Executive Summary:
XM satellite is a newly established company that has the potential and the ability to become leading satellite radio service provider in United States. At the time of the case, the demand for high quality, ad-free and mobile radio had a great potential and XM along with Sirius received a great opportunity to enter into the untapped market. XM’s only significant competition threat was Sirius. Both Companies were trying to capture market share from one another by creating superior customer access channels and build a brand image. These could have been done through retailers and strategic partnerships with radio producers for home and car markets. The home product brands include Sony, Pioneer, Matsushita and Car audio products include Sony, Pioneer Alpine, Delphi and Visteon
The major issue for XM was how to market, how to price and what will be the value proposition. Since there were only two companies in the market the pricing of the service could significantly shift the demand and estimated/desired earnings.
In order to thoroughly analyze the problem and seek viable alternative solutions I will try to list some of the key marketing issues.
Key marketing issues include but are not limited to: * Creating brand awareness: In my opinion it is very important to mention that potential future customers are only the ones who are aware of the brand. The creation of brand awareness would be complicated given the company’s value proposition to keep ads off the radio. * The initial marketing focus: The Company has to decide where it should market the product or its brand in the industry. It has to decide which market it wants to focus on and which market holds the best potential for growth and continued business in the future. Marketing the service to those who might not be interested in the offering or to those who may not continue their business in the future would be a fatal mistake. * Channel partner selection process: This process is very important since partnering will premium channel will create positive image in the minds of consumers. Partnering with an average channel partner in order to gain a standing in the market would damage the brand image. * Marketing for selling: Once the company is established and will position itself, XM can focus on promoting its service. If the company captures some market share in the industry and will eventually increase the brand recognition, then marketing its services and future products would be significantly easier and cheaper.
Before answering specific questions I have decided to state some recommendations for XM. These recommendations will very important since there is a direct relationship between my recommendations and answers below.

Recommendations for XM are; a. In my opinion, in order to be competitive XM should keep similar pricing strategy to. Since it is expected that Sirius will enter the market as a full operating radio earlier than XM it will be wise to position subscriptions fees as closely to Sirius as possible. Later in the paper and in exhibits you can see some calculations. Based on the calculations XM can provide the services with lower price than Sirius and still be profitable after five years. Of course this can be an issue since XM is trying to please Wall Street. b. Subsidize the development of chipset technologies, which will lower manufacturer risk and cost. This will help XM push through manufacturers, into retail channels, enabling greater and broader uptake of XM by the customer. c. Given the fact that XM is planning to partner with Sony, Pioneer, Alpine, Delphi and Visteon to produce car audio systems an extra product offering to include satellite TV could be an option as well. The infrastructure for service would already be setup once XM is launched and this could be an add-on feature available to those who purchase high end in-car head units. This would allow for a new market of automobile enthusiasts to be tapped. This would also keep XM ahead of the curve and on the cutting edge of innovation. d. Develop portable satellite radio receivers on the lines of mini Mp3 players to gain broader expansion in the market. Expanding into this market would create a very attractive offering to technology enthusiasts and would also create great competition in the industry since it would be comparatively cheaper to purchase a subscription than to pay and download music which becomes redundant after a short span of time. e. XM could charge higher rates to profit generating organizations such as bars, lounges and hotels which could potentially use their service offering. Department stores and shopping malls could be placed on that list as well. f. Leverage partnerships with manufacturing brands and gain entry into greater retailer channels. Greater partnerships would create a stronger brand image and allow XM to enter better retail channels. g. Broadcast a few free channels with advertisements and maintain the product offering of crystal clear audio quality. This would serve as great revenue generation for XM and would still maintain the service offering of free crystal clear satellite radio to those who do not want to incur a yearly cost. h. Offer added privileges to the first buyers of the product to be beta testers for future products. Beta testers are most likely to create hype in the market even before the product is released. This would benefit the brand greatly and create great demand for the product before it is even released. i. Channel packages could also be offered to those who want to listen only to music and not necessarily to the news or talk shows. Another offering XM could create is an encryption package which allows users to choose and purchase the stations they want to listen to specifically and enter an encryption code that decrypts only the stations purchased providing a better level of customization.

1. What is the value proposition of XM to different consumer segments? Who should be the primary target market for XM?
XM Satellite Radio had two main ways that would add value for consumers. XM satellite radio’s value proposition was its ability to provide clear radio service throughout the country, no matter where the consumer was located. The fact that AM and FM radio stations were relying mainly on the customer’s location with regard to the broadcast quality and choice of program gave an advantage. In contrast, XM planned to provide high quality radio service on a national level. The other service XM proposed to provide was commercial free radio for fixed subscription fee. Consumers could also listen to the radio from their homes and offices as an added advantage.
The results from the research that XM conducted proved that the best market to capitalize in the initial stages would be tech-savvy individual in other words Tech-seekers. Since tech-savvy individuals always prefer to be early adopters of latest technology it will be wise to target them in the initial stages.
In order to capture this target market XM needs to offer the service at a price which draws a greater interest in the product while maintaining its niche value. The market could later be expanded to tech friendly individuals to achieve greater growth.

2. What aspects need to be considered in pricing the radio receiver and subscription fee? What is the optimal price for a monthly subscription?
XM would have to consider a number of factors with regard to pricing of the radio receiver and subscription fees. The pricing of the radio receiver would depend primarily on the cost of manufacturing the device. A number of vendor’s would have to be considered before selecting any option, by thoroughly examining the overall quality of the device and the cost of manufacturing. The choice of distribution would be the next step in evaluating the price since vendors quote different margins on the product. The installation fee would also have to be taken into account during product pricing. The desire of consumers to pay for the device and service would also have to be evaluated in order to price the offering adequately.
Since the subscription fee is a large part of the service offering it would be wise to price it at an optimal level to begin with in order to draw and retain customers. Based on XM’s market research it would be best for the subscription amount to be kept at $10 for the first two years and increase the subscription price to $12 for the following years. Given the financial figures illustrated in Exhibit 1 we can compare this pricing option to the two other alternatives. This pricing option would not be applied to the modulator since it would appeal to a different income group and increasing the price of subscription would damage the demand for the product. Thus the price for the modulators would be kept at a standard rate of $10.
There were a lot of assumptions made in order to calculate the net income and project the demand. Some of the assumptions made were; * XM achieved 100% market penetration. * There was no growth in the market over time. * The cost of the radio has to be fixed at $400. * The cost to produce home and car radio will be equal, $300 per. * Subsidized cost of the device will be $151 per unit. * The total potential demand is equal to car listener demand plus the home listener demand. * The operating expenses of XM stay constant over the 5 year period. * We assumed that the innovators phase would last for two years and the early adoption phase lasts for 3 years. * We are selling modulators (adapters that can plug into any AM/FM stereo) vs. XM equipped radios. * The potential demand for the innovators and early adopters has been divided evenly across the time frame. * And finally it was assumed that the modulator would not be released along with the full size satellite radio unit, since the modulator would be a cheaper option and cannibalize the sales of a full size satellite radio unit. * Technology adoption life cycle will work for this specific service.(Exhibit 6)
By having this assumptions and doing the calculations, exhibit 1 through 5, we can conclude that XM would have the best profitability by pricing the subscription fee at $10 for the first two years and then increase it to $12 for the next three years. I believe that the increase of two dollars would not affect the customer base in a contrary way and would increase the company’s profitability to a great extent.

3. How should the price of the service change over time? Should you price high initially and then decrease it over time or vice versa?
Based on the figures illustrated in Exhibit 1 through 5 I can assume that the best pricing strategy should be to charge customers a slightly lower rate of $10 for the first 2 years and increase it to $12 from then on.
The potential demand for the first two years for the innovators has been subtracted from the total potential demand for the 3rd, 4th and 5th years since that portion of the market has been tapped. As mentioned above I will assume that the operating expenses of the company will be constant for all five years. The potential demand for the Innovators and Early Adopters were divided evenly across the years they were expected to purchase the product.
As the figures state, the potential net income the company could earn by increasing the price after the first two years is $572,094,112 more than what the company would earn if it maintained its subscription fee at $10. Despite the fact that the organization is new in the industry this pricing strategy would create a niche in the market and help establish the organization in the industry.

4. What aspects need to be considered in allowing advertising to run on XM’s service?
XM needs to consider its value proposition before allowing advertisements on the radio station. The use of advertisements will become an issue since consumers do not want to pay for radio service which is interrupted by ads every hour. As mentioned in the case FM and AM radio broadcasts have 20 minutes of commercials during an hour of radio broadcast. The fact that customers are willing to pay some fee to subscribe radio channel is because they would prefer paying the subscription fee than having 20 minutes of commercials in every hour.
In 2004 Clear Channel launched a campaign with the slogan “Less Is More”. It featured 30, 10 and even 1 second advertisement spots which resulted in consumers getting frustrated and looking for alternate options of radio. Thus, XM should consider other means of generating revenue in order to justify the products value to consumers.
Below I will discuss some ideas that XM can implement to generate revenue and not run advertisements.
Some ideas which could be used to generate revenue for XM through advertisements could be the broadcast of subscription free stations with advertisements for those who opt not to subscribe for the service. Although this defeats the primary purpose of XM, the basic value offering of crystal clear music regardless of a user’s location would still remain intact. This would restrict the advertisements to national ads but would still create an avenue for great revenue generation. Other ways of expanding this service to on a more regional scale could be the use of localized broadcasts given the fact that a user’s location could be established at any point in time. This would rely on a greater investment from XM but would increase their profitability considerably. Even though I did not calculate what will be the increase of the profits if XM will use this option, I am confident on a long run it can generate revenue.
Talk shows and news programs could be another possible solution. They can use these programs as independent shows and allow limited commercials on those programs since that would provide the necessary breaks for hosts and these consumers would be more tolerant of commercials than music listeners.
A lot of businesses these days use Pandora as non-stop music alternative for their businesses. Pandora charges them additional sum for this service. I think XM could do the same thing by adding fees on large establishments such as lounges, bars, department stores, shopping malls, airports, etc. XM could capitalize on advertisement free music which is important for these big establishments for creating the right atmosphere.

5. What are the implications of the expected launch plans for XM’s rival Sirius?
Since Sirius plans to launch the same product in the market they would have to consider the subscription and device pricing for XM given the fact that this is the only factor involved in differentiating the two products. They would have to consider the first mover advantage as well since, the brand that establishes its name in the industry first would have a clear advantage over its rival. Sirius would have to consider whether it should include advertisements in its broadcast. In order for Sirius to remain competitive it would also have to consider improving its product offering in order to compete with XM in the future. 6. What revenue model should Robert Acker recommend that XM pursue to capture value from satellite radio?
In my understanding, and based on the facts provided in the case, it is important to understand that most likely Sirius will have the first movers advantage, thus XM needs to have a very competitive revenue model to capture market share from Sirius.
Given the high initial investment consumers must commit to, there would be no chance of getting consumers to switch their service provider. Skimming the market by offering the service at a higher price and then reducing it would not be the best option since the number of potential investors at the time of the product launch would be relatively low. Considering the fact that the demand for the service is inelastic since the price of the initial product is relatively high and consumers will not switch for just any reason the subscription fee could be hiked later on without a great loss in repeated purchase behavior. This pricing would also create a niche thus establishing the product in the market and in the minds of consumers.
If Sirius manages to launch its product before XM does, a penetration pricing model would have to be used in order to draw customers in. This would seriously hamper XM’s profitability since the initial investment required to launch the product and setup the infrastructure needed to provide the service would be extremely high. Due to this I have decided to calculate XM’s profitability if they try to enter the market with lower price than Sirius. Based on the case facts Sirius is going to charge %10 monthly fees, thus I have decided to calculate XM’s model with $8 dollar subscription fee. (Exhibit 3)
XM would have to decide whether it is more important to separate themselves from their competition or create a service offering that is only better than terrestrial radio. There would a possibility to capture a more profitable revenue model after the product has penetrated the market and consumer usage is examined. The possibility of providing subscribed, advertisement free radio stations and free radio stations with advertisements is still a possibility. This would also allow the customer base to increase with regard to those consumers who feel that crystal clear nationwide radio would be the only value the service provides. Radio talk shows and news radio stations featuring advertisements could also be an option to explore in the future. 7. Given the business model selected, what should the marketing plan for launching the XM service be? (Communication strategy, channel design, pricing and incentives)
In order to examine the marketing plan best suited to XM a SWOT analysis of the company should be conducted first. (Illustration: Exhibit 7)
Strengths of XM will be the advantage of being the second and last entrant in the market which will allow them to enter and adapt to the market quickly by understanding customer needs.
XM has a number of weaknesses on the other hand, one being the fact that it is a startup company and is introducing new technology into the market. XM would have to deal with building brand name awareness. One way to overcome this issue would be to build strategic relationships in the industry. The other option would be to wait for Sirius to launch its product and spread awareness regarding the technology and capitalize on their advertising efforts but this would mean that XM would have to adopt a market penetration strategy and this could damage the earning potential of the company. Brand awareness could then be built over channels that were already in place. XM could not clearly differentiate itself from Sirius.
XM’s opportunity would be to provide service in a sector which has little alternative making it the 800 pound gorilla. They would have to focus all their competitive marketing efforts on only one competitor. There was also opportunity in the future for XM to expand beyond North America. Another opportunity of XM lies in the fact that there is very limited competition in the market allowing them to focus more on customer service and channel offerings rather than pricing alone. The fact that the government did not regulate satellite services at that time also added to XM’s strength given its ability to broadcast content that would not be available through normal radio airwaves. All music channels would be commercial free. It offered crystal clear audio quality.
The biggest threat to XM would be Sirius radio since both companies are providing a service involving new technology and both are receiving large capital investments. A competitor with great capital would be hard to compete against and would be a huge threat. Another threat would be the Federal Government since growing popularity would increase the scrutiny XM receives from the press. If legislations were passed in order to control and regulate the broadcasts XM might lose a large share of its potential value. Satellite radio would lose great potential in differentiating itself from terrestrial radio.
FM and AM stations will come up with innovative, alternative ways to offset the advantage of XM and Sirius, This is a possible threat because FM and AM stations have long established reputation and it is an industry.
The pricing, channel design, communication strategy and incentives are described in the following points.
The Solution or the Product offered would be advertisement free radio with clear quality and performance. XM would break the bond of immobility and would be delivered to all listeners wherever and whenever they want. XM is superior to terrestrial radio in every way and has been created as an alternative to FM and AM stations and brings the cutting edge of technology to consumers.
The Value or the Price offering follows the subscription model which supports XM’s core business model. Without subscriptions XM would have to advertise which would reduce the differentiation between traditional terrestrial radio and satellite radio. Demand would grow to be more inelastic as the prices of subscriptions and radios fall. Thus, the fall of subscription prices would diminish returns greatly. In order to maintain profitability the price would have to be set at a competitive rate but not necessarily as low as Sirius. The basic subscription price could be set at $10 and could be increased after the demand for the product increases as well. It would also be possible to price certain channels higher based on the demand it receives.
The Place or access offering focuses on the distribution of the product. It would be best to use both direct and indirect channels. Customers could order the product online or visit a retail outlet to purchase it. Selling the product at retails stores would create a niche in the market and it would be important to choose the intermediaries carefully. Given the price of the product it would be wise to capitalize on its perceived brand value. Selling it any and every store would not create the same brand value as maintaining exclusive marketing channels.
The best communication strategy would be through print media and terrestrial radio. It would be possible to get the word out with regard to XM by using online media as well since it would be the tech seekers and innovators who would be the first consumers attracted to the technology. The most critical issue to evaluate would be to examine whether XM should market the company or promote the product instead. Promoting the product would create demand but, the launch of new product offerings would be a hard task. It would be better for the company to promote the product by marketing the company itself. Once the company is positioned, it can better focus on selling its product.
Some of the incentives that could be used to draw in consumers could be first buyer privileges such as lower subscription fees or beta tester offers. Beta tester would be allowed to use the product before its release and creates a greater buzz among innovators. Seasonal rebates on older model receivers could also be used to drive sales. Channel packages could also be made available for those who do not want all the stations XM has to offer. Sports packages or music packages could be marketed to customers.

Exhibit 1 ($10 Subscription fee):

Exhibit 2 ($12 Subscription fee):

Exhibit 3 ($8 Subscription fee):

Exhibit 4 (Price Increase after 2 years):

Exhibit 5 (Price Decrease after 2 years):

Exhibit 6 Roger’s life cycle
Source: directimpactnow.com

Exhibit 7 SWOT analysis