Rebates And Their Impact On Metrics
Many analysts have issued reports and opinions on Sirius Satellite Radio, and for the most part, they cite that the quarter was as expected with a few surprises that were positive and a few that were negative. On common theme was that ARPU (average Revenue per user) was worse than expected and SAC (subscriber acquisition cost) was better than expected.
In many ways, rebates play a function in these metrics.
The costs associated with rebates get assigned to a particular metric based upon what the rebate is for. If a rebate is tied to the hardware it is assigned to SAC. If a rebate is tied to the service, it is assigned to ARPU.
By Example:
1) A satellite radio receiver priced at $100 carries a $30 rebate price break. In this situation the $30 cost is a subscriber acquisition cost.
2) A satellite receiver priced at $100 carries a $30 rebate/price break if you subscribe for 6 months. The cost of this $30 rebate can be assigned to either SAC or ARPU. The company determines where they are issuing a price break or rebating the consumer. If the company is giving a price break on the hardware, they assign it to SAC. If the company is rebating the service, they assign it to ARPU.
3) A satellite receiver is priced at $100 and the consumer gets 3 months free if they sign up for a year. This type of rebate is assigned to the service, and the company reports the rebate against ARPU.
In Sirius’ case, rebates in Q4 were assigned to ARPU. This has been the practice of Sirius for quite some time. In Q4 the impact of rebates was (.59) on ARPU. This brought that metric down substantially. SAC on the other hand, which was $90 for the quarter was better than many expected.
The key take away here is that certain costs can impact various metrics depending on how they are assigned. The rebates are a cost and they impact the company. The key is knowing how these impacts are reflected in the metrics reported.
Position – Long Sirius
>>> 1) A satellite radio receiver priced at $100 carries a $30 rebate. In this situation the $30 cost is a subscriber acquisition cost.
>>> 2) A satellite receiver priced at $100 carries a $30 rebate if you subscribe for 6 months. The cost of this $30 rebate can be assigned to either SAC or ARPU.
These remarks are inconsistent with SIRI’s 10Qs as well as with GAAP and SEC accounting standards, which require rebates to be taken as a debit against revenue. I find no reference to rebates in SIRI’s description of Subscriber Acquisition Costs. On this subject, the 10Q states:
“As required by Emerging Issues Task Force (“EITF”) No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products),” an estimate of mail-in rebates that are paid by us directly to subscribers is recorded as a reduction to revenue in the period the subscriber activates our service. For certain mail-in rebate promotions, a subscriber must remain active for a specified period of time to be considered eligible. In those instances, such estimate is recorded as a reduction to revenue over the required activation period. We estimate the effects of mail-in rebates based on actual take-rates for rebate incentives offered in prior periods, adjusted as deemed necessary based on take-rate data available at the time. In subsequent periods, estimates are adjusted when necessary.”
This would be the proper treatment according to GAAP, and there is no option to include such items in any expense line as you’re suggesting.
Frontmed….
Of course rebates are a debit against revenue. That is not the function of the article. The rebates are handled correctly according to GAAP standards in GAAP metrics
The function of the article is how they are treated in non GAAP metrics such as SAC or ARPU.
It is really a nuance of where these companies want to show the impact on their non-GAAP metrics. They can structure rebates/discounts to make the impact go to one metric or another. Sirius has been very consistent on how they report rebates.
A price cut for example, will carry the same cost impact as a rebate, but would be paid to the retailer and passed on to the consumer. This type of activity would likely be categorized as a SAC/marketing cost.
As you know, GAAP does not dictate SAC and ARPU.
>> >As you know, GAAP does not dictate SAC and ARPU.
SAC is a statistic derived from subscriber acquisition costs, an expense. As such, it cannot include rebates, which is at odds with what you said.
ARPU is a statistic that is derived from revenue, and would be obviously affected by rebates.
The overriding point of your post is that Sirius is “deciding” to do something about which it has no prerogative.
I was just correcting your rather blatantly incorrect post.
Frontmed….
You are obviously going into a level of detail that was not intended.
If a satellite radio is given away so long as a subscriber buys 6 months of service, the costs typically have been reported in SAC. This is how XM was treating this in 2005 for example when they were combating the “Stern Effect”.
I did not state anywhere that Sirius was “deciding” where to account for allocation. That decision is made when they determine how they are going to rebate/discount/give away products or services.
If they decide give away free radios, you will see the impact in SAC. If they decide to give away free service you will see the impact in ARPU. If they discount hardware at the retail level you will see the impact in SAC. If they decide to pay out cash to consumers you will see it in ARPU.
This is all pretty simple stuff.
What you said was:
1) A satellite radio receiver priced at $100 carries a $30 rebate. In this situation the $30 cost is a subscriber acquisition cost.
>>> 2) A satellite receiver priced at $100 carries a $30 rebate if you subscribe for 6 months. The cost of this $30 rebate can be assigned to either SAC or ARPU.
I merely pointed out that you do NOT see rebates in SAC which is totally contrary to what you said. A simple, “I was wrong” will do.
It looks like FrontMed has you there Tyler.
Frontmed…John….
I changed the article to state “price break/rebate” so as to give more clarity.
the point is that the company can structure a price reduction to appear in either metric.
Bring down the cost of a receiver and depending how it is structured it can impact one or the other. Frontmed is well aware of this.
He states that rebates do not appear in SAC as if I were stating that they do. I was not. Price breaks happen, and are often counted against SAC, as exampled in some promotions XM conducted in 2005. It is not spelled out as a “rebate” but indeed changes the price to a consumer, and to the consumer the net effect is the same.
By example. Had Sirius conducted across the board price breaks on receivers wothout categorizing it as a rebate, the costs would have been a SAC metric. The end result to the consumer is the same.
SAC and ARPU are not GAAP metrics.
Vary well stated Tyler. I also understand how difficult it must be to have someone so critical of each word. You do a fine job Tyler.