Free advice for Mel Karmazin


The Zen Master won his difficult and expensive 17-month battle to get the FCC and DOJ to approve the merger of Sirius and XM. That may have been the easy part. Professors at the Wharton School of Business at the University of Pennsylvania have been analyzing the merged satellite radio company. They see big challenges ahead as CEO Mel Karmazin tries to integrate the two companies, stem the flow of red ink and compete against other audio entertainment choices.

They note that Karmazin will have to move fast, given JP Morgan’s estimate that Sirius XM’s debt of $3.4 billion will have to be partially refinanced in early 2009. Meanwhile, Sirius XM faces competition from the iPod, Internet radio and other emerging music services such as Pandora and Slacker, which are interactive and deliver personalized service online. "Subscription radio models are a great way to go but it may be too late," says Wharton marketing professor Peter Fader, referring to the steep challenges Sirius XM faces. "They may have one more shot at a Hail Mary pass," he said in an analysis piece on the [email protected] website.

Experts at Wharton agree that the first mission for the newly constituted Sirius XM will be to integrate the companies as quickly as possible, save money and be creative yet frugal with programming, new content deals and marketing.  "Sirius XM will have to pick its battles smartly given its limited resources. The problem of this company is adoption – it has 18.5 million subscribers but is still short of break even," noted Wharton management professor David Hsu.

Karmazin, of course, has been telling Wall Street that there is a lot of growth ahead, with less than 20% of US households currently subscribing to satellite radio, compared to over 90% paying for cable/satellite TV.

Yet Wharton marketing professor Eric Bradlow says the market for satellite radio may not be as large as Karmazin hopes. Bradlow argues that the company is still too dependent on automobile sales for subscribers in an economy where consumers are buying fewer cars and cutting back on discretionary spending. And the competition for audio entertainment is fierce.

"I believe that Sirius XM can compete [because] there will be demand for satellite radio programming. However, the market will be smaller than initially forecast due to the changing way people receive communications through phones, personal digital assistants (PDAs) and laptops. The key for Sirius XM will be to find its target segment," said Bradlow.

Fader agrees that the company needs a marketing makeover. Although Karmazin says the company plans to make it clear what the company is about in retail outlets, Fader doubts Sirius XM will dramatically change its pitch. He advocates a potential name change and a marketing message that defines Sirius XM as a music service, plus an interactive content and entertainment provider.

Read the entire article.

RBR/TVBR observation:
Hey, if anyone can do it, Mel can. But as much appreciation as we have for Mel’s management abilities, we wouldn’t want to bet on his success this time around. He’s having to deal with business models created in the early 90s by people who were not only clueless about radio, but about the whole media business. We have our doubts that those broken business models can ever be patched together, cleaned up and made to work.