and tennis tournaments, NASCAR races, horse races, FIFA World Cup soccer
games, etc.). As an example of the large amounts
spent to acquire exclusive rights for high-profile
programming, XM paid $60 million annually for
a six-year agreement to broadcast Major League
Baseball games live nationwide for the years
2007 through 2012.
• Secure the services of well-known personalities
and brands (like Howard Stern, Oprah Winfrey,
and Martha Stewart Living) and create special channels featuring their shows and content.
In 2004, Sirius signed a five-year contractual
agreement with Howard Stern said to be worth
$400 million to $500 million in salaries for Stern
and his staff plus stock bonuses for Stern and his
agent that were based on exceeding specified subscriber targets; Howard Stern broadcasts began
on two Sirius channels in January 2006.
At XM, expenditures for programming and content were $101 million in 2005, $165.2 million in 2006,
and $183.9 million in 2007. Sirius Satellite Radio’s
expenditures for programming were $100.8 million
in 2005, $520.4 million in 2006, and $236.1 million
in 2007. Apart from battling to achieve differentiated programming content, the two competitors
also strived to attain overall product differentiation by offering greater geographic coverage, more 10/25/14 10:48 AM Final PDF to printer C-160 PART 2 Cases in Crafting and Executing Strategy commercial-free programming choices, and digital
sound quality.
Partnering with Automakers and Gaining Broad Distribution in the Retail Marketplace Simultaneously, both XM and Sirius
aggressively launched well-funded strategic initiatives to gain broad distribution of their satellite
radios via partnerships with motor vehicle manufacturers, making satellite radios available at national
and regional consumer electronics retailers and mass
merchandisers (Best Buy, Walmart, and Target), and
selling radios at their websites—all were sources of
new subscribers. The battle was particularly fierce in
the automobile segment for three reasons:
1. A big majority of the new subscribers for satellite
radio service were the owners of newly purchased
vehicles equipped with a satellite radio.
2. A majority of the satellite radios for new vehicles
were factory-installed, although automobile dealers could install satellite radios in some models.
3. The incompatibility of XM and Sirius radios
forced vehicle manufacturers to choose which
brand to install in factory-assembled vehicles.
Each of the competitors lobbied hard for vehicle manufacturers to sign contractual agreements to
exclusively install only its brand of satellite radio in
vehicles scheduled to be equipped with a satellite
radio. Both XM and Sirius used liberal subsidies and
commissions to induce manufacturers to sign exclusivity agreements: Each rival paid automakers a subsidy if its brand of satellite radio and a prepaid trial
subscription (usually for three months but sometimes for six months) was included in the sale or
lease price of a new vehicle. As a further incentive,
each paid automakers either a commission or a share
of the subscription revenues to purchase, install, and
activate its brand of satellite radio. There were also
revenue-sharing payments on subsequent subscriptions by new vehicle owners after the trial period
expired. For instance, XM had a long-term distribution agreement with General Motors whereby GM
agreed to exclusively install only XM’s brand of satellite radios in return for GM being paid a portion of
the revenues derived from all subscribers using GM
vehicles equipped to receive XM’s service—this was
in addition to the incentives XM paid to GM to subsidize a portion of the costs of installing XM radios
in GM vehicles. Indeed, it was common practice for tho20598_case11_C158-C177.indd 160 XM and Sirius to reimburse automakers for certain
hardware-related costs, tooling expenses, and promotional and advertising expenses directly related to
including a satellite radio as a vehicle option.
For the 2007 model year, Sirius radios were
available as a factory-installed option in 89 vehicle
models and as a dealer-installed option in 19 vehicle
models; Sirius service was also offered to renters of
Hertz vehicles at 55 airport locations nationwide.
For the same model year, XM’s satellite radios were
available as original equipment in over 140 vehicle
models.
In addition to offering subsidies and incentives
to automakers, XM and Sirius also offered subsidies
and incentives to (1) the manufacturers of their satellite radios, (2) the makers of chip sets and other
components used in manufacturing satellite radios,
(3) the various distributors and retailers of satellite
radio devices and equipment, and (4) automotive
dealers that installed satellite radios on vehicles not
having a factory-installed satellite radio. Moreover,
there were device royalties for certain types of satellite radios, subsidies for handling product warranty
obligations, price protection for distributor inventories, and provisions for inventory allowances.
All of these expenses (except for revenuesharing payments) were incurred in advance of
acquiring a subscriber and were classified as subscriber acquisition costs. For XM, subscriber acquisition costs were $245.6 million in 2005, $224.9
million in 2006, and $259.1 million in 2007; Sirius
incurred subscriber acquisition costs of $399.4 million in 2005, $451.6 million in 2006, and $407.6
million in 2007.
In 2006, the Federal Communications Commission, which had jurisdiction for satellite radio communications and had regulatory authority for issuing
operating licenses for satellite radio enterprises,
responded to growing numbers of consumer complaints about being locked into subscribing to the service of one company or the other, depending on the
brand of satellite radio they had purchased. The FCC
brought pressure on XM and Sirius to resolve the signal reception incompatibility and issued rules requiring the interoperability of both licensed satellite
radio systems. Late in 2006, XM and Sirius signed
an agreement to develop a unified standard for satellite radios to enable consumers to purchase one radio
capable of receiving either company’s broadcast
signal and thus subscribe to whichever company’s 10/25/14 10:48 AM Final PDF to printer CASE 11 Sirius XM Satellite Radio Inc. in 2014: On Track to Succeed after a Near-Death Experience? service they wished. The agreement called for the
technology relating to this unified standard to be
developed, jointly funded, and jointly owned by the
two companies. Satellite radio manufacturers began
including both XM and Sirius chip sets in their satellite radios to enable dual-signal reception in 2008;
within months, all satellite radios were being manufactured with dual-reception capability.
Building Brand Awareness and Stimulating
Demand for Satellite Radio Service Both
XM and Sirius pursued aggressive marketing strategies, spending heavily on a variety of sizable sales,
marketing, and promotional activities calculated to
build brand awareness, communicate the appealing features of satellite radio service compared to
traditional radio, and attract, first, hundreds of thousands and, then, millions of new subscribers annually.
Advertising and promotional activities were conducted
via television, radio, print, and the Internet; brochures
illustrating the array of available channels and programs, along with other satellite radio features, were
distributed at retail outlets, concert venues, and motor
sports events and on the Internet to generate consumer interest; some major retailers participated in
jointly funded local advertising campaigns. In-store
promotions typically included displays at electronics
and music stores, car audio retailers and other retailers that stocked and promoted sales of satellite radios,
automobile dealerships, and rental car agencies with
vehicles equipped with a satellite radio.
At XM, expenses for marketing and advertising were $182.4 million in 2005, $164.4 million in
2006, and $178.7 million in 2007. Sirius had sales
and marketing expenses of $197.7 million in 2005,
$203.7 million in 2006, and $173.6 million in 2007. The Competitive Battle
between XM and Sirius Inflicted
Major Financial Damage
The heavy expenses incurred by the efforts of the
two rivals as each tried to gain an edge over the
other produced gigantic losses every year of their
existence, despite having attracted millions of subscribers. Comparative performance statistics for
2005–2007 are shown in Exhibit 1.
With both companies burdened by sizable negative cash flows from operations, balance sheets that
were becoming precariously weaker as long-term tho20598_case11_C158-C177.indd 161 C-161 borrowings and stockholders’ deficits mounted,
waning ability to raise additional equity capital from
increasingly anxious investors, and growing concerns about the viability of their business models,
there was much speculation in 2006–2007 about
whether either XM or Sirius could obtain the financing needed to survive for much longer. Executives
at both companies concluded that after six years of
battling for subscribers and bidding up programming
costs, the only long-term solution was to merge and
bring a halt to the destructive competitive battle that
was unlikely to end short of bankruptcy. The executives and boards of directors of the two companies
hammered out a planned merger agreement that was
announced on February 19, 2007.
But there were significant hurdles to overcome
because the merger, if approved by the FCC and the
Antitrust Division of the U.S. Department of Justice,
would create a satellite radio monopoly, although
the merged company would still face competition for
listeners from multiple sources, including terrestrial
AM/FM radio, both free and paid Internet streaming
services (from Clear Channel, CBS Radio, Pandora,
and others), the music channels offered by cable TV
providers, digital music devices such as iPods and
MP3 players, and the music and other programming
that could be stored on or streamed to smartphones.
Traditional AM/FM radio enterprises offered free
broadcast reception paid for by commercial advertising rather than by a subscription fee. Sirius and
XM argued that the free broadcast programs of
AM/FM enterprises (as well as all the other free and
paid music programming that was widely available)
not only reduced the likelihood that customers would
be willing to pay for satellite radio subscription
service but also imposed limits on what a merged
XM-Sirius could charge for its service. Thus, it was
alleged by XM and Sirius that competitive forces
would be adequate to protect consumers from any
“monopoly pricing” or other monopolistically abusive practices stemming from an XM-Sirius merger.
However, many AM/FM enterprises, along with
consumer interest groups and other interested parties, expressed opposition to the merger, largely on
grounds that it would be anticompetitive and injurious to satellite radio subscribers.
After 17 months of regulatory scrutiny and
despite the objections of various concerned parties,
the proposed merger won approval from the FCC
and the Antitrust Division of the U.S. Department of 10/25/14 10:48 AM Final PDF to printer PART 2 C-162 EXHIBIT 1 Cases in Crafting and Executing Strategy Comparative Performance, XM Satellite Radio and Sirius Satellite Radio,
2005–2007 (dollar amounts in thousands, except per-subscriber data) XM Radio
Number of subscribers, year-end
Gross subscriber additions
Deactivated subscribers
Net subscriber additions
Subscriber revenues
Total revenues
Operating expenses
Loss from operations
Net loss
Long-term debt
Total stockholders’ (deficit) equity
Cash flows from operations
Average monthly revenue per subscriber
Subscriber acquisition costs per gross subscriber addition*
Sirius Satellite Radio
Number of subscribers, year-end
Gross subscriber additions
Deactivated subscribers
Net subscriber additions
Subscriber revenues
Total revenues
Operating expenses
Loss from operations
Net loss
Long-term debt
Total stockholders’ (deficit) equity
Cash flows from operations
Average monthly revenue per subscriber
Subscriber acquisition costs per gross subscriber addition* 2005 2006 2007 5,933,000
4,130,000
1,427,000
2,703,000
$ 502,612
558,266
1,113,801
(555,535)
(666,715)
1,035,584
80,948
$(166,717)
$10.57
$109 7,629,000
3,866,000
2,170,000
1,696,000
$ 825,626
933,417
1,336,515
(403,098)
(718,872)
1,286,179
(397,880
$(462,091)
$11.41
$108 9,027,000
3,891,000
2,493,000
1,398,000
$ 1,005,479
1,136,542
1,647,979
(511,437)
(682,381)
1,480,639
(984,303)
$(154,730)
$11.48
$121 3,316,560
2,519,301
345,999
2,173,302
$ 223,615
242,245
1,071,385
(829,140)
(862,997)
1,084,437
324,968
$(269,994)
$10.34
$139 6,024,555
3,758,163
1,050,168
2,707,995
$ 575,404
637,235
1,704,959
(1,067,724)
(1,104,867)
1,068,249
(389,071)
$(421,702)
$11.01
$114 8,321,785
4,183,901
1,886,671
2,297,230
$ 854,933
922,066
1,435,156
(513,090)
(562,252)
1,278,617
(792,737)
$(148,766)
$10.46
$101 *Subscriber acquisition costs include hardware subsidies paid to radio manufacturers, distributors, and automakers, including subsidies
paid to automakers that included a satellite radio and subscription to Sirius or XM service in the sale or lease price of a new vehicle; subsidies paid for chip sets and certain other components used in manufacturing satellite radios; device royalties for certain radios and chip
sets; commissions paid to automakers as incentives to purchase, install, and activate satellite radios; payments for handling product warranty obligations; freight; and provisions for inventory allowances associated with factory-installations of satellite radios by automakers and
the orders and sales of satellite radio equipment by distributors and retailers.
Source: Company 10-K report for 2007. Justice in July 2008 after XM and Sirius voluntarily
agreed to:
1. Pay a $20 million fine for failure to previously
comply with certain FCC regulations.
2. Sign a consent decree to cease such practices and
bring their operating activities into full compliance
with FCC regulations. tho20598_case11_C158-C177.indd 162 3. Not raise the retail price for, or reduce the number of channels in, the basic $12.95-per-month
subscription package, or any new programming
packages, before July 28, 2011.
4. Offer a variety of subscription plans (as opposed
to a single all-channel option priced at $12.95 per
month) that allowed subscribers to choose any of 10/25/14 10:48 AM Final PDF to printer CASE 11 Sirius XM Satellite Radio Inc. in 2014: On Track to Succeed after a Near-Death Experience? several combinations of channels, including an à
la carte subscription option.
The two companies quickly began preparations
to finalize the merger. On August 5, 2008, Sirius
Satellite Radio Inc. changed its name to Sirius XM
Radio Inc. In April 2010, XM Satellite Radio Holdings Inc. merged with and into XM Satellite Radio
Inc.; and in January 2011, XM Satellite Radio Inc.,
a wholly owned subsidiary of Sirius XM Radio, was
merged into Sirius XM Radio Inc. SIRIUS XM’S STRATEGY
In the period since the merger, Sirius XM’s strategy
had been aimed at: • Recruiting new subscribers and rapidly growing
the size of the company’s customer base. • Eliminating largely duplicative programming and
thereby significantly reducing the combined programming costs of the two former companies.
• Cutting the “bloated” operating costs stemming
from the mutually destructive and unprofitable
“arms race” between XM and Sirius to outcompete one another.
• Streamlining operations in ways that would enable
the merged company to become profitable within
a few years.
• Reducing long-term debt, taking advantage of low
interest rates to refinance existing debt, increasing the company’s operating margins, boosting
cash flows from operations, and getting the company on a strong financial footing.
Top executives believed it was essential to generate near-term results that would convince investors
and creditors that the merged company’s subscriptionbased business model was capable of producing
attractive long-term profitability. This required progressively reducing the company’s net losses per
year and turning the corner to positive net profits in
the 2011–2012 time frame.
Financial performance data for 2010–2013 is
shown in Exhibit 2. Income from operations had
climbed from $465.4 million in 2010 to $1.04 billion in 2013. From August 2012 to the end of 2013,
Sirius refinanced $2.5 billion of debt, pushed the
average maturities out from 4.7 years to 6.7 years,
and reduced its weighted-average interest rates from
9.2 to 5.1 percent. tho20598_case11_C158-C177.indd 163 C-163 Assorted subscriber metrics are shown in
Exhibit 3. Sirius XM Radio had a 38 percent equity
interest in Sirius XM Canada, which offered satellite
radio services in Canada and had 2 million subscribers in early 2014. However, subscribers to the Sirius XM Canada service were not included in Sirius
XM’s subscriber count. Programming Strategy
Since the 2008 merger, the programming strategy
had centered on three key elements:
1. Bargaining hard for lower prices on programming content so as to reduce the company’s overall programming costs. Sirius XM executives
were acutely aware that the fierce rivalry between
XM and Sirius during 2002–2007 had led to significant “overbidding” for content. The overbidding resulted from trying to match or beat the
content recently acquired by one’s rival and/or
sometimes agreeing to pay a big price premium
to keep the other firm from winning exclusive
rights to high-profile content with considerable
listener appeal (like Howard Stern or play-byplay sporting events). Hence, as the contracts
expired for programming content negotiated prior
to the merger, the central objective during contract renegotiation was to reduce the premium
prices the company was paying for high-profile
broadcast rights, most particularly for sporting
events and talk-show personalities (like Howard
Stern).
2. Curbing the costs of duplicate programming, particularly in the case of music channels where both
XM and Sirius were incurring the costs of programming “look-alike” channels, each operated
as an individual station, in every music genre. For
example, XM had four country-music channels,
each with its own format, style, mix of recordings, and branding, that were programmed and
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