It’s tempting to blame the downturn for all the bad news hitting tech in 2009, but downturns have a healthy impact too. They burn away the brush of businesses that looked good enough on paper to keep raising money, but never quite worked in reality. Consider two stories in the news today: The possible bankruptcy of Sirius XM Radio in the next 24 hours and the looming ouster of its chief executive Mel Karmazin, and the slumping DVD sales that the so-called “winning” BluRay format is doing little to boost.
Stick with me here: I realize satellite radio and DVDs are very different businesses. But if you look at how Sirius XM, Howard Stern, Sony, Hollywood studios and all their various fans and stakeholders got into this mess, you’ll see two things in common that are causing more problems for their continued viability than waning consumer spending and locked-up credit markets.
1. Both businesses were too confident that trends of the past would repeat in the Web age. Go back to 2004 and read the press both Howard Stern and Karmazin did when they bet their futures on and bolstered their bank accounts with fat Sirius deals. Nearly every time either was asked whether people wanted to pay for a device and pay a radio subscription fee on top of that, they countered that the same doubts were there at the beginning of cable TV and that the same thing that premium cable did to broadcast was happening with radio. Similarly, during the Blu-ray/HD-DVD wars, there was a blanket assumption that this battle was clearly VHS/Beta, Part Two and hence the winner would inherit a big multi-year-growth market. Beware new technologies whose arguments are rooted in something that happened decades ago.
Clearly, in both cases, the creative-destructive power of the Web was vastly underestimated. In a Web world, there are not only far fewer people willing to pay for content, but they’re willing to pay far less than in the past. Put another way, free distribution of popular podcasts like Diggnation or on-demand episodes of “The Office” for $1 were never forces with which cable TV and VHS had to reckon.
Similarly, the satellite radio and Blu-ray/HD-DVD wars also missed a substantial shift in how people want to consume media: They’d rather rent than own. The reason my husband and I have a bookshelf filled with (dusty, still shrink-wrapped) DVDs was the early lure of having our favorite movies at our fingertips. Now, we essentially have that via a combination of TiVo with a DVD burner, Vudu, Netflix, iTunes, and Comcast OnDemand without cluttering up our living room.
2. Both spent way too much money on the assumption that past-was-prologue. Even given the above point, it’s possible there were still good businesses to be built out of satellite radio and a next generation DVD standard. There are plenty of rabid audio/video geeks and early adopters, and at just .43 cents a day satellite radio is hardly an unaffordable luxury. And, as Karmazin points out, satellite radio customers and revenues are growing in double digits. The problem was the stakeholders in both visions believed so much in the assumptions described above that they spent billions blindly driving towards this El Dorado market, utterly ignoring their balance sheets along the way.
Sirius and XM acted like 1999-era companies filing for IPOs, and racking up a combined $3.25 billion in debt, before ever turning a profit or proving exactly what the spoils of this shift from terrestrial radio to satellite would be. It’s a rookie mistake when it comes to new tech markets: Getting more wrapped up with beating a rival before your market really exists, or a classic case of putting the cart before the horse. See: Stern’s $500 Million deal with Sirius and Toshiba paying studios like Paramount and DreamWorks a reported $150 million to offer movies in HD-DVD exclusively. These were only a few of the high-priced deals struck on all sides of the two wars. Contrast that to a rivalry like MySpace and Facebook. Sure there’s some good-natured sparring. But there’s also a realization that social networking is in its early days, and the bigger problem is figuring out the business model, not killing one another. Market before market-share.
The result? Sirius and Sony find themselves in 2009 with combined billions of dollars in debt and shareholder cash wasted, scorched earth all around them and two victors of a still uncertain market standing and wobbly. And, for both Karmazin and Sony’s Sir Howard Stringer, uncertainty about their future employment.
For those who believe that tech always leads the U.S. out of recessions, there’s a lesson from the meltdown and billions lost in the war for satellite radio and next-generation DVDs: Beware of the old adage that history repeats itself. Because if markets are truly innovating, patterns of the past only hold up so much.