The May 2010 auto sales are in the books, and the month fared better than most analysts thought. The big winners for the month were the U.S. Auto makers, but the import brands also had predominately positive numbers as well. Only a select few brands saw sales go down. Overall 1.1 million vehicles were sold in May. The real question for satellite radio investors is what it all means to Sirius XM.
Before going into some specific analysis, it is important to review how the OEM channel contributes subscribers to satellite radio. The different manufactures all have their own deals with satellite radio. There are several types of subscribers that are delivered, and understanding this mix is important as readers view the auto sales data:
Most people tend to think that all new cars equipped with satellite radio come with a promotional subscription. In many ways this is true, but only from the consumer standpoint. From the standpoint of counting subscribers, some new cars equipped with satellite radio are not promotional subscribers. When Sirius XM details their subscriber base they use two main categories. Self Paying Subscribers and Promotional Subscribers. Promotional subscribers in this context are subscriptions for which the company is receiving revenue (be it revenue or deferred revenue). This would include OEM's such as GM, Ford, Chrysler, Mercedes Benz, BMW, Volkswagen, Audi. Most of these OEM's were the early adopters of satellite radio, and the company shares revenue with them. These companies pay for the promotional subscription and get rewarded via revenue share if the subscriber converts to self paying.
Promotional subscriptions that are not counted as subscribers during the trial period include makers such as Toyota, Nissan, and Hyundai. A buyer of these cars gets "free" satellite radio for a trial period (usually 3 months), but will not become any type of counted subscriber unless they become self paying. Think of these as the Sirius XM investing in a radio installation (SAC - subscriber acquisition cost), in hopes that free service for 3 months will convince the end user to elect to become a self paying subscriber. These types will never show up in churn because they are not counted as subscribers.
SUBSCRIBER AT PRODUCTION
Among the promotional subscriptions that are counted as subscribers are what is sometimes referred to as parking lot subscriptions. They gained this name because even though a car may not have been purchased yet, it is still being counted as a subscription. This is the case for Ford and Chrysler. In their deal, Sirius XM pays a subsidy for the radio installation. Once the radio is installed on the production line Ford and GM buy a subscription from Sirius XM. With Chrysler it is a 1 year subscription. With Ford it is typically 6 months. For Sirius XM this represents deferred revenue. The benefits are that the company has a "dedicated" subscription for a long period of time, and during the period from production to sale, these satellite radios are churn proof. With Ford taking a bigger and bigger market share, and announcing production increases, the subscriber roles will benefit. To better understand impacts, every Ford that was sold in May was already counted as a subscriber prior to the sale. In some cases, a car that sold in May could have already been on the subscriber roles for 3 months. Thus with these OEM's, it is production and not sales that trigger the subscription.
SUBSCRIBER AT SALE
This type of subscriber applies to deals like the one with GM. The satellite radio is installed, and the promotional subscription starts at the time the car is sold. This impacts of this deal are shown directly each month in the car sales for that given month. A GM sold in May counts as a subscriber in May. This is perhaps the "purest" way to count subscriptions, and makes tracking easier. The news loves to report sales on a monthly basis, but production is far less reported.
SUBSCRIBER AFTER TRIAL
This is where Toyota, Nissan, Hyundai, etc. are counted. After the free 3 month trial a consumer faces a choice point. If they choose to become a self paying subscriber they are counted in the roles. If they decline the service, they are not counted. It is all as simple as that. Thus, a Toyota sold in May can not possibly become a subscriber until 3 months from now. This is a trailing effect.
Now that the basis of subscriptions has been outlined we want to understand the mix. The balance of this mix is what gives consistency in subscriber growth. I have stated for years that 1,000,000 car sales each month is the magic number. In fact, it has been my mantra when discussing the OEM channel. Getting into deeper detail, the mix of manufacturers and their market share is also important. This additional detail is important now because of the way the market share is shifting.
To better discuss this I will term the promotional subscribers into three categories. LEADING (i.e. Ford), POINT OF SALE (i.e. GM), and TRAILING (i.e. Toyota) as I discuss this section of the May auto sales. Looking at the May sales, it is interesting to note that Toyota's slump and Ford's resurgence have effectively shifted the balance slightly into the LEADING category. Having a balance for Sirius XM works well in the long term. This balance gives the company insulation and security in the ups and downs of the OEM channel. With the shift to a heavier weight on the LEADING category there is shorter term benefit to Sirius XM in terms of subscriber numbers. Understanding this dynamic is important because this imbalance should continue next month, and as production increases, the longer term promotional subscribers will outweigh the shorter term ones. On the flip side, the trailing subscriber benefit we would see three months from now is lower than it might have otherwise been. Overall the trade off is giving Sirius XM longer term subscribers, which is good, but the additional factor is that Ford gets a revenue share while Toyota does not.
Some additional interesting facts from May's auto sales rest with the top ten sellers.
Ford F - Series PU ------ 49,858 - LEADING
Chevrolet Silverado PU -- 33,690 - POINT OF SALE
Toyota Camry / Solara -- 29,295 - TRAILING
Honda Civic -------------28,458 - POINT OF SALE
Honda Accord -----------27,835 - POINT OF SALE
Toyota Corolla / Matrix --26,953 - TRAILING
Ford Fusion -------------22,381 - LEADING
Nissan Altima -----------21,950 - TRAILING
Chevrolet Malibu --------21,722 - POINT OF SALE
Hyundai Sonata ---------21,195 - TRAILING
In the top ten category there is a distinct shift and the LEADING category has fewer participants, but the sales of the Ford Pick-Up truck far outweighs everyone else by a healthy margin. The importance of seeing the top sellers rests in the 60% penetration rate that Sirius XM has in the OEM channel. Sirius XM seems to do best in mid to top tier cars, as well as trucks, SUV's and cross overs. Looking at the top 10 sellers, they are all good candidates for high satellite radio penetration. Sirius XM stated that they are focusing carefully on the penetration rate by not only brand, but model. By understanding the market, they can increase conversion rate. As an investor, readers who better understand the OEM channel are armed with knowledge that is usable and meaningful.
Stay tuned to SiriusBuzz for in depth analysis on the OEM channel that goes above and beyond.
Position - Long Sirius XM Radio