Satellite Radio: Still Trying To Get With The Program

Of the many similarities between the two main players in the subscription-based satellite radio category, none is more striking than the fact that both are hemorrhaging money. Both Sirius and XM offer hundreds of channels for a plethora of interests, have signed top-notch talent in recent years (Howard Stern and Oprah Winfrey, respectively), have increased subscriber numbers and struck deals with all the major automakers to be pre-installed in new cars. But what only a few years ago seemed like a promising business has so far eluded the warm embrace of consumers. And investors have taken notice, with stock prices for each taking a dramatic turn for the worse this year. Against this gloomy backdrop, XM last month launched a review of its creative account as it looks to boost its image and attract hard-to-convince subscribers. By last week, XM had selected four finalists to vie for its estimated $50 million account: The Richards Group in Dallas, Wieden + Kennedy in New York and Interpublic Group's Lowe and Omnicom Group's DDB, both in New York. IPG's Mullen in Wenham, Mass., is the incumbent, but is not defending. Its Media-Hub will continue to handle media planning and buying.Despite a stated preference for a New York agency, the client had to cast a wider geographical net when more than a few shops declined to participate. Among those agencies that passed are Berlin Cameron United, BBDO, Deutsch, The Kaplan Thaler Group (all New York) and Goodby, Silverstein & Partners in San Francisco, sources said. Sources who had been contacted but decided to pass said they had reservations about the category in general, which has suffered increasing challenges from new, more compelling mobile devices such as cell phones, PDAs, MP3 players and the increasing popularity of Internet radio.Said one agency executive who took a pass, "We didn't have much faith in their business model—that was really a big thing." He cited a scathing story in The Wall Street Journal during the pitch that "must have really scared" the contenders.Catherine Bension of Select Resources International, which is managing the review, disputed the notion that agencies shied away from the review. She declined to say how many RFPs were sent out, but noted that when news of the review broke, some 60 agencies contacted SRI expressing interest.In addition to category viability, other concerns included XM's current search for a CMO (a new position) and its perceived vulnerability to a takeover. Some also griped about the $2.4 million annual fee that sources said awaits the winning shop. "The fee is inconsistent with the scope of work they want," said one executive.According to the brief from SRI, the Washington client wants "powerful strategy development" and "persuasive creative executed against powerful consumer insights."But agency sources said that initial contact with the client made it clear that, on top of what's in the brief, XM expects a level of service that isn't justified by the revenue. "They want their agency to essentially live with them," said one executive. Time is also an issue, sources said, as XM wants a campaign on the air for the holiday season. "How could we take an account where every hour we devote to it loses money for us?" one source said. "I think satellite radio is a brilliant thing. It's a great technology and content-delivery mechanism. But the economics don't make sense for an agency that has financial self-respect." XM rep Nathaniel Brown would not comment on the fees and dismissed as "rumor" the idea that XM is a takeover target. "We've attracted more than 7 million subscribers in less than five years, making us one of the fastest-growing technologies ever," he said. "We're well positioned to continue that growth and our leadership in the category. Both our CEO Hugh Panero and our president/COO Nate Davis, to whom the future CMO will report, will personally participate in the final agency selection. We've been extremely pleased by the number of agencies that have expressed interest." Meanwhile, the finalists are focusing on more promising aspects of the account. One exec sees XM as an opportunity for a strong case study, "if someone can go in there and crack that nut." The problem with this category's advertising thus far, the source said, is that ads for both companies have failed to make the service compelling or relevant enough. "[The service] gives you anything you want in-depth," he said, "but it's a tough thing to explain. People who've tried XM satellite radio, once they've got it, it's hard to go back [to commercial radio]."Despite growing subscriber bases, XM and Sirius are struggling; each reported second-quarter net losses exceeding $225 million. A July 28 Goldman Sachs report said, "We remain wary of rising costs needed to attract and maintain subscribers."

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Satellite Radio: Still Trying To Get With The Program

Andrew McMains

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