This is a continuation of the Series Looking at the Bear Stearns upgrade of Sirius by Robert Peck. In post 1 of the series I covered the Washington Attitude, post 2 Liquidity, and post 3 Aftermarket Subscribers. This post will focus OEM Subscribers:
Robert Peck outlines the fact that the OEM channel is growing for the satellite radio sector, and that growth should continue in the sector through the 2013 timeframe that his report covers.
Peck noted that Sirius disclosed OEM penetration of about 10% in 2005, 23% in 2006 and an anticipated penetration of 34% in 2007. Some manufacturers have ramped up installations faster than others, and there are various reasons which will be covered later in this piece. Peck estimates that overall OEM penetration for Sirius will be 80% by 2013 which is in line with their estimates for XM’s partner GM.
Peck also notes that Sirius overall market share of the OEM channel to peak at 48% by 2008, and settle to 40% by 2013, as Nissan and Toyota begin more substantial XM installations. I expect Nissan to begin substantial switchover to exclusive XM factory installation for the 2008 model year. Whether the dealer and port install program between Sirius and Nissan will continue has not yet been determined. A recent visit to a Nissan dealership showed a pretty even split between cars with Sirius and Cars with XM, with XM having a better brochure area to highlight the service. At this point, some manufacturers such as Nissan use antennas capable of using either service.
Peck, noting that he is using conservative estimates, assumes a 40% conversion rate for OEM subscribers for both Sirius and XM. In his report Peck notes some subtle differences in how Sirius and XM account for conversion. The methodology of XM’s subscribers from Nissan, Toyota and Hyundai will differ in that they will not be counted as a subscriber until after the promotional period ends, and the consumer decides to keep the service (This issue ties to the fact that there is no revenue from these partners). This will make estimation of conversion rates more difficult as time goes forward.
Peck also outlines revenue share in his report. Revenue share represents the amount of the subscription price that is given back to the OEM as per the contract. In his report, Peck estimates that Sirius’ revenue share will be 25% to DCX and Ford, and 10% to smaller OEM partners. This differs substantially from XM, which Peck estimates will have significantly higher revenue shares due primarily to the GM contract which carries provisions for a revenue share of about 50%.
OEM SAC (Subscriber acquisition Cost) and CPGA (Cost Per Gross Addition) are expected to decline for Sirius during the period of the report. Peck cites that retail SAC is basically identical at this point, but OEM for SAC is higher for Sirius. Peck notes that Sirius OEM chipsets are still a combination of generation 2 and generation 3 while retail is at generation 4. The decline in OEM SAC for Sirius will improve the cash flow metrics of their OEM deals. Peck sees significant reduction in SAC for the OEM channel for Sirius, and SAC falling to levels below XM by 2010 as XM ramps up OEM partners Nissan and Toyota. One aspect Peck did not cover is how the structure of OEM deals impacts the SAC line item. Revenue share for example is not a SAC component.
More Bear Stearns upgrade analysis to come on Sirius Buzz
Position – Long Sirius, Long XM