11

Business-to-Business MarketingMedia Markets

Haas School of BusinessUC Berkeley

Fall 2008Week 12

Zsolt Katona

2

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

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)

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 won’t mind limited ads, will be possible to change)– initial research 3 months after launch:

AM/FM Much Better

AM/FM Better

The Same

XM Better XM Clearly Better

Rating of XM Compared to Regular Radio

1% 6% 93%

XM Has Many More

XM Has More

About the Same

XM Has Fewer

XM Has Far Fewer

Commercials on XM and Regular Radio

2% 13% 85%

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

XM vs. SIRIUSAt 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”-- didn’t always mention that advertising was limited, didn’t 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 couldn’t 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…

XM FinancialsRevenue Net Loss CPGA

2002 $20.2m $495.0m $425

2003 $91.8m $584.5m $137

2004 $244.4m $642.4m $100

2005 $503m $666.7m $109

2006 $933.4m $718.9m $108

2007 $1136.5m $682m $121

Revenue Net Loss CPGA

2002 $805k $313.1m

2003 $12.9m $437.5m $293

2004 $66.9m $456.2m $177

2005 $242.2m $567.5m $139

2006 $637.2m $1.1b $114

2007 $922.1m $565.3m $101

Sirius Financials

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)

Satellite Radio Diffusion PatternDate Total XM SIRI

01 Q4 28 28 0

02 Q1 77 76 0

02 Q2 140 137 3

02 Q3 213 202 12

02 Q4 390 360 30

03 Q1 551 483 68

03 Q2 797 692 105

03 Q3 1079 930 150

03 Q4 1621 1360 261

04 Q1 2034 1682 352

04 Q2 2581 2100 480

04 Q3 3178 2516 662

04 Q4 4343 3200 1143

05 Q1 5219 3770 1449

05 Q2 6215 4400 1815

05 Q3 7209 5035 2174

05 Q4 9250 5933 3317

06 Q1 10580 6502 4078

06 Q2 11578 6900 4678

06 Q3 12305 7186 5119

06 Q4 13654 7629 6025

07 Q1 14481 7900 6581

07 Q2 15393 8250 7143

07 Q3 16237 8570 7667

07 Q4 17420 9100 8320

Cumulative Satellite Radio Subscribers (in '000s)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

01 Q

4

02 Q

2

02 Q

4

03 Q

2

03 Q

4

04 Q

2

04 Q

4

05 Q

2

05 Q

4

06 Q

2

06 Q

4

07 Q

2

07 Q

4

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

Media Markets

• 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

Broadcast TVConsumers Advertisers

Payment (free content) Payment

Attention Attention

XM RadioConsumers Advertisers

Payment (less then w/o advertising)

Payment

Attention AttentionSubsidy

Content

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

PlatformSide 1 Side 2

Examples

Market Side 1 Side 2 Providers

Web Search Searchers Advertisers Google, Yahoo

PC OS Consumers Application developers

Microsoft, Apple

Online recruitment Job seekers Employers Monster, CareerBuilder

HMOs Patients Doctors Kaiser, WellPoint

Video Games Players Developers PS, Xbox, Wii

Universal Product Code Product suppliers Retailers NCR, Symbol Tech.

Credit Cards Cardholders Merchants Visa, MasterCard

Travel Reservation Travelers Airlines Orbitz, Travelocity

Shopping malls Shoppers (Buyers) Retailers (Sellers) Next week

Key Challanges

• How to price? Which side to subsidize?

• Winner-takes-all dynamics

• Envelopment

Pricing

• Take into account cross-side network effects

• Subsidize one side

• Which one?– Price sensitivity– Quality sensitivity– Variable cost– Brand value

Pricing

Price Price

Dem

and

Dem

and

Side 1 Side 2

Winner-Takes-All Dynamics

• How many platforms can the market support?

• User switching costs

• Network effects

• No strong preference for special features

Envelopment

• Multiplatform bundles as threats (convergence)

• Sell or

• Change business model or

• Sue

Summary

• Two-sided markets are common in high-tech industries

• Usually one side is B2B, but

• Cannot be treated separately from B2C side