In the wake of the GM bankruptcy, investors in satellite radio suddenly have become concerned about what impact will befall Sirius XM. Analysts such as Scott Moritz of TheStreet.com say that this "can't be good". In a video Moritz spoke briefly about the situation, but seems to have only highlighted one side of the story. I submit that the news is a mixed bag, and that both short and long term impacts need to be considered.
Moritz looked at the impact from a "subscriber numbers" standpoint, saying, "They are already going to lose 1.6 million subscribers this year, and that was before the GM bankruptcy announcement."
The problem with looking at only part of the picture is that there is a whole dynamic that gets missed. Yes, GM is Sirius biggest supplier of subscribers, but they are also a huge expense to the company. Each subscriber requires an investment by Sirius XM radio. This investment, referred to as Subscriber Acquisition Cost, is an expense to the company in the short term, in hopes that that investment will pay for itself in the long term. In the best situation, with higher end cars, it takes about a year for the company to recoup their SAC cost. Lower end cars can approach the three year mark to reach break even.
So while a slowdown in sales will hurt the sub number, a slow down in production will mean less costs. For a company like Sirius XM, getting to a point of better cash flow is an important factor, and less costs help that happen. Moritz states that the company's guidance did not consider a GM bankruptcy, but I think that he is wrong even there. The company quite clearly stated that they gave guidance based on 9 million car sales this year. The possibility of GM bankruptcy had to have been a consideration even months ago.
GM cars are not counted as subs until a car is sold. Dealer lots across the country are going to be closed. Those dealerships have been on news cast after news cast stating that the deals on GM brand cars will be attractive. This could actually serve to boost GM sales in the short term, and thus the impact to sub numbers (from a GM standpoint) may not be as bleak as it would have been. Longer term, a slowed production means fewer SDARS capable cars in the months ahead.
The measure of Sirius XM is no longer in subs though. Now, more than ever before, the bottom line is what everyone is looking at. Fewer installations will help the bottom line because those 1 to 3 year SAC investments will be fewer. This keeps cash in the coffers of Sirius XM, and that, in this economy, is a good thing.
Thus, the GM news is actually a mixed bag. It just depends on your perspective.
Position - Long Sirius XM, No Position GM