Silent Success

Why tech pundits don’t talk about XM Satellite Radio.

Media plaudits have been few and far between for XM Satellite Radio. Pundits who’ve gotten into a lather over TiVo and Xbox Live have largely shrugged over XM’s 100 digital channels—better radio is a nice convenience, perhaps, but not the sort to inspire New York Times Magazine cover stories (as TiVo did) or blogosphere fawning. Though Fortune’s Peter Lewis declared XM his 2001 “Product of the Year,” calling it “the first major advance in radio since FM,” much of what’s been written since then has focused on the company’s mounting debt. It hasn’t helped that XM’s earliest days were marred by pratfalls, such as the time it had to abort the launch of its debut satellite.

Yet the $10-a-month service, which first broadcast in October of 2001, broke the 500,000 subscriber mark in April and expects 1.24 million by year’s end. Compare that to TiVo, which currently stands at a hair over 700,000 users but projects only a million by December. Xbox Live, in a shorter time frame, has drawn 500,000 gamersimpressive, but Microsoft (which owns Slate) has inflated those numbers by giving away the first year of service for free.

Breaking the million-user mark doesn’t guarantee that the red ink will soon turn black for XM, which needs between 2.4 and 3 million subscribers to break even. Nor does satellite radio threaten the FM dial quite the way in which digital video recorders like TiVo endanger the Big Four networks. But the technology’s surprising success is a triumph of simplicity and a mild rebuke to coastal-dwelling journalists—present company included—who are often too enamored with the cutting edge rather than the sensible.

XM couldn’t have survived this long without help from its powerful investors, notably GM (with an 11 percent stake) and Honda (6 percent). Both have aggressively offered pre-installed XM hardware as an option in new cars, along with enticements such as three months of free service. Yet XM’s subscriber numbers aren’t particularly “soft”—that is, they don’t consist largely of freebies. Those who sign up for the promotional offer tend to stick around for the long haul, increasing the likelihood that the company will earn back its $120-per-customer acquisition costs. Things are going so well, in fact, that there’s talk that XM will soon end its subsidies to carmakers, forcing them to pay full price for the equipment. Given the growing popularity of the service, which helps entice young drivers to purchase new vehicles, the GMs and Hondas of the world are starting to need XM a lot more than vice versa.

XM has also benefited from its decision to accept advertising on a number of its channels. The company’s only competitor, Sirius, chose to go totally ad-free, depriving it of much-needed capital. Plus, XM seems to have a better nose for where the big Arbitron ratings lie. While Sirius’ latest coup is getting National Public Radio (sans Morning Edition and All Things Considered), XM offers Fox News and Playboy. According to SkyWaves Research Associates, which covers the industry, XM installations are outstripping those of Sirius equipment by a 10-to-1 margin.

Lots of big-market technology journalists, with the notable exception of Fortune’s Lewis, somehow missed the boat on XM’s potential. New Yorkers often commute via public transportation while San Franciscans enjoy the luxury of a relatively cluttered, varied FM dial. (Full disclosure: As an admitted Manhattan dweller, I’d never met an XM subscriber face-to-face before reporting this column.) To them—OK, to us—satellite radio initially seemed like an unnecessary frill, especially in the age when CD players are ubiquitous even in low-end cars. And, after all, it’s only commercial radio, a medium whose geek appeal rates just a notch above carrier pigeons.

But the growing homogenization of local radio, courtesy of behemoths like Clear Channel (which owns 3 percent of XM), and the FCC’s laissez-faire turn on regulation have made unhappy listeners willing to pay for a better product. At the same time, the average commute is now close to 26 minutes each way, and carpooling tailed off dramatically throughout the 1990s. In small- to medium-sized markets where there’s a paucity of drive-time listening options, XM is the perfect antidote to the humdrum of local shock jocks or “smooth jazz.”

That doesn’t mean that XM is content to limit its scope to the automotive space. In May, the company debuted its SKYFi receiver in 2,100 Wal-Marts, retailing for $200. The SKYFi is a portable take on the company’s car-only model, so that subscribers can tote the contraption from the Saturn to the den after a hard evening’s commute. There, it provides everything that people once expected of high-speed Web radio, at a fraction of the $40-$50 it costs per month to get DSL. (Not to mention the fact that it’s a lot easier to flick a switch, rather than boot up a PC, to get music.)

Look at how XM’s keep-it-simple strategy compares to the disappointing (and more-hyped) broadband rollout. The conventional wisdom on broadband is that sales will pick up once there’s a killer app, most obviously a cheap, easy way to download MP3s. Yet ISPs have done little to nothing to encourage the development of such services. Quite the opposite, in fact, as they’ve bullied and threatened many who’ve dared use peer-to-peer networks, even for legal purposes. Who needs the trouble when, for $40 less per month, you can get all the music, sports, and ’80s kitsch you can handle?

XM could have harped on satellite radio’s long-term potential as a competitor to telematics devices like OnStar by providing e-mail and driving directions as well as music and talk. That’s exactly the sort of farsighted hype that gets technology writers weak at the knees but befuddles the average consumer who merely wants to listen to ESPN’s Game Night while driving home. Pushed solely as a radio on steroids, XM has made life much simpler for electronics salesmen, who may have only 25 words or so to snare a customer. By contrast, a Best Buy employee trying to explain the wonders of TiVo or ReplayTV has a comparatively tough job—”Yes, it records shows like that VCR you already own, except not really. …”

Consumers have relatively modest wants—a device that works and that provides a service they need now, as opposed to five years down the line. The good news for high-tech stragglers, however, is that XM’s success proves that those same consumers aren’t allergic to the monthly subscription model, provided the price is fair. Obvious lessons, perhaps, but ones often lost amidst the rush to anoint the Next Big, Complicated Thing.