Merger watchers and sector followers have likely noticed that when Ibiquity files a comment or speaks to the FCC, they take no official stance on the merger. This seems odd in that HD radio stations are terrestrial radio stations that have adopted a new digital format. Traditionally, most, if not all, terrestrial radio stations as well as the National Association of Broadcasters have come out strongly against the merger. So why does Ibiquity take a neutral stance?
They Want Something Out Of The Deal
Ibiquity wants two specific things to happen if the merger goes through. First they want a requirement that all SDARS receivers be equipped with HD Radio. Second they want all exclusive SDARS OEM deals to be undone. These are concessions that Ibiquity would not have a prayer of getting if the merger does not go through. Thus, the merger between Sirius and XM has a possibility of benefiting Ibiquity if it is passed with these two stipulations.
Inclusion Into SDARS Receivers
Satellite radio launched prior to HD Radio. Consumers have already bought SDARS receivers. Those that have done this are not likely to opt to have two PNP units installed in their cars. HD Radio has already seen the retail channel soften for such audio entertainment devices. They are in effect third to market (after XM and Sirius), where those that were most likely to adopt the service have already adopted satellite radio. This makes retailing of plug and play units more difficult. Had Ibiquity launched prior to satellite, the tables would have been turned, and it would be SDARS trying to play catch up.
If Ibiquity were able to pull off this requirement, they would in effect gain a market position with a core group of consumers that have already become SDARS loyalists. HD would in effect get to "piggy-back" on all of the past and future efforts of SDARS. Ibiquity has made no mention that they would subsidize such an operation, and likely are in hopes that they would not have to.
In the OEM channel receivers, Ibiquity would benefit even more. They would effectively piggyback onto the existing SDARS deals without having to pony up the subsidy dollars or revenue share that satellite radio already offers. Ibiquity points out that a J.D. Power and Associates 2005 U.S. Automotive Emerging Technologies Study(sm) found that HD Radio is a highly attractive feature that consumers would like to see in their new vehicles based on their estimated market prices. And they found that consumers prefer to pay a one-time fee (for a new radio) rather than a continuous monthly subscription for satellite radio.
To date Ibiquity is trying to sell the OEM world that consumers want HD Radio and that the benefit to the OEM is that they (the OEM) will be ahead of their competition by offering it as an option. Compare this to the satellite radio deals which offer subsidies and revenue share, and it is little wonder that OEM's are aligning themselves with satellite radio over HD Radio. HD is offering a theoretical competitive edge that may only last a year. Satellite is offering revenue share that lasts for the life of the car. In a battle between theory and cash, the cash will almost always win. If HD radio were to gain this inclusion, they would effectively never have to come up with cash in order to get into the car world en mass.
An interesting side note can be garnered from the JD Powers survey linked above, as it specifically deals with satellite radio and HD radio as competition:
The study measures consumer familiarity, interest and purchase intent for emerging automotive technologies both before and after an estimated market value is revealed. While consumer interest in new technologies typically drops after a price point is revealed, relative interest in premium surround sound and HD radio actually improves dramatically after the market price is provided. Premium surround sound, which ranks sixth in consumer interest before the price is revealed, moves to second after consumers learn its market price ($400). With a realistic market price of just $150, the HD radio-compatible receiver jumps from 16th in initial interest to third after pricing is revealed.
"What is truly surprising is that among those interested in equipping their next new vehicle with the premium surround sound feature at $400, nearly 80 percent of those are willing to pay $800 for a branded system," said Lawrence Wu, senior director of automotive emerging technologies at J.D. Power and Associates. "This suggests that automakers and audio suppliers could add value to their products for consumers, while increasing their returns. While we have seen the availability of branded sound systems increase the past few years, it’s evident from this research that there is sufficient consumer demand to warrant equipping a much broader vehicle segment base."
Consumers still express more interest in satellite radio than HD radio prior to the introduction of price, but interest falls below HD radio at the realistic market price of $12.95 per month for satellite radio. The study shows that more consumers are willing to pay a one-time fee as opposed to paying monthly for the service.
"Even though satellite radio is at an advantage over HD radio by offering commercial-free content and coast-to-coast coverage, interest in HD radio is higher than satellite radio after the introduction of price," said Wu. "In general, consumers would rather pay once for a feature and have been reluctant to embrace subscription fees. This is evident in the trade-off exercise in this year’s study in which almost twice as many consumers chose lifetime (life of vehicle) satellite radio with a one-time $499 subscription fee compared to a one-year option."
The JD Powers Survey lends credence to the lifetime subscription offer that Sirius or the OEM's themselves have utilized with some OEM manufacturers. Mercury has made such an offer at two points over the past two years. Getting twice the subscribers from such a program has its merits, especially considering that a subsidy is paid no matter what.
The other interesting aspect of the survey is that HD radio had clearly developed a strategy to compete with satellite radio. The survey was conducted in 2005. Did the HD Radio strategy fail, or has it simply been late in developing to a point where it can be used? Clearly the study seems to indicate that HD Radio had an appeal to people in a way that gave HD Radio an advantage over satellite. In my opinion, the timeframe in which it has taken HD Radio to get off of the ground has been the biggest enemy of HD Radio. Proliferation on a large scale is the solution. The only way this happens is by large subsidies and residual cash for the OEM....something which HD Radio seems reluctant to offer....OR.....Inclusion on a large scale in a product that is already being offered. Thus, the request for inclusion, and thus the neutral stance on the merger if inclusion is part of the equation.
VOIDING EXCLUSIVE OEM CONTRACTS
If HD Radio were to get the first request as a concession, then the natural question is why this requirement is even needed. On its face this would seem to be logical, but if you think deeper, other potential reasons may well exist. Data, Navigation, and other non audio services exist. HD Radio wants a piece of this pie as well. Exclusive Data provider agreements, Exclusive backseat television agreements, and even giving OEM's access to bandwidth of the SDARS spectrum are all components that are deeper considerations. By voiding these contracts, HD Radio and Ibiquity can get their foot into the door with other services.
The fact of the matter is that the main product is radio, and there is nothing standing in the way of HD radio from making deals with auto manufacturers. In fact they have already done so with several including Ford, Hyundai, and BMW.
HD Radio's problem is that they need to get consumers to drive demand, but without getting their product in cars, there is no experience from which the consumer has to issue such a demand. Cash would solve the problem, but Ibiquity seems reluctant to give up a share of ad revenue that would translate into residual income for the OEM.
In my opinion, HD Radio is all for the merger if they get their concessions. The position they have taken is a pipe dream, but stranger things have happened. The HD Radio Alliance states that they feel that HD Radio is not yet strong enough to be considered competition for satellite radio. Is this accurate? By all measures, the requests being made by Ibiquity would seem to indicate that Ibiquity is either clear competition, or walking a slow path to obscurity. I do not believe that HD Radio will fade away. I believe it is indeed competitive with satellite. The J.D. Powers survey data is indicative that it is a viable substitute for consumers. This seems to be a case of the competition seeking the ultimate shortcut in catching up after a slow launch.
Position - Long Sirius, XM