SiriusXM and the long road to profitability

Peter Nowak sits down with Canada CEO Mark Redmond

<p>Woman Using Car Stereo</p>

Woman Using Car Stereo

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Last week, SiriusXM showed off a slew of new products at an event in Toronto. The company’s new iOS and Android apps were on display. Any day now, subscribers will be getting the new app, which will finally give SiriusXM a proper tablet presence (untill now, the smartphone version has had to do). The service is also introducing a bunch of new features such as pausing music, starting a song from the beginning if you’ve tuned into it in the middle, and going back into programming by up to five hours after it’s been broadcast live.

I finally got hooked on satellite radio last year. Frustrated by the increasing number of ads and dwindling amount of music—much of which is overplayed, CanCon-enforced drivel—on the rest of radio. I haven’t looked back since. Indeed, nowadays I cringe when I get into a car without satellite radio.

It was with dismay, then, that I read a story this summer on SiriusXM’s financial troubles. The Canadian operation, majority owned by John Bitove (the same entrepreneur who runs cellphone provider Mobilicity), has asked regulators to decrease the amount of money it must funnel to Canadian content development. With losses having mounted over the seven years since Sirius and XM launched—they merged last year—is the company is in trouble?

I sat down with SiriusXM Canada chief executive Mark Redmond and discussed the company’s financial woes, as well as its general competitive situation. Here’s an edited transcript of that conversation.

At what stage is your request at with the CRTC?

It’s part of our license renewal. Both companies were initially licensed for seven years, back in 2004, and at the time we announced the merger, both licenses were coming up for renewal. We went to the CRTC and said ‘we don’t want to deal with the merger and the license renewal at the same time so we’ll take a one-year administrative license extension,’ which they agreed to. Our hearing for the license renewal was in June-July of this year.

A big element that we went in with was a recalibration of our Canadian content development funding. Our position was that we’re paying five per cent of our revenue today, which is significantly more than our competitors. Terrestrial radio pays 0.5 per cent. We said we’d like to be treated the same as commercial radio on license renewal. They usually start a little higher than 0.5 per cent but it’s pretty much an automatic on license renewal that they drop to 0.5.

Why did you agree to the five per cent in the first place?

This was all new terrain. They’d never licensed satellite radio, there was a belief that satellite radio was going to be the death knell for commercial radio, that we were bringing in all these non-Canadian channels, that our license conditions were not as onerous, so therefore we should get the following conditions of license: a ratio of 1:9 on Canadian to non-Canadian channels, 85 per cent Canadian content, 25 per cent new and emerging music channels, a split of French and English channels and five per cent Canadian content development initiative. At the time, both companies were anxious to get licensed. This wasn’t a negotiation, it was: ‘here’s what your conditions of license are, you can decide whether you want to launch or not,’ and we did.

Both companies lost a lot of money over the past seven years, yet we’ve contributed over $100 million to Canadian content development activities. We felt like we’ve paid significantly and that it’s time to recalibrate. We have not got an outcome on our license renewal yet.

When do you expect it?

I’m hopeful for by the end of October, but you never know. There’s no question we’re going to be licensed, it’s just a question of what conditions may change.

If you get the reduction, how much closer will that bring you to profitability?

It’s not one of these automatics where, bang!, we become profitable. We’ve got significant back losses and we still have a business that requires a significant amount of investment. One of the things we tried to point out to them is that we are a really different business model than terrestrial radio. Our revenues are completely driven by subscription, not ad-based. We have significant costs that go into vehicles without us ever necessarily seeing the owner as a paying subscriber. It’s not a question of becoming profitable overnight. Will this help in our financial performance over the next six or seven years? Sure.

We merged the two companies because we thought we could get a bunch of synergies, but we’re still competing in a broad audio entertainment environment. There’s not only terrestrial radio, iPhones have become a device that people consumer their audio and video content on. That device wasn’t even on the marketplace in 2005 when we launched.

More on competition in a second, but back to profitability—the U.S. company looks like it’s profitable, so what’s the difference between the two operations?

You have to be careful about what you define as profitability. They’re generating a positive [earnings before interest, taxes, depreciation and amortization] today and so are we. They’re generating a positive cash flow and so are we. But they have a net operating loss and so do we. If you want to look at it from an EBITDA standpoint, we’re both positive. They’ve had to take a lot of costs out of their business and they’ve done a good job refinancing their debt. You’ve still got significant investments in the business, whether it’s putting satellites up or repeater networks, buying content, moving into new technology like products and platforms that give us the ability to better compete.

Should customers, whether they’re new or old, be concerned about the company’s financial performance?

No, we’ve got north of two million subscribers in Canada. To put it into perspective, if you take the wireless guys out for a second, from a sheer subscriber standpoint we are within striking distance of Bell and Rogers [cable and satellite services]. That puts us as one of the top subscription media companies in Canada. We’re past the point of the naysayers saying ‘is this category going to work, will people pay for audio?’ We’ve got two million and there are 22 million [paying subscribers] south of the border. Now it’s a matter of trying to continue to get better at what we do and continue to provide a better experience for customers and continue to improve our conversion and churn, and ultimately improving our financial performance.

From a customer’s standpoint, the only thing they’ve seen from 2005 to 2012 is more channels, more content, better user interface, more availability through new vehicles, and that’ll continue. That’s why we have as many [customers] as we have and the ones that we have—we know are 95-per-cent satisfied with the service.

Getting back to competition, that has intensified with all the options you mentioned. What’s your value proposition in the face of that?

It starts with what are people paying for. What they’re paying for is the array of content that we’re bringing. You’ve got 120 channels on the Sirius network and 130 on XM and you’ve got roughly 70 commercial-free music channels. That’s been our value proposition on the music side from day one and still a very important part of our business. You supplement that with all of the exclusive news, talk and entertainment that we have and there’s something there for everyone.

The exclusive content is a big element of what separates us from some of the Internet services and terrestrial radio. The uninterrupted signal across North America—I’m not streaming it through a network and relying on a [wireless] carrier’s ability to throttle up or down—there are no drop-outs, on incremental data charges. For us, it starts with the experience in the car, and, let’s face it. a lot of audio listening starts and happens in the vehicle, and then we should then have the ability to provide that content to subscribers irrespective of the platform. So if you get out of the car and want to stream it on your iPhone, we have to give you the ability to do that. If you want to be able to then move it from your iPhone to your office computer, we have to give you the ability to do that, and we’re doing it.

Our value proposition has proven to be successful at the level that we’re at today. That doesn’t mean we’re complacent, we have to watch what the competitive environment is doing on price and content. We have to continue to get better and evolve. When you take it down to the cost level, it’s about 50 cents a day. That’s an awful lot of entertainment value for 50 cents.

People do still complain that $16 a month is too expensive. How do you get them past that?

Part of it is in our marketing and communications, and a piece of it is related to the trial experience. It’s one thing to sit on the sidelines without ever hearing the content and say it’s expensive. It’s expensive versus free. Going back to the time prior to satellite television and cable, everybody was satisfied with the 30-40 channels you got through your antenna outside for free and everybody said there’s no way anyone will pay a monthly cable bill for a hundred channels. Twenty years later, lo and behold you can’t live without it. I look at our business as being not too dissimilar.

Once you give somebody the opportunity to experience something that’s better than what they have, you just have to convince them that there’s value there for the price that you’re charging. For us it starts with someone trying the service in a vehicle. We have agreements with every auto manufacturer across the country and are penetrated in about 55 per cent of all new vehicles. The market is about 1.6 million new cars [each year], so we have about 900,000 of those with either Sirius or XM, and the customer gets to try it either for three, six or 12 months depending on the brand. From there, we send them a welcome kit that explains the value proposition and we try to move them from trial to a paying subscriber. We know that once they become a subscriber, they’re very satisfied.

People will always have content on their iPhone, but it’s never going to fresh or programmed. Radio is largely a passive listening experience. If you have good people programming it and you’re picking a channel of the music or genre that you like, they’re doing all the heavy lifting for you. That and continuing to have exclusive content is a big element of our value proposition.

There are always going to be people who don’t want to pay, just like there’s people who still don’t pay for television. We just have to go and get the fence sitters.

Many subscribers claim in online forums that it’s easy to get a discount on your service. Is it more important for you to retain customers or to boost the revenue you get from them, and is discounting rampant?

Both are important. We want to acquire as many [subscribers] as we can and we want to retain as many as we can. Discounting is not rampant by any stretch but unfortunately, when you’re in a subscription business, there is some level of discounting that takes place. But greater than 50 per cent of our subscribers are on an annual plan. People wouldn’t pay up front for a year if they weren’t satisfied with the service. The level of discounting we provide there is we give you 12 months of service for the price of 11. That to us is a good trade-off for someone who wants to lock in for a year.

There is a point in which you can have an element of your subscribers on a discount, a point where you can analyze and determine whether you want to keep the subscribers and how much can you afford to pay to keep them, and there are some that are at the other end of the spectrum—they’re so high value that you want to service the daylights out of them. That’s just the nature of being a subscription business. I’m not overly concerned about the level of discounting or what people may perceive. We just have to keep providing a good level of service.

This [past] weekend, for example, we’re doing four days of Tragically Hip radio…

Can I just say that one of the reasons I love satellite radio is because I never have to hear the Tragically Hip?

And you don’t have to tune to it! That’s the nice thing. It’s the one channel you’re not going to listen to. But there is a big base of people that would like to hear from them, their history, some archived concerts. We just ran three weeks of Dave Matthews radio – I’m a big Dave Matthews fan and it was fabulous to hear. That’s one of the unique things about our service.