1. 11 Business-to-Business Marketing Media Markets Haas School of Business UC Berkeley Fall 2008 Week 12 Zsolt Katona

2. 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

3. 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)

4. 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 BetterXM 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%

5. 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

6. 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” -- 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…

7. XM Financials RevenueNet LossCPGA 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 RevenueNet LossCPGA 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

8. 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)

9. Satellite Radio Diffusion Pattern DateTotal XM SIRI 01 Q428 0 02 Q177760 02 Q21401373 02 Q321320212 02 Q439036030 03 Q155148368 03 Q2797692105 03 Q31079930150 03 Q416211360261 04 Q120341682352 04 Q225812100480 04 Q331782516662 04 Q4434332001143 05 Q1521937701449 05 Q2621544001815 05 Q3720950352174 05 Q4925059333317 06 Q11058065024078 06 Q21157869004678 06 Q31230571865119 06 Q41365476296025 07 Q11448179006581 07 Q21539382507143 07 Q31623785707667 07 Q41742091008320

10. XM and Sirius Merger Announced February 19 th 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

11. 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 TV Consumers Advertisers Payment (free content)Payment Attention XM Radio Consumers Advertisers Payment (less then w/o advertising) Payment Attention Subsidy Content

12. 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 Platform Side 1 Side 2

13. Examples MarketSide 1Side 2Providers Web SearchSearchersAdvertisersGoogle, Yahoo PC OSConsumersApplication developers Microsoft, Apple Online recruitmentJob seekersEmployersMonster, CareerBuilder HMOsPatientsDoctorsKaiser, WellPoint Video GamesPlayersDevelopersPS, Xbox, Wii Universal Product CodeProduct suppliersRetailersNCR, Symbol Tech. Credit CardsCardholdersMerchantsVisa, MasterCard Travel ReservationTravelersAirlinesOrbitz, Travelocity Shopping mallsShoppers (Buyers)Retailers (Sellers)Next week

14. Key Challanges How to price? Which side to subsidize? Winner-takes-all dynamics Envelopment

15. Pricing Take into account cross-side network effects Subsidize one side Which one? –Price sensitivity –Quality sensitivity –Variable cost –Brand value

16. Pricing Price Demand Side 1Side 2

17. Winner-Takes-All Dynamics How many platforms can the market support? User switching costs Network effects No strong preference for special features

18. Envelopment Multiplatform bundles as threats (convergence) Sell or Change business model or Sue

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