The news is making its way around that Sirius XM (NASDAQ:SIRI) will not be increasing prices in 2011, but instead may be raising prices by $2.00 across the board in January of 2012. Here in the short term the stock has taken a hit because many were anticipating a third quarter price increase based on what was stated by Sirius XM CEO Mel Karmazin in the Q1 conference call. The longer term outlook, from the investors perspective, seems promising.
Before we go off counting the new hundreds of millions of dollars that will reach SIRI coffers in 2012, we must look at exactly what was said past and present and understand the context in which it was stated. We must also consider some other factors. Certainly a $2.00 increase across the board would add substantial money to the revenue line. With an anticipated 18 million self paying subscribers and some back of the napkin math $2 represents $36 million more per month to the company.
All of the latest price increase talk relates to statements made by Sirius XM during a proposed law suit settlement that the company was anticipating raising prices by $2 per month:
"Defendant will provide support, through declarations or other evidence, that it has contemplated and made plans for raising the prices of its subscription plans and other charges, including the multi-receiver discount, by $2 per month (without an offsetting reduction in other fees) after the price restriction imposed upon it by the Federal Communications Commission expires on July 28, 2011."
The key word here is "CONTEMPLATED". It is not definitive and the context needs due consideration. Think about it. Sirius XM is trying to settle a lawsuit, and make the settlement rich enough to be acceptable to the opposition. Had they stated they were contemplating raising fees by $1, the proposed value would fall to $90 million instead of $180 million. The class, which essentially constitutes every self paying subscriber and anyone who churned out from July 2008 forward, helps to determine the value of the award. Sirius XM merely needs to show that $2 was a number they discussed. That is easy to do. They likely have contemplated a $1, $2, and even a $3 price hike. A $3 increase seems unrealistic, and $1 not enough to satisfy the opponent. Thus, $2 won the day.
These statements made by Sirius XM are not cast in stone. The company was trying to SELL a law suit settlement. In contrast, when they were trying to SELL the merger the company argued that they were more likely compelled to LOWER prices:
“As discussed above, Applicants have argued, however, that due to the particular nature of demand for satellite radio services, the merged entity will have an incentive instead to lower prices.316? FCC Merger Approval
What we know is that 1. the price cap ends on July 28th, and that the issue of a price cap or possible extension is right now being contemplated by the FCC, 2. the street was anticipating a price hike as early as this year, and 3. that price hike is now off of the table until at least Q1 2012. We also know that some (not all) analysts were anticipating a modest increase (in late 2011 or in 2012), but nothing to the scale of a $2 across the board hike. If the company does actually increase the price by $2, analyst models will be blown out of the water.
A new consideration that needs deeper exploration is that of pre-payment by subscribers. If the company announces an increase, subscribers can opt to pay early (in 2011) and tie themselves into long term contracts at current prices. This will generate huge amounts of cash into the coffers, help mitigate churn, and carry an impact on Sirius XM's financials. If this comes to fruition, all of this will bode well for SIRI throughout 2012, bolstering longer term outlooks.
The new wild card is not whether the company will raise prices, but by how much. To assume $2 is premature. Sirius XM is walking a fine line with pricing. There are many competitors out there that have much less expensive alternatives, and it becomes a game of finding that sweet spot that maximizes revenue, mitigates churn, and attracts new users. The company has some huge advantages in content, but also needs to give the consumer perceived value.
My informed opinion is that investors need to be cautious about a $2 number and that it may be prudent to expect something more along the lines of $1. I may be being conservative, but I think that is far better than banking on an unknown at this point. Remember, in 6 months Mel and Sirius XM can say that they looked at the market and came to a number different than the $2 that is getting so much play today.
Position - Long Sirius XM Radio.