BusinesstoBusiness Marketing Media Markets

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Business-to-Business MarketingMedia Markets

• Haas School of Business
• UC Berkeley
• Fall 2008
• Week 12
• Zsolt Katona

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Overview

• Week 12
• Media Markets (Two-sided markets)
• Second Life
• Week 13
• B2B E-Marketplaces
• Industrat Decision 9
• Week 14
• Online Marketing and B2B
• Industrat Decision 10
• Week 15
• Pricing in Industrial Markets

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XM Satellite Radio What Happened?

• Launched in September 2001 first operational
  satellite service (beat Sirius)
• Hugh Panero I am proud to announce that after
  being fully national for only 56 days, XM has
  over 30k subscribers will people pay for radio?
  The answer is a resounding YES.
• 2001 Product of the Year (Fortune), Invention
  of the Year (Time)
• XM fastest-selling audio product in 20 years
  (based on first 3 months)

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XM Satellite Radio What Happened (cont.)

• XM launched with a 10 subscription price
  (combination of competitive pressure
  advertising analysis)
• XM aired with ads
• 4-6 minutes on about half of music channels
  (35 channels with ads)
• 7-9 minutes on talk and third-party
  programming, like CNN
• (XM believed other value propositions were
  far more important than completely ad free,
  consumers wont mind limited ads, will be
  possible to change) initial research 3 months
  after launch

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XM vs. SIRIUS

• Sirius launched in February of 2002
• 100 commercial free on all music channels
• Service price 12.95 a month (3 more than XM!
  More consistent with market research analysis)
• XM secured GM, Sirius secured Ford and
  DaimlerChrysler
• Sirius puts emphasis on retailers particularly
  Best Buy and Circuit City

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XM vs. SIRIUS

• At retail the sales rep had no easy way to
  communicate the difference between XM and Sirius
  other than
• -- XM is cheaper on subscription but you have
  the ads while Sirius is ad free and costs you 3
  bucks more
• -- didnt always mention that advertising was
  limited, didnt always remember the nuanced
  details, no real incentive to differentiate
• -- both had 100 channels (and impossible for the
  salesperson to articulate a specific difference)
• -- XM couldnt afford the discussion to be framed
  that way
• In February of 2004 XM announces Commercial
  free on all music channels!
• In April of 2005 XM announces that it is raising
  the price of its subscription to 12.95 a month
  at that point, no difference in revenue model

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XM Financials
Sirius Financials
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Advertising Revenue on Non-Music Channels

• In 2006
• XM 35.3m
• Sirius 31m

• In 2007
• XM 39.2m
• Sirius 39.95m
• (corresponds to roughly 40cents per month per
  subscriber)

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Satellite Radio Diffusion Pattern
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XM and Sirius Merger

• Announced February 19th 2007 needs government
  FCC approval
• When gave licenses in 1997 stipulated One
  licensee will not be permitted to acquire control
  of the other remaining one
• Merger approved in July, 2008. New name Sirius
  XM Radio
• Regulators require price freeze for three years
  24 channels turned over to noncommercial and
  minority programming a la carte channel
  subscriptions and cross-offering of packages
• Best of both subscription for 16.99
• Working on a dual-receiver

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Media Markets
Attention
Attention
Broadcast TV
Advertisers
Consumers
Payment (free content)
Payment

• Media firms buy consumers attention by offering
  free content
• Low content prices attract more eyeballs, which
  can be sold to advertisers
• Too many commercials may annoy viewers

Subsidy
Attention
Attention
XM Radio
Advertisers
Consumers
Content
Payment
Payment (less then w/o advertising)
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Two-Sided Markets

• Platform the product or service that brings
  together two markets
• More demand on one side stimulates (sometimes
  hurts) demand on the other side
• XM Radio
• Side 1 Subscribers
• Side 2 Advertisers
• Typical scenario One side is B2C, other is B2B

Side 2
Platform
Side 1
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Examples
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Key Challanges

• How to price? Which side to subsidize?
• Winner-takes-all dynamics
• Envelopment

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Pricing

• Take into account cross-side network effects
• Subsidize one side
• Which one?
• Price sensitivity
• Quality sensitivity
• Variable cost
• Brand value

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Pricing
Side 1
Side 2
Demand
Demand
Price
Price
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Winner-Takes-All Dynamics

• How many platforms can the market support?
• User switching costs
• Network effects
• No strong preference for special features

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Envelopment

• Multiplatform bundles as threats (convergence)
• Sell or
• Change business model or
• Sue

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Summary

• Two-sided markets are common in high-tech
  industries
• Usually one side is B2B, but
• Cannot be treated separately from B2C side