Managerial Decision Making Process in Sirius XM - Case Study Example

 Managerial Decision Making Process Introduction The following report is an analysis of the managerial decisions that have been made by SIRIUS XM from time to time in response of the changes in market or change in the competitive environment. The company provides satellite radio service mainly to various cars in the country. Since the satellite services are provided from the satellites that are located normally over 20000 miles. In different countries the radio services are provided in different bands. The satellite radio services are provided by the company over the satellites and are provided upon subscription and commercial free. The satellite radio covers a wide area of broadcasting and covers nationwide broadcast. Since the technology allows radio to be broadcasted to all over the nation. The following report analyzes the position of the company and the various decisions that the company has made over time. The report in particular analyzes the economic impact of the environment on the organization. Through the report the managerial decisions that are taken by the company from time to time in respect t of the change in business environment of the company is analyzed. The purpose of the report is to find out if the company has taken any wrong managerial decision in response to change of the economic environment and whether some of the decisions that the company took could be changed for better. Analysis and Findings Brief history of operation of Company Sirius XM in 2013 completed reorganization of the company and as a component of the corporate reorganization Sirius was replaced by holding. Holdings reinstated Sirius XM and formed the new publicly detained corporation of Sirius XM. Sirius XM is the wholly owned ancillary of Sirius XM holdings and the company has no other subsidiary. Sirius XM holdings have only one wholly owned subsidiary and the wholly owned company has no other companies other than the subsidiary Sirius XM. The company broadcasts music, entertainment, sports, comedy, news, talk, weather channels, and traffic and infotainment services. The services are provided by the company through two satellite radio systems on the basis of subscription fees. It is possible for the customers to receive music and other services through channels and also added features such as Sirius XM on demand and My SXM over the internet radio services and also includes applications for mobile devices. The primary source of revenue is the subscription fees that are paid by the customers of the company who subscribes to the services that are provided by the company on monthly, Quarterly, semi annually and yearly basis (SiriusXm Holdings Inc, 2015). The company also derives revenue through activation and other fees. The company also earns revenue through the sale of advertisements on selected non music channels, direct selling of accessories and satellite radios and some other services. Year 2010 2011 2012 2013 2014 Particulars Revenue 2,816,992 3,014,524 3,402,040 3,799,095 4,181,095 Net income 43,055 426,961 3,472,702 377,215 493,241 Long term Debt 3,021,763 3,012,351 2,430,986 3,093,821 4,493,863 Equity 207,636 704,145 4,039,565 2,745,742 1,309,837 Assets 7,383,086 7,495,996 9,054,843 8,844,780 8,375,509 Debt/ Equity 15 4 1 1 3 Return on equity 21% 61% 86% 14% 38% Return on Assets 1% 6% 38% 4% 6% Assets turnover 38% 40% 38% 43% 50% Sources of Risk and Uncertainty There are several risk factors that are faced by the company. Competition that is faced by the company is from the radio and other audio services. Other radio service that are offered by traditional radio stations are competitors of the radio services that are offered by the company. Any other company which provides similar services ore can provide similar services in future is a competitor to the company. Another risk factor of the company is its ability to attract subscribers in the future which in turn depends on a large no. of other issues. The business of the company is associated with the auto industry as the systems are installed in the cars of the major auto manufacturers so any downward movement in the sales of cars will be reflected on the decreasing sales of the company. This is evident when the company posted a net profit for the first time in the year of 2009. The posting of profit in the year 2009 was due to the increase in sales of the cars in the United States. The other risk factor for the business arises from the fact of general economic conditions. Other factor that can serve as risk for the business is the consumer protection laws. The government rules and regulations and the technical failure of the satellites can also serve as risk factors for the business. The company has high debt levels which results in high debt by equity ratio for the company which is an obvious risk factor for the business. Government regulations There are several rules and regulations that are issued by the government which the company has to comply. Majority of the rules that the company has to comply are issued by FCC. As the company is a privately owned company it has to follow several rules that are issued by the FCC and the communication act of 1934. The several provisions of the act which the company has to comply are related to licenses related to the satellite system, Prevention of interference of other radio frequencies, ands complying with the rules that have been issued by FCC in this field. When the company had tried to venture into the market and start the business of satellite radio, it had to face several furors by traditional ground based radio companies. The company had to spend a lot of energy and time in lobbying for the launch of satellite radio business. When Sirius decided to merge with XM it had to face severe criticisms over the fact that it was going on to operate in a monopoly business. The company had to spend a lot of time again on lobbying to prove the fact that there were services that were being offered by the traditional radio stations which could serve as competition to the business. Inputs that are used The company is engaged in the production of online radio services that are sold to the customers either directly or sold to the car manufacturers. The customers of the company have to buy the subscription in order to enjoy radio entertainment uninterrupted from all over the country. The company has to acquire several inputs in order to provide the required services to the customers of the company. The company does not manufacture radios but have a list of authorized manufacturers and distributors in order to produce and distribute the radios. The company has licensed the technology to several electronics manufacturers so that the companies can develop, manufacture and then distribute the radios under certain brands. In order to facilitate the sale of the radios the company sometimes subsidizes the manufacturing of the radios so that the hardware cost of the radio that the consumer has to pay is reduced. Another crucial input cost is the payment of the royalty cost. The dicey issue in this matter is the fact that if the costs are too high then digital broadcasters will not be able to provide the public with much access to the music (Villasenor, 2012). On the other hand if the rates are too low then are artists are deprived from receiving a fair return for the effort that they put in. Another issue is the fact that it is found that the royalty rates are inconsistent across platforms. For example it is found that internet based radio companies pay over 60% of the revenues that they ear in royalty payments where as companies like Sirius XM pays only 8% of the revenue. There have been suggestions by some experts that the royalty fees should be same across all platforms but this is fundamentally flawed. In suggesting that the royalty fees should be same across all the platforms, platform cost is not considered however this is incorrect from the economic point of view. The common view of the mathematical representation of the production process is given by the cobb-Douglas function which gives the relation between the outputs Q and input K and L. Here K is capital and L is labor (Loc, 2011). The function is given by If either K or L is 0 outputs is 0, so platform costs cannot be ignored. Introduction of new products The company Sirius was the first to introduce satellite based radio services and thus had the first mover advantage in this field. The company is showing an increase in the subscription rates over the years. This is driven by the fact that Sirius XM has been able to get a sustained rate of new vehicle conversion and this is proving to be a major factor in driving the subscription rates. The company is also pushing into the used car segments in order to drive the revenue. The company is also focusing on factors like unique programming in order to make its internet based subscription model more appealing. The company is also increasing the focus on used car segments market. These factors together are contributing to the rising revenuer of the company. Pricing decisions The subscription prices and the monthly packages that the customers have are showing an increase year on year. This is due to the fact that the since the merger of the companies Sirius and XM the company has decided to pass on the royalty fees to the customers or the subscribers of the packages (Trefis Team, 2014). It is found that the company has annually passed on the royalty fees to the customers of the company. However this has not impacted on the number of subscribers of the company. The no. of subscriber of the company has increased over the years. The subscription of the country has been added by 1.4 million in the year 2015 as compared to the increase of 1.2 million in the previous years (Dulaney, 2015). Thus it is found that the demand for the goods is not dependent on the increase in price of the products. Profitability of the company It is found that the net income of the company has increased over the years. It is also found that the return on assets and the Asset turnover the company has increased over the years. It is found that economy and the competition plays a major role in determining the profitability of the company. This is because when the economy is booming it is found that the sales of the car increases in the economy (Trefis Team, 2013). As the sales of the cars increases so does the increase in the satellite based radio system of the company also increases as these systems are fitted in the new cars. The competition and the existence of the substitute product products also have an effect on the sales of satellite radio by the company. Competitive environment The company faces increased competition from the traditional radio services which provide their services for free. The other competitors of the company are the HD radio services, online radio services etc. The presence of competitors’ results in the fact that the company has to Endeavour to provide services that are improved and better versions than that is provided by the competitors of the company. It also results in the fact that the company cannot increase the prices of the subscription indefinitely. Market structure of the company It is stated that the company operates in the monopoly market since there are no other competitors in the satellite radio and this results in the fact that the company has resulted in the fact that the company has indulged in price setting for the company. The company can be said be enjoying monopoly power due to the fact that the technology of the company has not been replicated by the competitors of the company (Douglas, 2012). The satellite distribution system that was created by the company prevents the entry of competitors in the market. However this does not mean that the company sets whatever prices that it wants because there are other players in the market or in other words there are substitute goods in the market and the consumers can switch to them. Non- price competitive strategy The company is focusing on increase in the conversion rate of new vehicle, and push into the used car segment to boost the sales of the company. The factor which will determine the growing revenue of the company the robust subscription based model for the company. The company has also been adding unique programming and making its internet based model more attractive for customers in order to compete with the other companies besides focusing on the price points. Conclusion and recommendation It is found that over the course of the operation the company has taken several strategic decisions that have reflected upon the status of the economy and the nature of the competition that the company faces. One of the most strategically important decisions was to merge the two companies Sirius and XM. Another important decision for the company is to launch the services of the company for the used car segments and to reiterate the focus of the company for new car segments by strengthening the relationship with the car makers that exist in the market. However, one major decision for the company that can be said to be bad decision for the company is the increase in the debt levels of the company. The return on equity for the company is also showing a decreasing trend. Another strategic decision that the company seems to have got wrong is the fact that the sales of the company is tied with the sales of cars. The company must focus on increasing the stand alone sales of its radios irrespective of the sales of cars. References Dulaney, C. (2015). Sirius XM boosts revenue, subscriber outlook. Retrieved from: http://www.wsj.com/articles/sirius-xm-boosts-revenue-subscriber-outlook-1430224796 Douglas, E. (2012). Managerial Economics. New York: Pearson Custom Publishing. Loc. (2011). Determination of rates and terms for pre-existing subscription and satellite digital audio radio services. Retrieved from: http://www.loc.gov/crb/proceedings/2011-1/rps/sxm_vol_3.pdf SiriusXm Holdings Inc. (2015). Form 10k. Retrieved from: http://files.shareholder.com/downloads/SIRI/234846194x0xS908937-15-3/908937/filing.pdf Trefis Team. (2013). Sirius XM's results signal more growth opportunities ahead. Retrieved from: http://www.forbes.com/sites/greatspeculations/2013/02/08/sirius-xms-results-signal-more-growth-opportunities-ahead/ Trefis Team. (2014). Sirius xm beats estimates as subscriber growth picks up. Retrieved from: http://www.forbes.com/sites/greatspeculations/2014/07/31/sirius-xm-beats-estimates-as-subscriber-growth-picks-up/ Villasenor, J. (2012). Digital music broadcast royalties: the case for a level playing field. Retrieved from: http://www.brookings.edu/~/media/research/files/papers/2012/8/07%20music%20royalties%20technology%20villasenor/cti_19_villasenor.pdf Read More