What the Sirius XM Radio Future May Hold

by: Tyler Savery July 31, 2008 | about stocks: SIRI    

Tyler Savery

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Now that the merger between Sirius and XM is complete, it is now time for everyone to focus on what what will happen going forward. For those that listen to SiriusBuzz Radio, you have heard me discuss some of this potential before. This piece will focus on the OEM potential.

Each year 15,000,000 cars are sold in the United states. Some manufacturers have satellite radio as standard equipment, while some are barely getting started with SDARS installations. Up to this point we are familiar with promotional periods, take rates, and OEM subsidies.

The basic structure of satellite radio deals with auto manufacturers involves satellite radio subsidizing the radios as well as installations. In return, the OEMs for the most part pay part of the promotional period subscription. The consumer is exposed to satellite radio for “free” for a period of time. Half of those exposed to the service elect to become self paying subscribers. Those self paying subscribers generate revenue, and a portion of that revenue is shared with the OEM.

One of the problems with this business model is that all of those consumers that elect to forgo satellite radio represent costs for subsidies, etc. and no revenue for either the satellite radio company or the OEM going forward.

What if there were to be a shift in the OEM business model?

What if the price of a five year subscription was built into the price of the car? The first year delivers the standard $12.95 satellite radio service. Years 2 through 5 deliver the “Pick 50 Channels” service at $6.99. This represents a value of about $500.

If that $500 value were put into the price of the car, the consumer would see about a $10 per month difference in their monthly payment month, but would never really equate it with satellite radio. From the perspective of the consumer, the satellite radio simply came with the car.

Benefits of Such a Shift

1. All radios would generate revenue. As things are now, only half generate revenue.

2. Better churn metrics. These will be 5 year subscribers. They will not churn, and the churn metric will improve dramatically.

3. Everyone wins. 100 installs with the current business model gets 50 subscribers paying $12.95 per month for a total monthly revenue of $647.50. Using a general assumption of 40% revenue share, the OEM gets $259 and Sirius XM Radio (SIRI) keeps $388.50. This is virtually a month to month (consumers can churn any time) business model and means that cash flow can vary as projections become more difficult. Assuming these subs stay on for a full 5 years (they wouldn’t), the OEM will collect $15,540. Sirius XM Radio would get $23,310, and this is the best case situation with no churn.

100 installs with the new method gets 100 subscribers that in the first year generate revenue of $1295 per month. Years 2 through 5 generate $699 per month. Using the same 40% revenue share, the OEM gets $518 per month for the first year, and $279.60 per month for years 2 through 5. For the Sirius XM Radio, the first year would bring $777 per month, and years 2 through 5 would be $419.60. Over the five year period, the OEM collects $22,992, a minimum of a 48% improvement over the existing business model. For Sirius and XM the revenues are $29464.80.

4. Consumers who get used to the full lineup can upgrade the service delivering even more revenue.

5. The subscriber numbers will bolster, meaning that Sirius XM radio can charge more for advertising.

This type of business model delivers direct benefits from costs that already exist. The company invests dollars into every radio. To have radios that are not delivering revenue is a waste. If Sirius XM Radio were to establish this type of program, the bottom line would benefit on almost an immediate basis. If OEM installations were to reach 70%, there would be over 10,000,000 new subscribers per year coming out of the OEM channel instead of just 5,000,000. All of this by simply getting the OEM to build the price into the car.

Position: Long Sirius XM.

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This article has 83 comments:

  •  
    Jul 31 07:32 AM
    Good call Tyler, everyone wins if they could get this done. We need to push this idea to Mel and the boys.
    Reply | Link to Comment
  •  
    Jul 31 07:39 AM
    If I had a nickle for every good Idea I've heard about going forward after this merger, It would probably erase my losses from this merger.
    Reply | Link to Comment
  •  
    Jul 31 08:06 AM
    Missing some decimal points in the numbers, but the concept is dead on. Problem I see is that anything 'added' to the price of a car is tough to overcome in a down sales cycle as we are in. The idea has merit, but most likely will not happen now.
    Reply | Link to Comment
  •  
    Jul 31 08:07 AM
    I think Mel will get the company in order now that the merger is closed. As he said on the Howard Stern show yesterday, he will now be able to work on the company. It's going to take time though and I trust he has the stock holders best interest in mind. Lets face it people, he doesn't need this job. He loves to succeed in business and we will benefit.
    Reply | Link to Comment
  •  
    Jul 31 08:14 AM
    Why can't Sirius XM begin to run paid commercials during non-music programs?

    I notice that the radio shows that Sirius XM programs that are direct from cable or AM band all have gaps of time because they need to run paid commercials. When this happens, Sirius XM makes non-paid announcements to fill in those minutes. For example, I listen to CNBC (127) and Fox Business News (128) channels. These two programs regularly run their own paid commercials. Sirius uses this time to make non-paid announcements about their own program schedules. Since these gaps of time must be filled, why not offer commercial advertising time for which payment will be made. Sirius XM could still boast that they offer non commercial music programming and that a certain percentage of their programming is commercial free.
    Reply | Link to Comment
  •  
    Jul 31 08:19 AM
    Good idia I hope mel is listening. But what would be the incentive for The highly stressed auto makers to put out more bucks in a something that would help SIRI more than the themselves.
    Reply | Link to Comment
  •  
    Jul 31 08:43 AM
    What if SIRIUS XM pursued the "Used Car" Dealerships to install satrads in their vehicles? With the economy these days; the majority of people are not buying New vehicles, they are buying second hand vehicles. If Mel would go out and get the second hand marketiers and sign contracts to get them to install satellite radios in these used cars what would the revenues be?

    Just a thought.
    KaptKos
    Reply | Link to Comment
  •  
    Jul 31 08:48 AM
    the problem is that the auto mfrs insist on nothing more than, say, $100 added to the price tag of the car. they're very sensitive about the optics of their customer-facing pricing. cook's made comments on this in the past...xm's been trying this in a way that maintained some semblance of balance (low-er cost for the OEM and acceptable revenue for the carrier), but haven't gotten the kinds of deal terms that enable a large-scale rollout.

    in the end, you have to make the case to the OEM that satellite radio is something that pushes a purchaser more towards one label or trim level more than another...otherwise, why inflate the costs? "if it doesn't increase the propensity to purchase, then i'll just keep the lower costs and maintain the conversion model we have today, thank you..."

    to date, the auto mfrs aren't any different than anyone else...always looking for something for nothing. the game's changed a little...with SIRI acquiring a little more muscle at the negotiating table post merge. they might now be more interested in entertaining higher bundled pricing, but we're still a ways away from bundles being the predominant subscription method in the automotive space.
    Reply | Link to Comment
  •  
    Jul 31 08:49 AM
    Gee Dobie, I can't believe what your saying. Since half the consumers won't voluntarily buy a subscription, lets shove it down their throats and make them pay whether they want it or not. I'm sure the car manfacturers are dying to line up to raise the price of their cars and the monthly payments to help SiriXm radio. You're grabbing at straws to save SiriXm shareholders from the inept, incompetent, lying management teams that brought us to this sorry state. Clayton, Mel, Parsons, and Panero have got rich while the common shareholders have got the shaft. Take a good hard look at the balance sheet these idiots have created. Don't worry. SiriXM as a service will survive and prosper after the inevitable reorganization under Chapter 11 that wipes out existing holders of the common shares. If you've got money in this POS shares, sell and salvage what you can. Reinvest after the reorganization in the new shares and you might make some serious change. This baby is too far gone to survive so quit grabbing at straws. The writings on the wall, great product, shitty stock, thanks to Mel, Howie, and a host of other high level crooks that raped us all.
    Reply | Link to Comment
  •  
    Jul 31 09:16 AM
    Hey Oracle, tell us how you really feel

    ;)

    Reply | Link to Comment
  •  
    Jul 31 09:26 AM
    Very simple solution on the retail new car end. Most dealerships are always offering a cash back incentive, usually $2000. They drop their $2000 offer to $1500 and advertise it as $1500 cash back and FREE sat radio for 5 years.
    Reply | Link to Comment
  •  
    Jul 31 09:31 AM
    Most of the new cars that are actually selling (cheaper & good on gas) have gross profit mark up of about $450-$900 dollars. Adding that much to the price will only squeeze hard pressed car dealers even more.
    Imagine the dealers point of view. Buying a $20K + vehicle from the OEM, then sitting on it for 90 days or more (paying interest after the first 21 days) then making $450 to $900 profit (if you sell it for sticker!). Adding more to the cost is not going to happen.
    Reply | Link to Comment
  •  
    Jul 31 09:45 AM
    We-good idea
    Reply | Link to Comment
  •  
    Jul 31 09:47 AM
    What are the chances that Mel and Co. will file chapter 11? Is this just some more negative press to scare stock holders even more?
    Reply | Link to Comment
  •  
    Jul 31 09:52 AM
    $500 is too much to raise the price. $50 might fly.
    Reply | Link to Comment
  •  
    Jul 31 10:03 AM
    How ridicoulous to devote a whole article on a "What if" scenario. It's as useful as an article devoted to "What if the NAB never opposed the merger in the first place?" Give us some real insight into the future (bad or good) of this company instead of wasting time with telling us what you wish they would do.
    Reply | Link to Comment
  •  
    Jul 31 10:54 AM
    wait until china comes out with this service,then you can kiss sirius xm adios.
    Reply | Link to Comment
  •  
    Jul 31 10:57 AM
    It is a great idea and I'd love it if it were instituted but unfortunatly auto makers aren't the sharpest tools in the shed. I worked for a top end manufacturer and logic and common sense goes right out the window.
    Reply | Link to Comment
  •  
    Jul 31 10:59 AM
    I really hate to say this, but subscription based radio is always going to be a tough sell. I get cable TV and high speed Internet through that same cable. Typically I watch two hours of TV every day made up of a half hour regular news, a half hour business news and one hour of History Channel or something like that. I don't listen to radio two hours every day as my commute is short. Nevertheless I do have a subscription to XM because that is what came in the car and on longer commutes or travel it is a blessing. Many people cannot justify $10 a month for radio alone. The point that I want to make is that for auto manufacturers to embrace satrad it will have to become 100% free advertising supported. Only then will absolutely everybody in the US will demand it and auto manufacturers will make it a standard OEM device like AM-FM radio and a CD player. Some stations, say 20% or so, can remain commercial free but the others will earn their keep. This is the only way that I see satrad being the absolute gangbuster successs that we as investors have hoped and prayed for these past five years. I might be wrong, but the curent business model is sort of leaning towards my thinking. Look at AOL. It held out to the near very end before going free. One last thing, if there's a buyout of Sirius XM then I am convinced that the buyer will do exactly that. There's much more money in advertising than subscriptions could ever bring in.
    Reply | Link to Comment
  •  
    Jul 31 11:02 AM
    @"decoflair"... the whole idea is to not have ANY commercials. having paid commercials on the non-music channels would defeat the purpose of what makes Satrad so great. It is like the people who say they are vegetarians but eat fish.....you are defeating the purpose.
    Reply | Link to Comment
  •  
    Jul 31 11:27 AM
    think of this. if 25% of the siriusxm subscribers bought one extra sub for there friends or family, there would be 4.750 millions additions made.
    if you believe in the product, we need to help grow this. I just bought six subscription for my family and friend.
    Reply | Link to Comment
  •  
    Jul 31 11:36 AM
    paul whats 10 a month I spend that at lunch in a day its well worth it to hear songs on the radio...sinces thats the point and regular radio is all ads/talk....and no music
    Reply | Link to Comment
  •  
    Jul 31 11:38 AM
    People get your head out of the sand. Look at what is really happening. The stock is tanking. Today so far has dropped another 5 cents. Sure Mel gave out good news to the public ,on Howard stern. Who heard it? The people who already own STRD!!! I sold ALL my shares on Monday. This stock has been a real disappointment, owned it for two years! Save the rest of your investment get out!
    Reply | Link to Comment
  •  
    Jul 31 11:54 AM
    Chapter 11-----why if you have been in for 2 years that means you bought in around 4 a share why take that loss they cant file chapter 11 for a while and they are reducing there cost and many people I know are waiting on the new system to come out and there going to buy them so were going to get a real spike in dec and were down 5 cent we were up 6 yesterday at least its starting to stablize the big firms are trying to scare you into selling so they can make more money shorting...you just fell for it and let them win and lost a lot in the prcocess at this point why take a 60% loss let it ride for a year
    Reply | Link to Comment
  •  
    Jul 31 11:55 AM
    Chapter 11 if you sold all your shares monday then what the heck are you doing on a sirius blog on a Thursday? You are obviously not that altruistic and it's obvious you are hoping to buy back or buy again cheaply. Don't waste our time. This stock is down 5 cents so what? Many stocks are down on a bad day. You need think long term and since you are a gambler looking for a quick hit you should go get some help and leave us alone
    Reply | Link to Comment
  •  
    Jul 31 12:03 PM
    good point dougie

    Chapter 11-its been 3 days at least give it a month to get everything in order before you flip out and sell you work for the NAB
    Reply | Link to Comment
  •  
    Jul 31 12:29 PM
    Hi all. Okay, I am a small investor and went to check today and it says that XMSR isn't a listed anymore. Did the name change? How can I track my track?
    Reply | Link to Comment
  •  
    Jul 31 12:31 PM
    User 235553 they took it off you now have 4.6 shars siri per 1 of xmsr
    Reply | Link to Comment
  •  
    Jul 31 12:49 PM
    At first glance, this sounds like a great idea. But the problem is, $10 or not, its a subscription fee, and theres something intrinsically abrasive about that term. Consumers see it as just another bill at the end of the month. Which is why adding it into the auto price seems to be so appealing. But what about customers that just don't really care that much about radio? Or the mass amounts of people buying used cars instead of new? There are a lot of pieces here that still need to be figured out. Subscription revenue can be tricky, which is why I think advertising could be a viable, more concrete option as well. Regardless, SIRI is down again today and sentiment is falling with it (predictwallstreet.com/...). Shareholders are tired of watching the SIRI/XM battle with minimal rewards and just want out at this point. I wanted to be optimistic about this merge, but nothing has lead me to believe so.
    Reply | Link to Comment
  •  
    Jul 31 12:57 PM
    Sounds great but won't work. Car company A (with satrad) becomes 500 more expensive than car company B (without satrad) . The Value Proposition must be made, and hasn't been.

    I propose a split format of advertised radio with pay-for.
    Reply | Link to Comment
  •  
    Jul 31 01:03 PM
    well the systems have been installed in new cars for last couple years so those used cars have the system in there if its all across the board with all cars witch it is almost the consumer would have a choice....but honestly i cant see this happening forcing people to buy it
    Reply | Link to Comment
  •  
    Jul 31 01:12 PM
    Damn, NanG, where the hell have you been? LOL
    Reply | Link to Comment
  •  
    Jul 31 01:15 PM
    I have to concur with Oracle, as this writer is the only other one besides myself who is giving these companies a healthy skeptical and realistic look.

    Mr. Savery's proposal of building five year subscriptions into the price of the car demonstrates a profound level of ignorance of the realities of manufacturing, economics, and politics. Make the vehicle owner buy the service whether they want it or not? Great idea, let's shove the product down their throats since they won't buy it themselves.

    Given the fact that automakers have precious little pricing power to begin with, The Vicar sees this proposal as DOA. Besides, even if this ill-conceived proposal were placed on the table, it would cause a clamor among all other suppliers to the auto companies for price hikes on their own components. Read your Econ 101 textbook Mr. Savery. Your disservice to readers continues with the prolific nonsense that emanates from your column.
    Reply | Link to Comment
  •  
    Jul 31 01:28 PM
    Tyler once again I want to commend you for your consistent excellent articles on Sirius now a merged SiriusXM company. All investors of now SirusXM will in my opinion see their lengthly patience rewarded as time will only tell.
    Reply | Link to Comment