Sirius-XM: On track for 50m subs?

Last week the John Malone-controlled pay-radio operator unveiled record subscriber numbers as well as its best churn figures (1.8 per cent/month) for the past 5 years.

The results also coincided with CEO Mel Karmazin stepping down (he went officially on Feb 1st) and being replaced by interim CEO Jim Mayer, who has a hard act to follow. Karmazin had taken the broadcaster from near-bankruptcy to its present 23.9 million subs, with subscription revenues for the year growing 13 per cent to $3.4 billion and free cashflow up 71 per cent to $709 million. But the dream for Siriux-XM is for much greater subscriber levels.

Sirius-XM is historically healthy when the American auto-trade is healthy, and the 2013 model year is doing well. January saw 15.3 million cars, SUVs and trucks sold (up 14 per cent on Jan 2012) in the USA, and almost all of the auto-brands supply vehicles with Sirius-XM built-in and with a ‘free’ 6 or 12 month subscription to the service.

Sirius-XM’s challenge has always been to convert a fair share of that number, and to hold onto the end result. At last week’s analyst call the company renewed its formal guidance for this year, but that’s just the first step. The future, say Sirius-watchers, is for the company to see the installed base balloon from today’s 24 million to anything between 50 -150 million over the next 10 years.

The variable number is largely down to uncertainty over the impact of telematics into the auto-trade equation. More and more ‘smart’ cars are rolling off the production line. These vehicles increasingly have the ability to easily connect smart-phones and thus make internet radio (whether from a tethered iPhone or wirelessly) a reality.

Also impacting these guesstimates is what happens to radio subscribers when they sell their cars and buy a new model. As the older vehicles trickle down into the second-hand car market do these buyers re-activate the subscription? When money is tight is the $199 per annum too costly?  Sirius-XM’s Jim Mayer last week also admitted what is common sense, that the lower price (new) cars convert at lower levels than higher-value models.

But Sirius-XM is addressing these problems. Two years ago they had just 103 second-hand car dealers in their sights, and being able to offer subscriptions to buyers. Now that number tops 8000. Sirius-XM expects around 1.5 million ‘new’ subscribers to emerge from these new dealer-relationships.  Sirius-XM’s CFO David Frear said on the conference call: “[As to] used cars, I’d say that it’s still sort of early days on individual metrics, and I know it sounds like we’ve got a lot of transactions, and we do. But we do like to see these things sort of trend over time. Overall profitability on used cards is going to be certainly as good as the new car profitability, the single biggest reason being that we don’t have to reinvest in the radio. So reacquiring revenue generating subscriptions on previously installed radios is an immensely profitable business for us. I think it will be a little while before we’re able to tease out sort of sustained differences in churn profile. So you just have to stay tuned for that.”

There is one extra worry for Sirius-XM, and it concerns ARPU. A close look at the numbers shows that monthly ARPU for Q4 went down from Q3’s $12.14 to Q4’s $12.12. Now, admittedly two cents isn’t a lot of cash, but the previous four quarters also saw healthy rises. It would seem that Sirius-XM has been discounting to hold onto threatened cancellations.  CFO David Frear said there had been no change in the company’s discounting practices.

Sirius-XM’s challenge is to eliminate more of last year’s 7,610,259 million deactivations (the numbers taken from the company’s Form 10K filing to the SEC), and to build on the 9,617,771 gross activations.

Another large question is what might John Malone’s long-term plan be for Sirius-XM? Will he export the model to Europe onto his now huge cable assets?  Might he use the (albeit fading) WorldSpace service which he owns?  Watch this space!

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