THE BLOG
07/01/2008 04:19 pm ET Updated May 25, 2011

Sirius and XM Disintermediated

In spite of the fact that Sirius Satellite Radio CEO Mel Karmazin painted an upbeat financial picture for 2009 if the proposed merger with XM Satellite Radio gets approved by the FCC, these two (or one) companies will soon be disintermediated because of nationwide wireless access to the Internet.

The last week of June, Chrysler announced it will offer wireless Internet access in all of its 2009 models, as reported in Jim Carnegie's Radio Business Report. RBR reports the Chrysler system "...dubbed UConnect Web, would be the first such technology from any automaker. Chrysler is hoping that providing drivers access to the information superhighway will set it apart from competitors. Needless to say, the system will be able to stream audio."

According to RBR:

Chrysler is not the first company to offer Internet access in cars. Avis Rent A Car introduced Avis Connect in January 2007. Like UConnect Web, Avis Connect (which costs $10.95 a day) operates on the 3G network using a cellular-based signal.

UConnect Web is an extension of the company's UConnect system, which provides Bluetooth connectivity for cellphones and MP3 player integration with the car stereo. Rival Ford provides similar services, but without Web access, in its popular Sync system.

With the added Internet connectivity, drivers and passengers will be able to get such devices as laptop computers and Nintendo Wii consoles online. As to what users can download while in the car, Chrysler's Leung said anything was fair game.

RBR also makes the following observation:

Radio shouldn't be quite as alarmed as satellite radio at this development, because as folks choose to spend disposable income on subscriptions for car internet vs. car satellite service, they will likely choose internet, because streaming Internet audio would be free with the package. And remember, someone listening to a streaming, terrestrial radio station a thousand miles away in their car would be credited in the online ratings and that station would benefit with online ad dollars.

If Chrysler does it, can Toyota, General Motors, Ford, Honda, and all the other car makers be far behind?

XM and Sirius charge subscribers $12.95 a month for over a hundred commercial-free music channels that they program and for commercial-laden news/talk/sports audio channels such as CNN News and ESPN. XM has Major League Baseball and Sirius has NFL Football plus its biggest draw, potty mouth Howard Stern.

Soon, with free Internet access, people in cars will be able to access every radio station in the world that streams audio, plus Internet audio and music services such as Pandora.com and Last.fm. Baseball will be available via MLB.com for $10 a year or free from radio stations that have an audio stream of the games, and the same with NFL games.

All of this means that content providers (music, sports, talk, comedy, and news) will be able to go directly to their consumers and bypass (disintermediate) traditional distribution channels such as radio stations, satellite radio, television stations, and cable systems sooner rather than later. The disintermediation of the main-stream, traditional media has begun.

There are several implications: One is that content will be more important than ever. Another is that creators of content (artists, writers, musicians, performers, etc.) can now sell their creations directly to their audience without having to pay rent and fees to middlemen such as wholesalers, agents, and distributors. Another is that marketing in the disintermediated world will be more important than ever -- getting the message out about creative content to widely dispersed and niche (long-tail) audiences will be more difficult and require innovative solutions. Audience choice will be much greater as people learn that they can pull exactly the content they want from the Web and individualize it rather than having it pushed at them in homogenized, distributor controlled bundles. And, trillions of dollars of investment in buggy-whip distribution assets will be lost as radio towers are turned into cell phone towers and transmitting equipment is scrapped.

Terrestrial radio stations owners seem to be doing a good job of repurposing their content and streaming it on the Web in creative, user-controlled ways. Television networks are learning to stream their content on the Web and to create new, Web-friendly content. But what is satellite radio doing besides seeing the future through merger-tinted rose colored glasses? If Sirius and XM are to survive, they must begin streaming their content on the Internet. They can make their content password protected for subscribers for the time being, but be ready to make it free if the merger is not approved.

Sirius and XM will have to do what AOL did when it began losing dial-up subscribers by the hundreds of thousands each quarter, switch to a free, ad-supported model. Time Warner cannot sell AOL at anywhere near its $20 billion valuation because that valuation was based on a revenue model that produced over $1 billion in subscriber revenue, which is now sinking faster than real estate prices. The same will happen to Sirius and XM if they don't act now.

Even though Sirius and XM can probably not get as much money for advertising on the Web as they do now for their satellite distributed programming, their market would increase substantially by having their content available world-wide, not just within the footprint of their satellite signals, which is primarily the United States.

Just think, you might eventually be able to get Howard Stern free all over the world in a variety of languages. Howard would love that, but Sirius investors will have to wait a long time to get their money back, if they ever do.