CASE 11 Sirius XM Satellite Radio Inc. in 2014: On Track to Succeed connect after a Near-Death Experience? Arthur A. Thompson The University of Alabama In February 2009, the outlook for Sirius XM Satel- income of $1 billion, net income of $377 million, lite Radio was grim. Despite having 2008 revenues and cash flows from operations of $1.1 billion. The of nearly $1.7 billion and some 19 million subscribe company's stock price had rebounded nicely and ers, the company's stock price had dropped to a low traded mostly in the $3.50 to $4 range during the last of $0.05 per share, and the company was mired in a three months of 2013, equal to a market capitaliza deep financial crisis, with debts totaling more than tion of $21 billion to $24 billion. $3 billion. Years of big spending and annual losses in the hundreds of billions had depleted the company's COMPANY BACKGROUND ability to secure additional credit to pay its bills, and the company lacked the cash to make a scheduled Sirius XM Satellite Radio was the product of a debt payment of $171.6 million due on February 17. 2008 merger of Sirius Satellite Radio and XM Sat- But hours before filing for Chapter 1 1 bankruptcy (in ellite Radio. The two predecessor companies had order to avoid defaulting on the scheduled debt pay- begun operations in 2001-2002, spending hundreds ment), Sirius XM got a lifeline from Liberty Media, of millions to launch satellites for broadcasting sig- a $2 billion company with business interests in the nals, arrange for the manufacture of satellite radio media, communications, and entertainment indus- receivers and other equipment, install terrestrial tries; Liberty was headed by cable TV pioneer and signal repeaters and other necessary networking financial tycoon John Malone, who not only owned equipment, develop programming, conduct mar- a controlling interest in Liberty Media but also was ket research, and attract subscribers. The primary known for making big investments in troubled or target market for satellite radio service included undervalued companies having what he believed the owners of the more than 230 million registered were good prospects for long-term profitability. Lib- vehicles in North America and, secondarily, the erty agreed to provide an aggregate of $530 million over 120 million households in the United States in loans to Sirius in return for (1) 12.5 million shares and Canada. of Sirius XM preferred stock convertible into 40 per- Market research done in 2000-2001 indicated cent of common stock of Sirius XM and (2) seats that as many as 49 million people might subscribe to on the Sirius XM board of directors proportional to satellite radio service by 2012, assuming a monthly its equity ownership. Two of these seats were to be fee of $9.95 and radio receiver prices of $150 to occupied by John Malone, Liberty's chairman, and $399, depending on the car or home model chosen. Greg Maffei, Liberty's CEO. Many outsiders viewed A 2002 market research study conducted for XM the terms to be a sweetheart deal for Liberty Media. Headed into 2014, Sirius XM had 25.6 million subscribers, 2013 revenues of $3.8 billion, operating Copyright O 2014 by Arthur A. Thompson. All rights reserved.cASE it concluded there would be a total of about 15 mil lion satellite radio subscribers by the end of 2006. Considering that in spring 2005 both XM and Sirius raised their subscription rates to $12.95 monthly, the forecast turned out to be fairly close to the actual _ 13.6 million satellite radio subscribers in the United States reported at year-end 2006. Both Sirius and XM employed a subscription- ' based business model to generate revenues. Sub 'SCribers received discounts if they had multiple XM , or Sirius satellite radios (for different vehicles or for home and office use) or if they signed up for prepaid plans of two to three years. Both companies did not _ expect to cover the high startup costs and become profitable until acquiring at least 8 million to 10 mil lion subscribers. Competition between XM and Sirius Quickly Becomes Spirited and Expensive Early on, the two companies became embroiled in a erce market battle waged on multiple fronts: - Creating a programming lineup that was more attractive than its rival's programming lineup. 0 Convincing automakers to factory-install its brand of satellite radio (the radios of the two rivals were incompatibleXM radios could not receive sig- nals broadcast by Sirius, and vice versa). Gaining broad retail distribution of its various satellite radio models and equipment for use at home or in used vehicles. ~ Building brand awareness and stimulating con~ sumer demand for satellite radio service. The Race to Differentiate Programming Content While each company's programming strategy was to offer a diverse, appealing selection of digitalquality radio programs that would attract listeners willing to subscribe to mostly commercial- free programming, each company recognized that the key to gaining a competitive edge was having dif- ferentiated programming content capable of attract ing and retaining the greatest number of subscribers. Each company quickly moved to create one or more channels for almost every music genre and a big assortment of channels devoted to news and com mentary, sports, comedy and entertainment, family and health, religion, politics, traffic, and weather. By Sirius XM Satellite Radio inc. in 2014: On Track to Succeed after a Near-Death Experience? C-159 2007, XM had a programming lineup of over 170 channels that included 69 commercialfree music channels; 5 commercial music channels; 37 news, talk, and commentary channels; 38 sports channels; and 21 instant traffic and weather channels. Sirius was broadcasting on 133 channels that included 69 channels of 100 percent commercial-free music and 64 channels providing sports programming, news, talk, information, entertainment, traffic, and weather. To achieve differentiation, both companies spent large, sometimes lavish, sums for contracts to: Obtain broadcast rights for the audio portions of programs on National Public Radio and such cable TV channels as Fox News, CNN, CNBC, MSNBC, ESPN News, and ESPN Radio. Gain exclusive rights to air live play-by-play broadcasts of various sporting events (Major League Baseball games, National Football League games, National Basketball Association games, National Hockey League games, college football and basketball games for all major conferences, professional golf and tennis tournaments, NAS CAR races, horse races, FIFA World Cup soccer games, etc). As an example of the large amounts spent to acquire exclusive rights for high-profile programming, XM paid $60 million annually for a six-year agreement to broadcast Major League Baseball games live nationwide for the years 2007 through 2012. 0 Secure the services of wellknown personalities and brands (like Howard Stern, Oprah Winfrey, and Martha Stewart Living) and create spe- cial channels featuring their shows and content. In 2004, Sirius signed a fiveyear contractual agreement with Howard Stern said to be worth $400 million to $500 million in salaries for Stern and his staff plus stock bonuses for Stern and his agent that were based on exceeding specied sub- scriber targets; Howard Stern broadcasts began on two Sirius channels in January 2006. At XM, expenditures for programming and con tent were $101 million in 2005, $165.2 million in 2006, and $183.9 million in 2007. Sirius Satellite Radio's expenditures for programming were $100.8 million in 2005, $520.4 million in 2006, and $236.1 million in 2007. Apart from battling to achieve differenti~ ated programming content, the two competitors also strived to attain overall product differentia~ ' tion by offering greater geographic coverage, more g. 3 t' (. E t E, i % z i s r i i i, g, 5, r i; (1460 PART 2 Cases in Crafting and Executing Strategy commercial-free programming choices, and digital sorrnd quality Partnering with Automakers and Gain- ing Broad Distribution in the Retail. Mar ketplace Simultaneously, both XM and Sirius aggressively larrnched well-funded strategic irri tiatives to gain broad distribution of their satellite radios via partnerships with motor vehicle manufac- turers. making satellite radios available at national and regional consumer electronics retailers and mass merchandisers (Best Buy. Walrnar't. and Target). and selling radios at their websites#all were sources of new subscribers. The battle was particularly fierce in the automobile segment for three reasons: 1. A big majority of the new subscribers for satellite radio service were the owners of newly purchased vehicles equipped with a satellite radio. 2. A majority of the satellite radios for new vehicles were factoryinstalled. although automobile deal- ers could install satellite radios in some models. 3. The incompatibility of XM and Sirius radios forced vehicle rnamrfacturers to choose which brand to install in factoryassembled vehicles. Each of the competitors lobbied hard for vehi- cle manufacturers to sign contractual agreements to exclusively install only its brand of satellite radio in vehicles scheduled to be equipped with a satellite radio. Both XM and Sirius used liberal subsidies and commissions to induce manrrfacturers to sign exclu sivity agreements: Each rival paid automakers a sub sidy if its brand of satellite radio and a prepaid trial subscription (usually for\" three months but some- times i'or six months) was included in the sale or lease price of a new vehicle. As a further incentive, each paid automakers either a commission or a share of the subscription revenues to prrrchasc. install. and activate its brand of satellite radio. There were also revenue-sharing payments on subsequent subscrip- tions by new vehicle owners after the trial period expired. For instance. XM had a long~term distribu tion agreement with General Motors whereby GM agreed to exclusively install only XM's brand of sat- ellite radios in return for GM being paid a portion of the revenues derived from all subscribers using GM vehicles equipped to receive XM's servicethis was in addition to the incentives XM paid to GM to sub- sidize a portion of the costs of installing XM radios in GM vehicles. Indeed. it was common practice for XM and Sirius to reimburse automakers for CL'I'Iain hardwarerelated costs. tooling expenses. and pro- motional and advertising expenses directly related to including a satellite radio as a vehicle Option. For the 2007 model year. Sirius radios were available as a factory-installed option in 89 vehicle models and as a dealerinstalled option in [0 vehicle models: Sirius service was also offered to renters of Hertz vehicles at 55 airport locations natiorrwide_ For the same model year. XM'S satellite radios Were available as original equipment in over 140 vehicle models. in addition to offering subsidies and incentives to automakers. XM and Sirius also offered subsidies and incentives to (l) the manufacturers of their sat. ellite radios. (2) the makers of chip sets and other components used in manufacturing satellite radios. (3) the various distributors and retailers of satellite radio devices and equipment, and (4) automotive dealers that installed satellite radios on vehicles not having a factoryinstalled satellite radio. Moreover, there were device royalties for certain types of satel- lite radios. subsidies for handling product warranty obligations. price protection for distributor invento ries, and provisions for inventory allowances. All of these expenses (except for revenue- sharing payments) were incurred in advance of acquiring a subscriber and were classified as sub scriber acquisition costs. For XM. subscriber acqui- sition costs were $245.6 million in 2005. $224.9 million in 2006. and $259.l million in 2007; Sirius incurred subscriber acquisition costs of $390.4 mil~ lion in 2005. $45l.6 million in 2006, and $407.6 million in 2007. In 2006, the Federal Communications Commis- sion. which had jurisdiction for satellite radio com munications and had regulatory authority for issuing operating licenses for satellite radio enterprises. responded to growing numbers of consumer corn- plaints about being locked into subscribing to the ser- vice of one company or the other, depending on the brand of satellite radio they had purchased. The FCC brought pressure on XM and Sirius to resolve the sig- nal reception incompatibility and issued rules requir- ing the interoperability of both licensed satellite radio systems. Late in 2006. XM and Sirius signed an agreement to develop a unified standard for satel' lite radios to enable consumers to purchase one radio capable of receiving either company's broadcast signal and thus subscribe to whichever company's CASE ii Sirius XM Satellite Radio inc. in 2014: On Track to Succeed alter a Near'Death Experience? 0161 service they wished. The agreement called for the technology relating to this unified standard to be developed, jointly funded, and jointly owned by the two companies. Satellite radio manufacturers began including both XM and Sirius chip sets in their sat~ ellite radios to encble dualsignal reception in 2008: within months, all satellite radios were being manu factured with dualreception capability. ' Building Brand Awareness and Stimulating Demand for Satellite Radio Service Both XM and Sirius pursued aggressive marketing strate gies, spending heavily on a variety of sizable sales, marketing, and promotional activities calculated to build brand awareness, communicate the appeal ing features of satellite radio service compared to traditional radio, and attract, first, hundreds of thou- sands and, then, millions of new subscribers annually. Advertising and promotional activities were conducted via television, radio, print, and the Internet; brochures illustrating the array of available channels and pro grams, along with other satellite radio features, were distributed at retail outlets, concert venues, and motor sports events and on the Internet to generate con- sumer interest; some major retailers participated in jointly funded local advertising campaigns. Iiistore promotions typically included displays at electronics and music stores, car audio retailers and other retail- ers that stocked and promoted sales of satellite radios, automobile dealerships, and rental car agencies with vehicles equipped with a satellite radio. At XM, expenses for marketing and advertis- ing were $182.4 million in 2005, $164.4 million in 2006, and $178.7 million in 2007. Sirius had sales and marketing expenses of $197.7 million in 2005, $203.7 million in 2006, and $173.6 million in 2007. The Competitive Battle between XM and Sirius Inflicted Major Financial Damage The heavy expenses incurred by the efforts of the two rivals as each tried to gain an edge over the other produced gigantic losses every year of their existence, despite having attracted millions of sub- scribers. Comparative performance statistics for 20052007 are shown in Exhibit 1. With both companies burdened by sizable nega- tive cash flows from operations, balance sheets that were becoming precariously weaker as longwterm borrowings and stockholders' deficits mounted, waning ability to raise additional equity capital from increasingly anxious investors, and growing con cerns about the viability of their business models, there was much speculation in 20062007 about whether either XM or Sirius could obtain the financ ing needed to survive for much longer. Executives at both companies concluded that after six years of battling for subscribers and bidding up programming costs, the only long~term solution was to merge and bring a halt to the destructive competitive battle that was unlikely to end short of bankruptcy. The execu tives and boards of directors of the two companies hammered out a planned merger agreement that was announced on February 19, 2007. But there were significant hurdles to overcome because the merger, if approved by the FCC and the Antitrust Division of the US. Department of Justice, would create a satellite radio monopoly, although the merged company would still face competition for listeners from multiple sources, including terrestrial AM/FM radio. both free and paid Internet streaming services (from Clear Channel, CBS Radio, Pandora, and others), the music channels offered by cable TV providers, digital music devices such as iPods and MP3'p1ayers, and the music and other programming that could be stored on or streamed to smartphones. Traditional AM/FM radio enterprises offered free broadcast reception paid for by commercial adver tising rather than by a subscription fee. Sirius and XM argued that the free broadcast programs of AM/FM enterprises (as well as all the other free and paid music programming that was widely available) not only reduced the likelihood that customers would be willing to pay for satellite radio subscription service but also imposed limits on what a merged XMSirius could charge for its service. Thus, it was alleged by XM and Sirius that competitive forces would be adequate to protect consumers from any \"monopoly pricing\" or other monopolistically abu sive practices stemming from an XMSirius merger. However, many AM/FM enterprises, along with consumer interest groups and other interested par- ties, expressed opposition to the merger, largely on grounds that it would be anticompetitive and injuri- ous to satellite radio subscribers. After 17 months of regulatory scrutiny and despite the objections of various concerned parties, the proposed merger won approval from the FCC and the Antitrust Division of the US. Department of C462 PART 2 Cases in Crafting and Executing Strategy Comparative Performance, XM Satellite Radio and Sirius Satellite Radio 20052007 (dollar amounts in thousands, except per-subscriber data) \\ XM Radio Number of subscribers, year-end 5,933,000 7,629,000 9,027,000 Gross subscriber additions 4,130,000 3,866,000 3,891,000 Deactivated subscribers 1,427,000 2,170,000 2,493,000 Net subscriber additions 2,703,000 1,696,000 1,398,000 Subscriber revenues $ 502,612 $ 825,626 $ 1,005,479 Total revenues 558,266 933,417 1,136,542 Operating expenses 1,113,801 1,336,515 1,647,979 Loss from operations ' (555,535) (403,098) (511,437) Net loss (666,715) (718,872) (682,381) Long-term debt 1,035,584 1,286,179 1,480,639 Total stockholders' (deficit) equity 80,948 (397,880 (984,303) Cash flows from operations $(166,717) $(462,091) $(154,730) Average monthly revenue per subscriber $10.57 $11.41 $11.48 Subscriber acquisition costs per gross subscriber addition' $109 $108 $121 Sirius Satellite Radio Number of subscribers, year-end 3,316,560 6,024,555 8,321,785 Gross subscriber additions 2,519,301 3,758,163 4,183,901 Deactivated subscribers 345,999 1,050,168 1,886,671 Net subscriber additions 2,173,302 2,707,995 2,297,230 Subscriber revenues $ 223,615 $ 575,404 $ 854,933 Total revenues 242,245 637,235 922,066 Operating expenses 1,071,385 1,704,959 1,435,156 Loss from operations (829,140) (1,067,724) (513,090) Net loss (862,997) (1,104,867) (562,252) Long-term debt 1,084,437 1,068,249 1,278,617 Total stockholders' (deticit) equity 324,968 (389,071) (792,737) Cash flows from operations $(269,994) $(421,702) $(148,766) Average monthly revenue per subscriber $10.34 $11.01 $10.46 Subscriber acquisition costs per gross subscriber addition' $139 $114 $101 W *Subscriber acquisition costs include hardware subsidies paid to radio manufacturers, distributors, and automakers, including subsidies paid to automakers that included a satellite radio and subscription to Sirius or XM service in the sale or lease price of a new vehicle; sub- sidies paid tor chip sets and certain other components used in manufacturing satellite radios; device royalties for certain radios and chip sets; commissions paid to automakers as incentives to purchase, install, and activate satellite radios; payments for handling product war- ranty obligations; freight; and provisions for inventory allowances associated with factory-installations of satellite radios by automakers and the orders and sales of satellite radio equipment by distributors and retailers. Source: Company to-K report for 2007 Justice in July 2008 after XM and Sirius voluntarily 3. Not raise the retail price for. or reduce the num- agreed to: ber of channels in, the basic $12.95pcrmonth subscription package, or any new programming 1. Pay a $20 million tine tor lttlltll'0 to prevrously packages, before July 28,2011. comply with certain FCC regulations. 2. Sign a consent decree to cease such practices and 4. Offer '4 variety 0i Subscription plans (as oppoSCd bring their operating activities into full compliance to a srngle allchannel option priced at $13495 per with FCC regulations. month) that allowed subscribers to choose any in CASE 11 Sirius XM Satellite Radio Inc. in 2014: On Track to Succeed after a Near-Death Experience? C-163 several combinations of channels, including an a Assorted subscriber metrics are shown in la carte subscription option. Exhibit 3. Sirius XM Radio had a 38 percent equity The two companies quickly began preparations interest in Sirius XM Canada, which offered satellite to finalize the merger. On August 5, 2008, Sirius radio services in Canada and had 2 million subscribe Satellite Radio Inc. changed its name to Sirius XM ers in early 2014. However, subscribers to the Sir- Radio Inc. In April 2010, XM Satellite Radio Hold- ius XM Canada service were not included in Sirius ings Inc. merged with and into XM Satellite Radio XM's subscriber count. Inc.; and in January 2011, XM Satellite Radio Inc., a wholly owned subsidiary of Sirius XM Radio, was Programming Strategy merged into Sirius XM Radio Inc. Since the 2008 merger, the programming strategy had centered on three key elements: SIRIUS XM'S STRATEGY 1. Bargaining hard for lower prices on program- In the period since the merger, Sirius XM's strategy ming content so as to reduce the company's over- had been aimed at: all programming costs. Sirius XM executives were acutely aware that the fierce rivalry between . Recruiting new subscribers and rapidly growing XM and Sirius during 2002-2007 had led to sig- the size of the company's customer base. nificant "overbidding" for content. The overbid- Eliminating largely duplicative programming and ding resulted from trying to match or beat the thereby significantly reducing the combined pro- content recently acquired by one's rival and/or gramming costs of the two former companies sometimes agreeing to pay a big price premium Cutting the "bloated" operating costs stemming to keep the other firm from winning exclusive from the mutually destructive and unprofitable rights to high-profile content with considerable 'arms race" between XM and Sirius to outcom- listener appeal (like Howard Stern or play-by- pete one another. play sporting events). Hence, as the contracts Streamlining operations in ways that would enable expired for programming content negotiated prior the merged company to become profitable within to the merger, the central objective during con- a few years. tract renegotiation was to reduce the premium prices the company was paying for high-profile Reducing long-term debt, taking advantage of low broadcast rights, most particularly for sporting interest rates to refinance existing debt, increas events and talk-show personalities (like Howard ing the company's operating margins, boosting Stern). cash flows from operations, and getting the com- pany on a strong financial footing 2. Curbing the costs of duplicate programming, par- ticularly in the case of music channels where both Top executives believed it was essential to gen- XM and Sirius were incurring the costs of pro- erate near-term results that would convince investors gramming "look-alike" channels, each operated and creditors that the merged company's subscription- as an individual station, in every music genre. For based business model was capable of producing example, XM had four country-music channels, attractive long-term profitability. This required pro- each with its own format, style, mix of record- gressively reducing the company's net losses per ings, and branding, that were programmed and year and turning the corner to positive net profits in hosted by a team of country-music experts, while the 2011-2012 time frame. Sirius also had four country-music channels, Financial performance data for 2010-2013 is each with its own slightly different format, style, shown in Exhibit 2. Income from operations had recordings mix, and branding, that were pro- climbed from $465.4 million in 2010 to $1.04 bil- grammed and hosted by a different set of country- lion in 2013. From August 2012 to the end of 2013, music experts. The same sort of duplication and Sirius refinanced $2.5 billion of debt, pushed the overlap existed for the rock, pop, hip-hop, gos- average maturities out from 4.7 years to 6.7 years, pel, dance, jazz, Latin, and classical channels the and reduced its weighted-average interest rates from two companies were broadcasting. Sirius XM 9.2 to 5.1 percent. executives promptly began a multiyear initiativeC-l64 PART 2 Cases in Crafting and Executing Strategy Select Financial Statement Data for Sirius XM Satellite Radio, 20102013 (in thousands, except per share data) income statement data Revenue: Subscriber revenue1 $2,414,174 3 2,55,414 $2,962,665 $3,824,680 Advertising revenue? net of agency fees 64,517 73,672 82,320 89.288 Equipment revenuea 71,355 71,051 73,456 80,573 Other revenue\" 266,946 274,387 283,599 344,574 Total revenue 2,816,992 3,014,524 3,402,040 3,799,095 Operating expenses: Royalty and revenue-sharing payments ' 435,410 471,149 551,012 677,642 Programming and content 305,914 281,234 278,997 290,323 Customer service and billing 241,680 259,719 294,980 320,755 Satellite and transmission 80,947 75,902 72,615 79,292 Cost of equipment 35,281 33,095 31,766 26,478 Subscriber acquisition costs 413,041 434,482 474,697 495,610 Sales and marketing 215,454 222,773 248,905 291,024 Engineering, design and development 45,390 53,435 48,843 57,969 General and administrative 240,970 238,738 261,905 262,135 Depreciation and amortization 273,691 267,880 266,295 253,314 Restructuring, impairments, and related costs 63,800 - _ Total operating expenses 2,351,578 2,338,407 2,530,015 2,754,542 income from operations 465,414 676,117 872,025 1,044,553 Other income (expense): interest expense, net of amounts capitalized (295,643) (304,938) (265,321) (204,671) Loss on extinguishment of debt and credit facilities, net (120,120) (7,206) (132,726) (190,577) Interest and investment income (loss) (5,375) 73,970 716 6,976 Loss on change in value of derivatives (20,393) Other (loss) income 7 3,399 3,252 (226) 1,204 Total other expense (417,739) (234,922) (397,557) (407,461) income before income taxes 47,675 441,195 474,468 636,092 income tax benefit (expense) (4,620) (14,234) 2,998,234 (259,877) Net income 3 43,055 $ 426,961 $3,472,702 3 377,215 Net income per common share: Basic $0.01 $0.07 $0.55 $0.06 Diluted $0.01 $0.07 $0.51 $0.06 Dividends paid on common stock $0.05 - Weighted-average common shares outstanding: Basic 3,693,259 3,744,606 4,209,073 6,277,646 Diluted 6,391,071 6,500,822 6,873,786 6,384,791 Balance sheet data Cash and cash equivalents: $ 586,691 $ 773,990 $ 520,945 $ 134,805 Total current assets 991,775 1,276,954 1,828,182 1,419,013 Total assets 7,383,086 7,495,996 9,054,843 8,844,760 Total current liabilities 2,349,709 2,247,596 2,314,588 2,948,904 Long-term debt, including related-party debt 3,021,763 3,012,351 2,430,986 3,093,821 Total stockholders'equity $ 207,636 $ 704,145 $4,039,565 $2,745,742 CASE 11 Sirius XM Satellite Radio Inc. in 2014: On Track to Succeed after a Near-Death Experience? C-165 Cash flow data Net cash provided by operating activities $ 512,895 $ 543,630 $ 806,765 $ 1, 102,832 Repayment of long-term borrowings 1,262,396 234,976 1,041,824 1,982, 160 Proceeds from long-term borrowings and revolving credit facility, net of costs 1,274,707 383,641 3, 156,063 Includes revenues from all the various subscription plans, activation fees (including those for radios activated on vehicles rented at par- ticipating car rental agencies), and other fees Includes the sale of advertising on certain nonmusic channels, net of agency fees. Agency fees are based on a contractual percentage of he gross advertising revenue. Includes revenue and royalties associated with the sale of satellite radios, components, and accessories. 4Includes amounts cha ounts charged to subscribers for the U.S. music royalty fee (this fee was a surcharge on all subscription plans involving music channels), royalties earned from the operations of the company's Canadian affiliate, and ancillary fees earned on weather, traffic, data and Backseat TV services. Source: Company 10-K reports, 2011, 2012, and 2013. to consolidate the roughly 70 music channels 3. Refreshing and expanding the company's program- broadcast by XM and the 70 or so music chan- ming lineup. Sirius executives viewed program- nels broadcast by Sirius into a new set of about 70 ming as the foundation of the company's business. music channels that were jointly broadcast to XM To complement and strengthen Sirius XM's broad subscribers and to Sirius subscribers. channel lineup and offering of exclusive programs, EXHIBIT 3 Select Subscriber Statistics, Sirius XM Satellite Radio, 2010-2013 2013 Subscriber data Beginning subscribers 18,772,758 20, 190,964 21,892,824 23,900,336 Gross subscriber additions 7,768,827 8,696,020 9,617,771 10, 136,391 Deactivated subscribers (6,350,621) (6,994, 160) (7,610,259) (8,477,407) Net additions 1,418,206 1,701,860 2,007,512 1,658,974 Self-pay 82,867 1,221,943 1,661,532 1,511,543 Paid promotional (trial) 435,339 479,917 345,980 147,431 Ending subscribers 20, 190,964 21,892,824 23,900,336 25,559,310 Self-pay 16,686,799 17,908,742 19,570,274 21,081,817 Paid promotional (trial) 3,504, 165 3,984,082 4,330,062 4,477,493 Subscriber metrics Daily weighted-average number of subscribers 19,385,055 20,903,908 22,794, 170 2 24,886,300 Average self-pay monthly churn* .9% .9% 1.9% 1 1.8% New-vehicle conversion rate from trial to self-pay 46% 45% 45% 144% Average revenue per subscriber $11.53 $11.73 $12.00 $12.27 Subscriber acquisition cost, per gross subscriber addition $59 $55 654 7 $50 Customer service and billing expense per average subscriber $1.03 $1.03 $1.07 $1.07 Derived from the average of the quarterly average self-pay monthly churn during the year. The average self-pay monthly churn for a quarter is calculated by dividing the monthly average of self-pay deactivations for a quarter by the average self-pay subscriber balance for a quarter. Sources: Company 10-K report, 2012, pp. 30 and 32; and company 10-K report, 2013, pp. 31 and 33.C-166 PART 2 Cases in Crafting and Executing Strategy management continuously looked for new and would be based on subscription revenue from U.S. unique brands and personalities to collaborate satellite digital audio radio subscribers and advertis- with and develop content that was unavailable to ing revenue from channels other than those chan- terrestrial radio and online competitors. The strate- nels that make only incidental performances of gic objective was to continue to build record num- sound recordings and that the royalty rates would be bers of subscribers by producing innovative and 9 percent for 2013, 9.5 percent for 2014, 10 percent appealing content. for 2015, 10.5 percent for 2016, and 1 1 percent for Company efforts to cut programming costs had 2017. The rate for 2012 was 8 percent. However, been successful. When interviewed by a Barron's revenues derived from the following were not sub- reporter in fall 2013, Sirius XM CEO Jim Meyer ject to CRB-mandated royalty payments: (1 ) chan- was quoted as saying: nels, programming, and products or other services offered for a separate charge when such channels Before we merged, our programming cost was $450 make only incidental performances of sound record- million for everything besides music. Now, it's under $300 million. And that's not going to change a lot. ings, (2) equipment sales, (3) current and future data services, and (4) certain other services and activities. One industry analyst estimated that Sirius XM's In addition, the regulations allowed Sirius XM to monthly programming costs were $0.96 per sub- reduce its monthly royalty fee in proportion to the scriber in 2013 and would likely fall to $0.76 per percentage of its music performances that featured subscriber by 2016 because of flat programming pre-1972 recordings (which were not subject to fed- costs and growing numbers of subscribers. eral copyright protection) as well as those that were licensed directly from the copyright holder, rather Music Programming Sirius XM's music offer- than through a statutory license. Sirius XM charged ings were regularly adjusted and fine-tuned to remain all U.S. subscribers a U.S. music royalty fee, as an in step with the ongoing changes in the tastes and add-on to the regular subscription price, to cover the preferences of music listeners and the shifting popu- music royalty payments required by the CRB. larity of music artists. The channels created by the company were broadcast commercial-free, but cer- Sports Programming Live play-by-play sports tain music channels were programmed by third par- were an important part of Sirius XM's programming ties and aired commercials. The 2013 channel lineup strategy. In 2013-2014, Sirius XM was the Offi- also featured interviews and performances of some cial Satellite Radio Partner of the National Football of the biggest names in music, a Town Hall series League (NFL), the National Hockey League (NHL), that featured concerts and interviews before a live and the PGA TOUR, and it broadcast most major audience, and several "pop-up" channels featuring college sports, including NCAA Division I regular- the music of particular artists. season football and basketball games, over 30 col- In 2013, music programming accounted for lege football bowl games, and all tournament games about 60 percent of the company's total program- of the NCAA Division 1 Men's Basketball Cham- ming costs." Sirius XM had to pay royalties to the pionship. There were broadcasts of soccer matches music publishers, recording studios and record from the Barclays Premier League, FIS Alpine Ski- companies, songwriters, and performing artists ing events, FIFA World Cup events, and horse racing. whose musical works were broadcast on its chan- In addition, the sports lineup included a number of nels. In some cases, the royalty rate was negotia exclusive talk channels and programs such as MLB ated directly with the copyright owners or their Network Radio, SiriusXM NASCAR Radio, Sirius representatives; but if no agreements were reached, XM NFL Radio, College Sports Nation, and Chris the laws in the United States governing copyrights "Mad Dog" Russo's Mad Dog Unleashed on Mad called for the royalty rates to be determined by the Dog Radio, as well as two ESPN channels (ESPN Copyright Royalty Board (CRB) of the Library of Radio and ESPN Xtra). Simulcasts of select ESPN Congress. In December 2012, the CRB determined television shows, including SportsCenter, were that the royalties paid on sound recordings broadcast broadcast on the company's ESPN Xtra channel. over satellite radio for the five-year period starting Sirius XM's contract to broadcast every January 1, 2013, and ending December 31, 2017, Major League Baseball game ran through 2021. ItsCASE 11 Sirius XM Satellite Radio Inc. in 2014: On Track to Succeed after a Near-Death Experience? C-167 agreement with the National Football League was channels and Sirius XM's exclusive channel, POTUS. up for renewal at the end of 2015. Subscribers could get local traffic reports for 22 met- ropolitan markets throughout the United States. Talk and Entertainment Programming Sir- ius XM's channel lineup included about 30 talk Internet Radio Sirius XM streamed music chan- and entertainment channels that were designed for nels and select nonmusic channels over the Internet, a broad variety of audiences and thus differenti- including several channels and features that were not ated the company's programming from terrestrial available to satellite radio subscribers. Access to the radio and other audio entertainment providers. The company's Internet services was offered to satellite talk-radio listening options featured a multitude of radio subscribers for an additional fee. Sirius XM popular talk personalities, some with their own radio marketed devices that enabled access to its Internet shows that aired exclusively on Sirius XM, include services without the need for a personal computer. ing Howard Stern, Oprah Winfrey, Dr. Laura Schles It had also developed apps that allowed consumers singer, Opie and Anthony, Bob Edwards, former to access the company's Internet services on certain senator Bill Bradley, and doctors from the NYU smartphones and tablet computers. Langone Medical Center. Subscribers could listen to In 2012, the company launched SiriusXM On a range of humor on Sirius XM's comedy channels, Demand that gave Internet subscribers listening on the including Jamie Foxx's The Foxxhole, Laugh USA, company's online media player and on smartphones Blue Collar Comedy, and Raw Dog Comedy. Other the ability to choose their favorite episodes from a talk and entertainment channels included a full-time library of more than 300 shows and over 3,000 hours channel devoted to business and management, Siri- of content that included regularly updated feature usXM Book Radio, Kids Place Live, Radio Disney, content, commercial-free music from many genres, Rural Radio, Cosmo Radio, OutQ, Road Dog Truck- Town Hall specials, music specials, interviews with ing, and Playboy Radio. Religious programming a wide range of celebrities, The Howard Stern Show, included The Catholic Channel (programmed with Dr. Laura, Jimmy Buffett concerts, Coach K, Bob the archdiocese of New York), EWTN (Catholic pro- Dylan's Theme Time Radio Hour, and selected shows gramming and news programming from around the from the company's lineup of sports, comedy, and world), and Family Talk. exclusive talk and entertainment channels. The company's contract with Howard Stern More recently, Sirius had introduced MySXM was up for renewal at the end of 2015. According to that permitted listeners to personalize the company's media reports, the five-year contract Sirius XM and existing commercial-free music and comedy chan- Howard Stern signed in December 2010 called for nels to create a more tailored listening experience. Sirius XM to pay an estimated $80 million annually Channel-specific sliders allowed users to create over for Howard Stern programming, down 20 percent 100 variations of each of more than 50 channels by from the approximately $100 million annual pay- adjusting characteristics like library depth, familiar- ments (including bonuses) for the initial five-year ity, music style, tempo, region, and multiple other contract signed in 2004. Some observers had specu- channel-specific attributes. SiriusXM On Demand lated that Stern's declining popularity and listener and MySXM were offered to Internet subscribers at base might give Sirius XM greater leverage in nego- no extra charge. tiating to renew its contract with Stern in 2015. Sir- In 2013 Sirius expanded its online offering to ius had already made some progress in reducing the further enhance the appeal of subscribing to Sirius prices of its highest-paid radio personalities-both XM Internet Radio. Top management believed that Martha Stewart and Bubba the Love Sponge Clem coordinating the content and programming attrac- had already agreed to reduced compensation. tions across its satellite and streaming platforms News and Information Programming There would allow the company to provide subscribers was a wide range of national, international, and finan- with an "unparalleled experience." cial news, including news from CNBC, CNN, Fox Dynamic Programming Content and Chan- News, HLN, Bloomberg Radio, MSNBC, NPR, BBC nel Content Sirius XM monitored the popular- World Service News, and World Radio Network, plus ity of the content on each channel and the size of several political call-in talk shows on a variety of the audience listening to each channel. Channels(2168 PART 2 Cases in Crafting and Executing Strategy with ttneconomieally low listener appeal either were dropped or had their content revised. Programming of existing channels was periodically refreshed. From time to time. new channels with altogether new content were added to the lineup of channel offerings. In 2012. the company launched a Corn edy Central Radio channel and added Michael Smerconish. a nationally syndicated terrestrial talk radio star. to its lineup in its ongoing campaign to bring the best audio entertainment to subscribers. In 2013. prominent programming additions included numerous Torr/i Hull special events with highpro l'ile personalities. dozens of new weekly programs and special events on existing channels. arid the launch of a David Bowie channel. an expanded Pink Floyd channel. a Just for Laughs comedy channel. a Tom Petty Radio channel. an Entertainment Weekly channel (in partnership with Entertain/item Week/y. which was the content provider). a The Girls\" Room channel. and a Bon Jovi channel. Several times each month. the company sent emails to subscribers calling attention to upcoming programs. shows. and events of interest scheduled for broad 'ast across its entire channel lineup. The emails also announced the launch ol' new shows on particular channels. temporary switches to seasonal music on particular channels. and any other note worthy items (contests to win tickets to live perfor- mances and maior sporting events. the appearance of special guests and/or the discussion of particular topics on regularly scheduled talk and entertain ment shows. and the availability of certain videos that could be watched on the company's website or streamed to subscribers' tablets or smar'tphones). The e-mails served to heighten subscriber interest in satellite radio and build awareness of the dynamic and unique nature of Sirius XM's programming and how its diverse channel lineup and content offered \"something for everyone and every mood.\" Programming Studios Sirius XM's program- ming activities were conducted principally in studio facilities occupying a full floor at the company's cor- porate headquarters building in midtown Manhattan and at studios in Washington. DC. The company also operated smaller studio facilities in Cleveland, Los Angeles. Memphis. Nashville. and Austin. Both the New York City and Washington. DC. offices housed facilities for programming origination. pro- gramming personnel. and programming transmis- sion to the company's 140plus channels. Radio Distribution Strategy Following the merger in 2008. Sirius XM continued to employ the strategy of gaining access to new sub- scribers by distributing its satellite radios through three channels: automakers. assorted retail locations nationwide (including rental car companies). and the company's website. As had been the case dur. ing 20022008. when XM and Sirius battled each other for new subscribers. the merged Sirius XM continued to use subsidies and incentives to induce automakers to install a satellite radio and to partner with Siritts XM in promoting satellite radio service to customers who bought or leased a new vehicle equipped with a satellite radio. Automakers Just as had been the case prior to the merger. Sirius XM's primary means of distrib- uting satellite radios (and gaining new subscrib- ers) was through the sale and lease of new vehicles equipped with satellite radios. The purchasers of new or leased motor vehicles had. from the onset of satellite radio service. been the chief source of new subscribers. Listening to satellite radio broadcasts while driving had gained in popularity in the years since broadcasts began in 2002. spurring vehicle maturl'acturcrs to equip an increasing fraction of new vehicles. particularly models selling for $30000 or more. with factoryinstalled satellite radios. About 70 percent of the l5.6 million new vehicles sold in the United States in 20l3 had satellite radios (up from 33 percent in 2007). and the percentage was to grow in coming years. New vehicle sales were lore- cast to be around I63 million in 2014. Sirius XM's subscriber growth since 2009 had been driven largely by the recovery in automotive sales that had been under way since the Great Recession of 20082009. when annual sales in the United States in 200') t"ll to 10.4 million vehicles. To help boost the percentage of vehicles equipped with satellite radios. Sirius XM had con- tinued the practice of using subsidies and incen tives to induce automakers to offer satellite radios as a factory or dealer-installed option in substan- tially all vehicle makes sold in the United States. Since the merger. Sirius XM had been successful in signing agreements with almost all vehicle makers whereby Siritrs XM paid certain specified subsidies and incentives for each satellite radio installed in a new or leased vehicle. Sirius executives believed that these subsidies and incentives. coupled with CASE ii Sirius XM Satellite Radio Inc. in 2014: On Track to Succeed after a NearDeath Experience? C469 growing driver enthusiasm for satellite radio service, would continue to broaden the distribution of satel lite radios and boost the company's ability to attract growing numbers of new subscribers. The Retail Channel Sirius distributed and mar keted its satellite and Internet radios through major national and regional retailers; to secure broader distribution, the company relied heavily on subsi dies and incentives to induce retailers to stock satel lite radios and promote Sirius XM's satellite radio service. Sirius also provided these retailers with an assortment of in-store merchandising materials to support their efforts to sell satellite radios to COllr sumers, and it provided sales force training for sev eral retailers. In addition, the company's distribution strategy in the retail channel included: 0 Using subsidies and incentives to induce distribu tors to stock satellite radio equipment and fill the orders of retailers who sold satellite radios. Selling satellite and internet radios directly to consumers at the company's website. - Working with certain rental car companies to equip a portion of the vehicles in their rental car fleets with satellite radios and to offer satellite radio service to their car rental customers. Sales and Marketing Strategy Because Sirius XM's primary source of revenue was subscription fees, the company's sales and mar- keting strategy was concentrated on programs and initiatives to attract and retain new subscribers and rapidly grow its subscriber base. Going into 2014, Sirius XM radios were installed in close to 60 mil- lion vehicles in the United States, a number that represented 30 percent of the 200 million nonfleet registered vehicles on the road. With new vehicle sales in the United States running at 15 million to 16 million vehicles annually, roughly ll million new vehicles per year were being equipped with a satellite radio. Approximately 110 million satellite- equipped vehicles were expected to be on the road in 2019. Sirius CEO Jim Meyer expected the company to easily get to 30 million subscribers and believed that reaching 40 million subscribers was feasible in the not too distant future.5 To achieve those numbers, Sirius was concentrating its sales and marketing efforts to gain new subscribers in both the new vehicle and usedvehicle segments, using subsidies and incentives to automakers. the retailers of used vehicles, and the retailers of satellite radios, comple- mented with telemarketing efforts to nonsubscribing owners of vehicles equipped with satellite radios. However, the company had over $500 million in annual revenues from other sources, including the sale of advertising on select nonmusic channels, equipment revenues and royalties associated with the sale of satellite radios and accessories, amounts earned from subscribers through the US. music royalty fee, royalties from the company's Cana dian affiliate, and ancillary fees from weather, traf- fic, data, and Backseat TV servicessee Exhibit 2. Consequently, a portion of the company's sales and marketing strategy was aimed at growing these rev- enue streams. Subsidies and Incentives for Automakers Far and away the biggest marketing effort to secure new subscribers continued to be directed at people who purchased or leased new vehicles. This effort began with the longstanding practice of rewarding automakers for installing a satellite radio in new vehicles and including a three-month or sixmonth trial subscription to Sirius satellite service in the sale or lease price of these vehicles. The incentive package Sirius offered had induced every major automaker to offer satellite radios as a factory or dealer-installed option in substantially all makes of vehicles sold in the United States. As a general rule, Sirius received trial subscrip- tion payments from automakers in advance of acti vating the trial subscription on the day the vehicle was purchased or leased from franchised dealers. Furthermore, Sirius reimbursed various automakers for certain costs associated with the satellite radios installed in their vehicles, including hardware costs. tooling expenses associated with installing satellite radios, and promotional and advertising expenses. And it shared with certain automakers a portion of the revenues it got from subscribers driving their satellite radio~equipped models. All of these subsidies, incentives, and expenses for cooperative marketing programs were classified as subscriber acquisition costs, To complement this effort, Sirius had been using outbound telemarketing campaigns to contact the nonsubscribing owners of new vehicles and try to convert them into becoming subscribers. C-170 PART 2 Cases in Crafting and Executing Strategy Trial Subscriptions with Purchase or Lease conversion rate from trial subscriptions to paid sub- of Used Vehicles Equipped with a Satellite scriptions was running above 30 percent. Radio In recent years, Sirius XM had accelerated its sales and marketing efforts to help induce people Subsidies and Incentives for the Retailers who bought or leased previously owned vehicles of Satellite Radios Subsidies and incentives with factory-installed or dealer-installed satellite were also used to induce retailers to stock satel- radios to subscribe to Sirius XM service. The com- lite radios and promote Sirius XM's satellite radio pany had recently developed systems and methods service. They included hardware subsidies paid to to identify these people and had established market- retail distributors, inventory allowances, in-store mer- ing programs to promote its programming to these chandising materials, sales force training for large- potential subscribers. The company worked directly volume retailers, the handling of product warranty with franchised and independent vehicle dealers to obligations on radios sold, loyalty payments, com- promote and sell Sirius XM subscriptions for both missions (or some other sort of revenue-sharing certified and noncertified used vehicles equipped arrangement) on subsequent subscriptions, and pay- with satellite radios. It had launched subscriber pro- ments to reimburse retailers for the cost of advertis- grams at large used-car retailers, such as CarMax, ing and other product awareness activities performed AutoNation, and Penske, and over 11,000 other on Sirius XM's behalf dealer locations to enhance its capabilities to gain Share-based payments of subscription revenues to new subscribers when satellite radio-enabled vehi- automakers, franchised dealers, independent used-car cles changed ownership. The centerpiece of Sirius dealers, and the retailers of satellite radios totaled XM's program with these participating used-vehicle $68.9 million in 2013, $63.8 million in 2012. $53.4 retailers was giving a three-month Sirius XM trial million in 2011, and $63.3 million in 2010. These subscription to customers buying any preowned payments appeared on the company's income vehicle with a factory-equipped satellite radio; in statement in the operating expense category labeled addition, the dealers reported the sale of such vehi- "Royalty and revenue-sharing payments"-see cles to Sirius. About 34 percent of used-car owners Exhibit 2. converted their three-month trial subscriptions to A Variety of Subscription Plans and Sub- self-paying subscriptions. scription Packages Sirius marketers had cre- In 2013, Sirius XM began enrolling dealers in ated a variety of subscription plans for customers its Service Lane Program to provide a compliment to choose from-Exhibit 4 shows the three most tary two-month Sirius XM subscription to qualify- popular plans. Most customers, especially newer ing customers who brought their vehicles with a subscribers, opted for annual, semiannual, quarterly. factory-equipped satellite radio in for service; there or sometimes monthly subscription plans. To entice were over 2,500 dealers participating in the Service customers whose subscriptions were expiring to Lane Program as of February 2014. Both the used- sign up for a longer term, Sirius offered discounts car dealer and Service Lane programs also involved for prepaid subscriptions and for automatic-renewal providing subsidies and/or revenue-sharing incen- plans that ran for terms of two or three years. There tives of one kind or another, as well as providing were also discounts for customers who subscribed promotional materials and participating in various for service for two or more vehicles or had mul- cooperative marketing activities. The company was tiple radios for home and/or office use-roughly also using telemarketing to promote Sirius XM to 80 percent of car-owning households in the United nonsubscribing owners of satellite radio-equipped States owned two or more vehicles. The percentages used vehicles. of subscribers taking advantage of the discounts for The strategic target was to convert some of the longer-term plans and multiple-vehicle service were 30 million vehicles on the road with inactive satellite rising. From time to time, Sirius ran special promo- radios into vehicles with active subscriptions to Sir- tions offering slightly deeper discounts on these ius XM's service. At the end of the 2013 third quar- plans. ter, Sirius was on track to gain 1.5 million in gross Subscribers having an a la carte-capable radio subscriber additions in the used-vehicle segment in (Sirius Starmate 8) could customize the program- 2013 (up from 1 million in 2012); the used-vehicle ming they received; there were two a la carteCASE 11 Sirius XM Satellite Radio Inc. in 2014: On Track to Succeed after a Near-Death Experience? C-171 EXHIBIT 4 Sirius XM's Most Popular Subscription Plans, February 2014 Monthly subscription $14.99 $18.99 $9.99 Quarterly subscription $44.97 $56.97 $27.97 ($14.99 per month) ($18.99 per month) ($9.99 per month) Annual subscription $164.89 $199.00 $119.88 ($13.74 per month) ($16.58 per month) ($9.99 per month) 1 free month 1 free month 2-year subscription $314.79 $398.00 $239.76 ($13.12 per month) ($16.58 per month) $9.99 per month) 3 free months 3 free months 3-year subscription $464.69 $588.69 $359.64 ($12.91 per month) . ($16.35 per month) $9.99 per month) 5 free months 5 free months Addition of a second radio $9.99 per month $13.99 per month $9.99 per month Number of channels Over 140 channels Over 150 channels plus Over 80 channels online listening Internet Radio Add $4 per month Included Add $4 per month Howard Stern X Oprah Radio, Opie and X X Anthony, Bob Edwards Every NFL game Every NASCAR race X X - - Every MLB game x X X NBA and NHL games and PGA Tour coverage Up-to-the-minute traffic and X weather coverage for 22 locations Source: Company website (accessed February 4, 2014). subscription plans-one allowed subscribers to pick XM signals and Sirius signals rather than just a sin- their 50 favorite channels within the Select package gle signal. But the subscription plan packages and for a monthly price of $7.99, and the other allowed prices for customers with either XM or Sirius radios subscribers to choose 100 channels (not including were identical. live sports broadcast channels) for a monthly price of $15.99. There were also two family-friendly Sales and Marketing Expenses Sirius XM's packages that did not contain adult-themed channels costs for sales and marketing activities are shown in and had $1-per-month cheaper subscription prices, Exhibit 2. These expenses included (1) expenditures a 50+ channel news-sports-talk package priced at for advertising, promotional events, and sponsor- $9.99 per month, and a 155-channel Internet-only ships, (2) reimbursement payments to automakers plan (for people who preferred to listen on a com- and retailers for advertising costs, certain coopera- puter, tablet, smartphone, or other Internet-enabled tive marketing activities, and other product aware- device) priced at $14.99 per month-people who ness activities performed on Sirius XM's behalf, (3) signed up for the Internet-only plan got a 30-day expenses related to direct mail, outbound telemarket- free trial. Because a substantial number of subscribe ing, and e-mail, and (4) personnel costs. Management ers were driving older motor vehicles equipped with anticipated that future sales and marketing expenses XM or Sirius radios that did not permit dual-signal would increase as the company launched seasonal reception, the company still had to broadcast both advertising, expanded promotional initiatives to: s i (1172 PART 2 Cases in Crafting and Executing Strategy attract new subscribers. and boosted efforts to retain existing subscribers and win back former subscribers. Customer Service and Customer Care Strategy One ofSirius XM's top strategic priorities was to help boost subscriber retention rates through improve ments in customer service and overall customer satisfaction. To improve customer retention and cos tomer" satisfaction metrics by making it easier and more satisfying to be a Sirius XM subscriber. the company had: ' ' Made significant investments in customer care and assembled a team of experienced customer service personnel to perform an assortment of customer support activities. ' Increased its capabilities to \"chat" with online customersa function that online customers liked and used when trying to manage their accounts. purchase equipment. and resolve other questions or issues they had. ' Expanded the customer selfservice options that enabled subscribers to perform more transactions online. ' Integrated its subscriber management systems to enable Sirius radios and XM radios to exist on a single consolidated account. ' Launched a mobile service app to allow transac tions and account management from a subscrib- er's smartphone. Satellite Systems and Operations Strategies In 2(il4 Sirius had a fleet of It) orbiting satellites. costing an average of $300 million each; four were manufactured by Boeing Satellite Systems and six were manufactured by Space Systems/Loral. The company used launch and in'orbit insurance to initi- gate the potential financial impact of satellite launch and in~orbit failures unless the premium costs were considered to be ttneconomical relative to the risk of satellite failure. The satellite fleet provided clear reception in most areas despite terrain variations. buildings. and other obstructions. Subscribers could receive transmissions at all outdoor locations in the continental United States where the satellite radio had an unobstructed line of sight with one ot' the satellites or was within range of one of the comp\". ny's 700 terrestrial repeaters to supplement satellite coverage. Sirius controlled anti communicated with the satellites from facilities in North America and also maintained earth stations in Panama and Ecuador to control and communicate with several satellites, The satellites were monitored. tracked. and controlled by a third-party satellite operator. ' Satellite Radios Sirius did not manufacture satellite radios. Rather. it designed the radios. cstab lished their specifications. either sourced or spcci. tied the needed parts and components. and managed various aspects of the logistics and production ofitg satellite and Internet radios. It had authorized Itttttttt facturers and distributors to produce and distribute radios. and it had licensed the company's rcchnot ogy to various electronics manufacturers to develop. manufacture. and distribute radios under brands other than Sirius XM. It also was responsible for obtaining FCC certification of its radios. Sirius pttt'~ chased radios from these manufacturers for distribu- tion through the company's website. To facilitate the sale of its radios. Sirirts typically subsidized a por- tion of the radio manufacturing costs to rcdttcc the hardware price to consumersethe majority of these subsidies were paid to the makers of the chip sets (microprocessors) used in its radios and to the sup pliers of certain other parts and components, Radios were manufactured in four principal con figurationsin-dash radios for new and used motor vehicles. Dock & Play radios. home or commercial units. and portable radios. In ZOI l. Sirius introduced the Sirius XM Edge. a Dock & Play radio featuring a technology that expanded the company's available channel lineup and data bandwidth, At the time. the Edge was the only Sirius XM radio able to access Sirius XM's new 2.0 technology: it was sold at retail locations and on the Sirius XM website for is l 30.99. Later. Siritrs XM introduced the Lynx model. a pot- table radio with Sirirrs XM 2.0 satellite and Internet radio capability. In addition. there was an interop- erable radio. MIRGB. which had a unified control interface allowing for easy switching between the XM and Siritts satellite radio networks. Sirius's other important radio model was the XIVI SkyDock. which connected to art Apple iPhone and iPod touch anti provided live XM satellite radio using the control CASE 1] Sirius XM Satellite Radio Inc. in 2014: On Track to Succeed after a NearDeath Experience? 0173 capability of the iPhone or iPod touch. A new model. the Sirius XM Onyx Plus Dock & Play radio, priced at $99.99, was introduced in November 2013. The Onyx Plus had the ca