Subscription Radio Cannot Work Unless . . .

NEW YORK (TheStreet) -- Sirius XM (SIRI) serves as an exception to the rule. Subscription-based radio -- as well as television -- cannot work unless you have two things going for you:

1. Premium pricing; and

2. Exclusive or otherwise compelling content.

Generally speaking, you need these two things.

Satellite radio has them and stands out because it targets a highly coveted niche audience, comprised largely of 35-to-64-year old affluent males. Sirius runs programming that appeals to this less fickle set and can count on them to pay every month, even after a price hike here or there.

In recent years, Sirius has hit users with two price increases -- one artificial, one direct -- and subscriber growth did not miss a beat. On the downside, satellite radio faces similar problems as AM radio did while it was dying -- it could end up stuck with a dead user base if it doesn't find ways to embrace younger audiences through digital channels, a better mix of content and different pricing schemes that include the freemium model.

Lots of folks scoff at free, but there's something to be said for the model, particularly if you cannot pull off No. 1 and cannot max out on No. 2.

Free, traditional radio still dominates overall radio listening -- blowing away both satellite and Pandora ( P). It should come as no surprise that the alternative service with the largest audience, relative to traditional radio, is Pandora, not Sirius, not Spotify.

These conversations must focus on not only the business as it hums today (Sirius wins hands down in that regard), but on the future of the business in a changing world. We're not even close to being in a place with dust firmly settled.

You can listen to practically any piece of music you are ever going to think of -- free and on-demand -- on the Internet. YouTube continues to emerge as a resource for this, especially among young people. The free possibilities are just about endless.

If you expect enough people to pay for your service on a monthly basis so that it can work as a viable long-term business, you absolutely need something miles beyond distinct and head and shoulders above excellent.

It's all about scale. I have hit that theme hard over the last couple weeks because all others refuse to address it. Maybe they don't think it's important. Or, like the music labels, maybe they're smoking the pipe dream that large numbers of people will pay money each month to listen to music they can get for free elsewhere.

Look at subscription-based services. The ones that thrive -- i.e., they're not losing money, bleeding cash or otherwise hurting -- charge premium prices, have exclusive and ultra-compelling content or both.

Big success stories such as Time Warner's ( TWX) HBO and Liberty Media's ( LMCA) Starz and Encore have cable and satellite companies by the short hairs. For all intents and purposes, they run in a different world.

Satellite and cable companies maintain viable businesses because, somewhat ironically, they get fleeced by the content owners. Cable and satellite turns around and charges premium rates to subscribers because, contrary to popular meme, cord-cutting -- at least at this point -- is not viable for most viewers, who want live sports programming, first-run television shows and movies and other exclusive content.

Even if content goes digital -- think HBO GO and the myriad TV Everywhere ventures -- you need a traditional subscription (or subscriptions) to access it.

Subscription-based businesses without a stranglehold on premium content run at a loss, burn cash and get fleeced even worse than cable and satellite. Think Netflix ( NFLX). Think Spotify.

All day long on Twitter, I see the media regurgitate headline after headline -- Spotify announces it has over 5 million paid subscribers globally, 1 million paid in U.S., 20 million total users -- as if that's a good thing. It sounds awesome, but none of these stories talk about scale.

Pandora has that ability because -- and primarily because -- it focuses on the free model. Scoff at it all you want, it works. It's been working for quite some time. When you assess free- vs. subscription-based models in radio and television, the scale problem becomes obvious, specifically if you are not offering exclusive/premium content to a niche audience.

Try to go mainstream with content available everywhere else and you'll go nowhere charging for your product.

In fact, you're better off charging more. If people love Netflix and Spotify so much, they'll pay more for these services just like the Sirius XM user.

As Netflix improves the quality of its content -- and it has big time over the last 12-18 months -- it needs to look at raising prices. I would rather have seven subscribers at $20 a month than 10 at $10 a month.

And, don't forget, if Netflix charges more, programmers will be much more willing to license it better, more premium content, quite possibly on an exclusive basis. We'll see plenty more deals like the Disney ( DIS) one. Of course, Netflix cannot afford to cut these deals without a major boost in revenue. It all circles back.

--Written by Rocco Pendola in Santa Monica, Calif.

Rocco Pendola is TheStreet's Director of Social Media. Pendola's daily contributions to TheStreet frequently appear on CNBC and at various top online properties, such as Forbes.

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