We are all well aware that Sirius XM is a subscription service. We are also aware that over 16,000,000 Americans are willing to pay for subscriptions themselves. What we don't know is if the current pricing structure of Sirius XM is at that magic point that maximizes potential. Sirius XM is still relatively young as a company, but the service ages almost daily with the amount of services and methods that people can obtain their audio entertainment.
There has been a lot of talk lately about "Cloud Computing". The concept is simple. Your data, in this case videos and music, are stored on the net for streaming from any capable device anywhere. It is a model being considered by iTunes, and is already working with many other services such as MP3Tunes. Simply stated, you no longer need massive amounts of storage to hold your music and videos. With cloud computing, your entertainment is stored elsewhere, and you can access and stream it any time. New smart phones are great, but with all of the apps that users seem to love, space becomes a premium, and users are forced to choose between apps and some music or movies they have on the device. Cloud computing makes that choice easy.
NPD recently polled 3,862 iTunes users and posed a simple question to them. How much would you pay per month to have your iTune library stored for you?
Between 7- and 8 million iTunes users in the U.S. told NPD they would have “strong interest” in one of the paid subscription options. In exchange for paying a monthly fee of $10—the minimum charge that NPD floated—they would want either streaming music or access to their personal music libraries on multiple devices. NPD estimates that there are 50 million iTunes users in the U.S. According to NPD’s music industry research, a model that offers iTunes users free access to their own music libraries would attract in the range of 13 to 15 million subscribers.
It has been rumored that Apple is considering a subscription based model, and if they do, there will certainly be those who would take advantage. For Sirius XM, the numbers could shed light onto what pricing options they may choose to use in the future. As the company moves forward it needs to consider several factors as well as several types of competition. Last Wednesday on the second installment of the Satellite Radio Round Table (a monthly radio show featuring SiriusBuzz, Satellite Radio Playground, and Orbitcast), Ryan Saghir of Orbitcast brought out a very good point. Internet radio has two distinct platforms. The first is the Internet, and the second is the Mobile Internet. The point was a very valid one. People use the Internet differently than they use the Mobile Internet. It is the Mobile Internet that gets all of Sirius XM's Internet competition into the car.
Yes, it is true Sirius XM has apps on most of the major cell networks. However, the apps are more focused to existing subscribers rather than new ones. The average consumer that is not already subscribed to Sirius XM, when looking at music choices for their smart phone, sees Sirius XM with a fee, and Pandora, Slacker and others as free. There is a reason that Pandora already enjoys over 58 million subscribers. Sirius XM has options, but they need to pick a path soon. In my opinion they should give consideration to a three month free trial for new users that download the app. This model would be much like their OEM model, and would give users a chance to see the amount of content that differentiates Sirius XM from the competition. It also gives users ample time to test out and explore the service.
With the NPD survey we see that while most users would enjoy free, there is a substantial number that would pay $10. A few months from now the FCC will open up for comments on whether or not Sirius XM should be allowed to increase rates. The comment period will last six months. After that period the FCC will decide whether or not Sirius XM will have a cap on their price, and perhaps whether or not the issue still needs to be controlled by the FCC. In my opinion, the marketplace, and not the FCC will determine Sirius XM's prices. The company may have to strongly consider going for more volume through slightly lower prices. If they feel they can increase revenue through more aggressive pricing, it may be something they act on. One thing that is certain is that cloud computing will change the landscape and Sirius XM needs to have a strategy in place that will satisfy consumers as well as investors.
Only two years ago I would have argued that Sirius XM had some elasticity in their pricing. Since then the economy has tanked and other services have launched or gained traction. Two years ago Mel Karmazin spoke about price elasticity. I have not heard those words from him in quite some time. During the merger process it was often stated that terrestrial radio provided plenty of competition and that Sirius XM had to "compete against free". The "Free" landscape has gotten bigger, and some of these free services are pretty cool and becoming available in the car via a simple in-dash USB port and a smart phone. Yes AT&T is charging more for data, but the consumer attributes that cost to the cell company, not Pandora, Slacker, or YouTube.
The bottom line is that the issues posed in this article are issues that Sirius XM is already considering (or should be). If they are considering these issues, you can bet that analysts and the street are as well. Isn't it time that you the investor give this issue some hard thinking as well. I know Sirius XM is a great service. The landscape is morphing and investors need to be aware of this.
Position - Long Sirius XM, No Position Apple