• by Dana Blankenhorn , April 2, 2003

While its business plan doesn't depend on advertising, XM Radio is working hard to make its satellite radio system a valid advertising medium.

"We contracted with Arbitron to make sure they could give us good data on demographics. We used their demographics and subscriber numbers," said Bob Lion, vice president for advertising at XM, based in Washington, D.C.

"We often take the average quarter hour and re-express it against the RADAR population so it becomes like a RADAR rating. The ice may not be thick but it gives nice coverage." Ad prices are then determined on a CPM basis based on these ratings.

XM currently has about 480,000 paid subscribers, said spokesman Chance Patterson, who pay $9.95/month.

Later this month XM will introduce a family plan, so current XM subscribers can buy additional subscriptions at $6.99/month each. Set prices, which were $300-350 last year, are also down to the $200-230 range, and portable sets are now available.

The number of listeners is about 2.5 times higher than the subscriber count, said Lion. Those listeners are spread across 101 channels, 65 of which take advertising, two minutes per hour on music channels, double that on news-talk channels.

With a half-million paid (and maybe 750,000 additional) listeners spread across 24 hours and 100 channels, the ice is very thin indeed. As a result, national advertisers often "are buying groups of channels we customize," said Lion. "Some advertisers are buying clusters of 40-50 channels."

Patterson insisted XM is "on track" to break even, on a cash flow basis, by late 2004, at which point it expects to have 2 million subscribers. General Motors and Honda are both investors in the company and are putting XM-capable radios in many car models, including small cars like the Chevy Cavalier.

Shares in XM's rival Sirius Satellite Radio plunged in value last week after it reported a wider-than-expected loss for the fourth quarter of 2002. XM, meanwhile, closed a round of $475 million in capital from existing shareholders in January.

Over half of XM's music channels are produced by XM, with most of the on-air talent in Washington and New York. The rest, including MTV, CNN, and ESPN, take a share of ad revenue.

XM can sell this entire inventory directly, Lion said, while its partners do cross-media deals that include television and the channels they broadcast on XM.

XM subscribers are balanced geographically, Lion said, between urban and rural, and among regions of the country, unlike satellite television services like DirecTv, which first sold heavily in rural areas beyond the reach of cable.

XM's first retailers were "big box" consumer electronics outfits like Circuit City, but an increasing portion of its sales are through car dealers, Lion said. There is a skew toward male listeners, with long-haul truckers among the "early adopter" groups, Lion said, but this is declining with increased dealer sales.

The XM business plan is to be fully profitable at about 3 million subscribers, with advertising's share of the revenue stream growing with the subscriber count.

"We're one of the great growth stories in radio," Lion concluded. "I think people are very encouraged, and many new advertisers are coming on board. At this time last year we had few listeners. Now people are becoming comfortable with us as a partner in marketing."