While consumers may not appreciate a price increase for any product, investors most certainly understand the dynamics of what such an increase means. For Sirius XM, the impact of their recently announced price increases will surely help the bottom line as well as cash flow.
The company will soon be rolling out a $2 per month price increase on their “Family Plan”. In general, the “Family Plan” are additional receivers activated on an account. Typically, satellite radio has seen about 20% of their self paying subscriber base in the Family Plan category. Thus, out of 20 mil. subscribers, there are 4 mil. that would fit into this category and those 4 mil. delivered about $28 mil. in revenue each month. If we were to assume that the price increase would cause a 10% drop (a high estimate in my opinion) in the existing Family Plans, we would see 3.6 mil. Family Plan subs left, each paying $2 more than they were. The price increase would effectively give a $4.4 mil. per month raise to the revenue line of Sirius XM, bringing revenue to $32.4 mil. The fact of the matter is that it would take a subscriber drop of over 20% to make the move a net negative. That kind of backlash simply is unlikely.
Meanwhile, the company is also going to charge for the Internet feed of the service. The $3 per month charge means that subscribers will no longer get to listen over the net unless they pay. This move makes devices like the Logitech Squeezebox, which uses the Internet feed, become a $3 per month device rather than free as in the past. Royalties for on-line listening are higher, so the company will be able to offset some costs, but in real terms, the take rate on the Internet feed may be more than what people initially think. If we assume that 4 million subscribers take up the added cost, then that represents $12 million more in revenue each month.
Combine these two increases, and the company will be seeing an additional $16.4 million in revenue each month. While this may not seem tremendous, it is is nearly $200 million per year added to the coffers. The other item to consider is the cash infusion that will happen for subscribers that will pay early to lock in the lower rates. People look for value. When XM satellite radio did a price increase from $9.99 to $12.95, they allowed subscribers to pay ahead to lock in the lower rate. The response was measurable, and the cash on hand for the company increased. For Sirius XM, with various debt issues, additional cash is a good thing. The company will be getting $7 per month more from my account:
Main Subscription with Best Of XM – $15.95
Second Subscription —————-$6.99
Third Subscription —————— $6.99
Main Subscription with Best Of and Internet – $18.95
Second Subscription ————————–$8.99
Third Subscription —————————-$8.99
The bottom line is that this move by Sirius XM helps the bottom line, and helps the health of the company. It allows the business model to be modified so that the company will appear more attractive not only to potential lenders, but to the street as well. Metrics such as ARPU will see a positive bump. From my own account, I will be paying $7, or $2.33 per account, per moth more than I once was if I opt for the Internet feed. The price increase helps add revenue (and deferred revenue), helps defray costs, and is not so offensive that it will spurn mass cancellations. From a business perspective, this is a positive move for the company.
Position: Long Sirius XM