Before 1930, zero percent of all automobiles had radios. In 1930 Paul Galvin, owner of Galvin Manufacturing, Inc., which built certain electrical components for automobiles, developed the first AM auto radio, consisting of a box about the size of a carry-on suitcase, a control console mounted on the dashboard, and a speaker, large enough to put the woofer in your $10,000 audio system to shame. He installed this equipment in his personal auto and demonstrated it at a trade show in Atlantic City. The attendees were impressed, and over the next few years, Galvin’s technicians toured the country installing “Motorola’s” in private autos. Within a few years, auto radios were an option from every auto manufacturer, and when auto production resumed after World War II, nearly every car built had an AM radio installed.
In the 1960’s the first FM radios, or more correctly AM/FM radios were added to auto option lists. Initial acceptance was slow, but by 1980 essentially every auto radio was AM/FM.
In the 1970’s auto sound systems had no music reproduction (e.g. tape) player. 8 Track cartridge players, and soon thereafter 4 Track Cassette players were introduced and by the mid 1980’s nearly every auto sound system had a “tape” player.
In the 1990’s CD players were introduced, and again, after relatively slow acceptance, eventually, by 2000 reached the point that they were standard equipment with nearly every auto sound system.
In the early part of the new millennium, Sirius Radio and XM Radio introduced the concept of satellite broadcast, targeted to the auto sound system. Despite the epic battle between these two, very well capitalized new ventures, acceptance was slow, and turf battles between the two providers left potential customers confused, and reluctant to commit to one system or the other. Fortunately, by 2008, both companies, and the U.S. Government (both the Federal Communications Commission and the Justice Department) agreed that the only way for satellite radio as a broad based consumer service to survive was to permit the two companies to merge.
Acceptance of the “paid” satellite radio subscription, having been previously targeted primarily to “premium” priced automobiles, began to find acceptance across the full spectrum of auto manufacturers. The combination of the two companies removed purchase decision obstacles from most consumers, as the channel list merged, and a “complete” service was available with the satellite radio from any auto manufacturer.
Now, in late 2010, SiriusXM subscribers number close to 20,000,000, and nearly every auto sold in the US has SiriusXM radio either as standard feature, or alternatively as a very low cost option, except maybe Porsche, who still has the nerve to charge $750 for the SiriusXM option. Of course, I’ve yet to see a 2010 or 2011 Porsche on any dealer’s lot that does not have that option installed already.
In most cases, the delivery of a new auto with SiriusXM installed includes an initial trial subscription, and one of SiriusXM’s greatest challenges is to get essentially all of those trials to turn into revenue paying customers. However, even with a new car sales rate as low as 12 Million units per year, and even with a conversion rate 80% of trial subscribers, SiriusXM should have a subscriber count close to 100 Million by 2020.
What about revenue? Right now SiriusXM is seeing gross revenue of only about $120/year per subscriber. Since subscription fees are much more than $10/month, where is the rest of the revenue? It is “free trial” subscribers, and in the subscribers that have been offered very aggressive incentives to keep their radios active. Over time, these incentives will not be needed as user’s perception of Satellite radio becomes more like consumer perception of Cable/Satellite TV. If someone tells you that they have no cable or satellite system at home, you probably think that they are lying!
By 2020, it is more likely that gross revenue per subscriber will exceed $200 per year (current dollars) and not even close to the current value of $120. So by 2020, total revenue of $20 Billion would not be unrealistic. And this does not even include revenue from equipment sales (e.g. home receivers), from special “pay per hear” broadcasts, from auxiliary services (such as weather, routing, traffic, etc), or most of all, from additional advertising revenue from non-commercial free channels, which, if SiriusXM is smart, will be made available to anyone who has the receiver but chooses not to subscribe to the paid service.
What kind of profit could be generated from a $20 Billion revenue stream? Cost of revenue (which I guess is heavily royalty and talent based) certainly shouldn’t increase by more than 25 or 30 cents for each new revenue dollar. Let’s assume 30 cents. Thus, revenue increase of $17 Billion (from today’s revenue levels) should increase the cost of revenue by about $5 Billion. R&D might increase from about $120 Million today to $400 Million. SG&A, currently running at about 20% of revenue should drop to no more than 12% of revenue, or about $2.4 Billion. All other expenses, currently running about 10% of revenue should drop to no more than 5% of revenue, or about $1 Billion. So let’s look at the top level income statement, circa 2020 for SiriusXM:
Dollar amounts in Millions:
Cost of Revenue $ 6,400
Gross Profit $13,600
R&D $ 400
All Other $1,000
By 2020, Sirius XM should be generating nearly $10 Billion in cash flow before interest and taxes. Now for the really beautiful part of the SiriusXM business. Unlike cable TV, unlike internet services, unlike wireless phone services, unlike terrestrial wireless entertainment services, new subscribers to SiriusXM services use no additional resources from the Sirius system. The same radio signals that serve 1000 subscribers will serve 1,000,000 subscribers. And the same radio signals that serve today’s 20 Million subscribers, will in principle, serve 2020’s 100 Million subscribers. In essence, given the large capital investment in today’s SiriusXM systems, the future capital cost per subscriber is very low. Most future capital costs will be used to add additional services, facilities, and programs, each designed to generate additional revenue. It is beyond the scope of this brief analysis to estimate SiriusXM future capital needs. But suffice it to say, that a company with an EBITA of nearly $10 Billion per year should have no trouble financing additional future capital needs. Even if today’s interest expense of about $300 M per year were to increase to $1 Billion per year, the SiriusXM operating profit by 2010 should be on the order of $9 Billion, or about $2.30 per currently existing SiriusXM share.
To get from today’s nearly break even operating income, to an operating income of $2.30 per share, in a relatively smooth trajectory over the next 10 years, would represent a profit growth rate of more than 30% per year. What might the stock market pay for a company growing profits at more than 30% a year, with a huge, relatively captive customer base? Twelve time earnings, twenty, maybe forty? Even at twenty times earnings, SiriusXM shares in 2020 should be selling for at least $46 per share. Spread evenly (which of course it never would happen that way) means that the shares should increase an average of $5 per share per year between 2010 and 2020. More likely, once the investing public realizes what a gem SiriusXM really is, the multiple will probably jump to 50 or 100 times soon, and taper off toward a multiple of 15 or 20 times by 2020.
Like Galvin’s first “Motorola”, SiriusXM was, in most ways was ahead of its time. But, it’s time has come. Now, if customer services could only be made as good the programming.
Disclosure: This is not really Tyler's take; Tyler has nothing to do with it. Just posted that title so curious SB readers would click the link on the main page. The above is actually a post made at another site by someone named "waterinfo" and then copied to the September Stock Thread by SB member "Boomer" . . . Boomer's post then retitled, repackaged and copied here in its own thread.