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Thursday, January 12, 2006

A Turning Point Decision…

As you are probably well aware, I have been a strong supporter of the Sirius management team. My support is strong from the board of directors to Mel at the top of the operations all the way down to the programmers at each channel and content vertical. The company was in a tough position less than two years ago, being so far behind the industry leader XM, and things did not look good long term.

The Sirius management team decided they needed to differentiate themselves from the big elephant in the room and implemented a new strategy. You see, XM had a strong distribution deal, especially their long term General Motors deal. XM also had better technology and also had great partnership deals. XM also had such a strong market lead, they were taking about four unit sales for every one Sirius deal. This gap was widening every month and there were no signs it was slowing down. XM valuation was 20x that of Sirius, and the trends were going in opposite directions.

Well, there was a turning point that started the turn around for Sirius. This was when the management decided to compete in a different way. They decided to compete for the potential satellite radio customer by signing exclusive content deals. This was a complicated decision as it would cause the pricing for deals to be exponential of the non-exclusive, and the economics were scary. The issue also could put Sirius in a really bad spot if they created a market that could drive any chance of profit out of the business. But, they had no choice. They could not compete in the market that existed already.

So they did what every good business person would do, they turned the market on its side and created a new competitive differentiator and took the gloves off. The Sirius management set this strategy to fight the battle and ensure they would win one of the battles out of many. They knew they needed to be in the game and have something that would be a discrete choice for the consumer in their consideration set. Content was the game they would play.

Long story short, they are winning the battle, and there are signs they could win the war longer term. They signed exclusives with the top properties within the radio world, including Martha Stewart, Howard Stern, The NFL, Nascar, NBA, NHL, NPR, Playboy Radio, Maxium Radio, English Soccer, Richard Simmons, Eminem and many other stars. They also have signed exclusive deals with some stars such as: Lance Armstrong, Jimmy Buffett, Tony Hawk, and Grandmaster Flash to name a few. XM has signed the MLB as their exclusive content. This is a good summary of the different in approach between the two approaches. XM has now shown signs they are going to sign some exclusive content, though it second tier at best.

Anyway, this approach is what has helped Sirius begin to compete and become a legitimate player in the market. The interesting thing is to watch XM reel from this and act as if they are the second player, rather than the market leader. XM spends a majority of their resources, press, and internal talk about Sirius. They are running scared, and rightfully so. The problem is Hugh is not controlling this fear. The fear is going to kill the XM business and they will lose their market leadership by 2008, if not before.

One additional note of importance, Sirius can’t lose this focus and strategy. There have been some early signs that they are getting fat and comfortable a little too quickly. The fact that they can’t get the technology out quicker, they can’t launch streaming for all their shows, they don’t have podcasts, they are losing important deals such as Fox News, is a concerning sign. If a few more of these signs show-up in the market will flag a potential weakness in the Sirius management and approach. I will be keeping my eyes open.

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