18/03/06 Executive Decision: XM mulls betting the bank in competitive game of subscriber growth
The challenge: Establish a profile in satellite radio to attract subscribersThe call: Ramp up spending to steal market share away from Sirius, without blowing the budget GRANT ROBERTSON Globe & Mail Media Reporter http://www.theglobeandmail.com/servlet/story/LAC.20060318.RDECISION18/TPStory/Business Important decisions made over breakfast usually involve white toast or brown, decaf or regular. But when XM Canada founder John Bitove Jr. called his chief operating officer Stephen Tapp to a morning meeting at a diner in Toronto last year, there was a bigger choice on the menu for the startup satellite radio company. Around the corner from the restaurant was an old bank vacated by Canadian Imperial Bank of Commerce. The spot was ideal for a new business looking to stand out, serving as both an office and a giant billboard at a busy intersection. But the question was not about location, it was about money. Like many startup ventures, the cost of launching a satellite radio operation is disproportionately high in the first few years. From advertising expenses to deep discounts offered on radio receivers, the list of expenses for a new company is long. Canadian Satellite Radio Holdings Inc., operator of XM Canada, had to decide whether spending several million dollars to turn the bank into radio studios and offices was worth the cost, particularly as rival Sirius Canada was opting to go without a similar standalone facility to broadcast from. The decision was made to gamble on the bank. The building, which is scheduled to be completed this month, may come with a multimillion-dollar price tag now, but it will pay for itself down the road, Mr. Tapp said. "In our opinion, it's a very smart business decision. It gives you marketing opportunities and it gives you a presence that people can see." It's one of many crucial spending decisions the company has faced in the early going, and one of many such choices it will have to sell to its investors. Similar to Sirius Canada, XM must strike a delicate balance between spending needed to build the company and keeping those bills from getting out of control. "We make those decisions on a daily basis," Mr. Tapp said. "There's a little bit of art and there's a little bit of science because, with the decisions that you're making, obviously you want to back the right horse." How satellite radio companies spend their dollars has become a concern in the United States. Both XM Canada and Sirius Canada have watched their U.S. counterparts burn through piles of cash to get those businesses off the ground. The U.S. industry has spent hundreds of millions signing celebrities to host shows, while slashing the sticker price on radios to encourage people to subscribe. The companies have also battled each other in pricey advertising campaigns. In the fourth quarter, the U.S. versions of XM and Sirius spent $89 (U.S.) and $113, respectively, for every customer they added, but neither company has turned a profit in roughly five years of operations. Concerns about that spending reached a boiling point last month when the chairman of XM's U.S. operation resigned, warning of a "crisis on the horizon" if the company didn't slow down. The U.S. situation is now a cautionary tale for Canada's satellite radio sector. Though spending is crucial, every dollar must be evaluated for its strategic value, Mr. Tapp said. Beyond XM Canada's investment in the headquarters, it's spending in other areas it believes will pay off. The cost of radio receivers -- which range from $99 (Canadian) to $399 -- is subsidized to make them more attractive for consumers. That approach works if enough customers subscribe to the service long-term, paying $12.99 a month. Marketing costs have also been higher. When XM announced two weeks ago that it has secured 44,000 subscribers in its first three months of operating, the company also said it was footing the bill for another 6,000 listeners who were not paying subscribers. Getting its receivers in the hands of potential customers who haven't heard satellite radio before costs money, Mr. Tapp said. Programming costs are a major up-front cost. Investments in an all-NHL channel, including a dedicated studio in the new building, are among the company's major programming costs in the first year, but are expected to attract subscribers, Mr. Tapp said. XM will release its first full quarter of earnings soon, providing a glimpse of what startup costs have been. Sirius Canada is not publicly traded and doesn't report earnings. Speaking to analysts in February, Mr. Bitove said XM Canada will have higher costs for the first 18 months of its existence, which could then drop significantly to a few million dollars a quarter. At that point, investments made now will be looked upon to show the healthy returns the company is predicting. The image satellite radio has created in the U.S. of new companies spending frivolously -- particularly after New York-based Sirius spent $500-million to sign controversial shock jock Howard Stern for five years -- won't be adopted in Canada, Mr. Tapp said. "Even though this is a fun and crazy startup, there is a real discipline that we apply to spending decisions." --------------- Stephen Tapp, President and COO, XM Canada, Canadian Satellite Radio Inc. Age: 44 Career history: Involved in several startups, including TSN in 1984 and the launch of Viewers Choice pay per view in 1991. Previous job: Executive vice-president of CHUM Ltd.'s television division. Number of satellite radio receivers owned: 3 Listening to right now: (Un)Signed -- Channel 52. Emerging Canadian bands. Classical music channels or Open Road, The Truckers Channel? Open Road. Hardest part of the job: "It's a startup company so we're all running around like crazy right now." Management mantra: Take care of your customer now and they will take care of you in the long term. Biggest challenge for the company: Familiarizing people with satellite radio since the industry is still new in Canada. ================================ George Antunes, Political Science Dept University of Houston; Houston, TX 77204 Voice: 713-743-3923 Fax: 713-743-3927 antunes at uh dot edu Reply with a "Thank you" if you liked this post. _____________________________ MEDIANEWS mailing list [email protected] To unsubscribe send an email to: [EMAIL PROTECTED]
