With the financial sector on a roller coaster ride, concerns over credit debt and liquidity have impacted companies across the board regardless of sector. While the Federal Government has stepped in to bail out AIG, it could represent the latest of "lines in the sand" drawn to try to avert a crisis, that may or may not work. Concerns over Washington Mutual, Wachovia and others still loom, so the roller coaster ride is not over quite yet.
Meanwhile, in the midst of all of this we have Sirius XM Radio that has $300 million in converts in February, and then additional debt coming later in 2009. In total, the company would like to finance about $1 billion in debt. In current markets that represents challenges for Sirius XM radio. While they may have some offers, they are likely at rates that the company would rather not have.
So what viable solutions are available?
Currently Sirius XM Radio has about 19,000,000 subscribers. The company, at this point, should give consideration to any and all avenues to generate enough cash from that subscriber base to put themselves in a position to either better negotiate with lenders, or better yet pay down that debt.
As we are all aware, the "Best Of" programming will be available on October 5th. This programming offers the ability for current Sirius subscribers to access some additional programming from the XM service, and XM subscribers to receive Sirius programming. The charge for this premium service is $4.99 per month.
Let's assume that 10% of the subscriber base thinks that "Best Of" is a great idea. Why not offer a pre-launch of "Best Of" right away at a discounted rate in exchange for a one year prepayment. The "Best Of" will cost subscriber $60 per year if they pay monthly. Pre-Launch it for $40 for one year, and start collecting the money. The offer will be good only until October 31st. With 1,900,000 subscribers (only 10% of the existing subscriber base) paying $40 each up front, it would instantly deliver $76,000,000 into the coffers of the company.
Start a campaign titled something like "Add A Year For Your Ear". Sirius XM Radio currently enjoys a subscriber pool where over 20% of the base is on a 1 year or higher plan. Let those loyal subscribers get a good deal, and bring cash into the company. One year of the base service costs $155. The company should take advantage of the fact that their subscribers like to prepay, and further that people want a good deal in these trying economic times. Let this group of subscribers add a year to their existing plan for $100. This loyal group of about 3,800,000 subscribers would infuse the company with an additional $380,000,000. In addition, some that currently do not prepay may be enticed to step up to the plate themselves. If getting a good deal encouraged 500,000 additional subscriber to prepay, that would add another $50,000,000 to the mix.
A second subscription runs $6.99 per month. Both Sirius and XM have marketed this for years, and recently the marketing efforts have been stepped up. Why not sweeten the deal during this special period. Add a year on a second subscription, and get it for $60 instead of the normal $84. If 500,000 new family plan subscriptions were added that normally would not have, the added revenue would be another $30,000,000.
Such programs are not free from dangers. Selling the subscription at a lower price devalues the product. You have to be careful with how you do this. It is for this reason that the program should run for a very limited time and for a very specific reason. Right now there is a natural reason in the announcement of the merged company programming finally being launched on October 5th. This program should also be limited to October 31st.
Another impact would be in the company financials. All prepayments are deferred revenue and count as a liability on the financial statements. The silver lining is that the company "pays off" that liability by delivering the very service that they already deliver anyway. As the service is delivered to the prepay customers, the deferred revenue column will decrease.
Because the company is getting revenue up front, it will also impact future cash flow. If the consumer has already paid, they will not be paying in future months. For this reason, the company needs to do this in a disciplined manner so as not to throw the financials and cash flows out of whack going forward.
The goal here is to increase the cash position to an extent where Sirius XM Radio is no longer at the mercy of the financial institutions, and can negotiate from a position of strength. For this program to succeed, it is important that it be mass marketed. That will mean costs, but the goal is to get at least another $300,000,000 or more into the coffers without additional debt.
It is currently a situation of taking a whack on the chin in the way of high interest rates on borrowed money OR creating a bit of unsettlement in the financial statements for a quarter or two. Personally I believe that the company has avenues to explore that buy not only time, but negotiating power as well. At this point, such a solution is more palatable than the debt overhang, and the perception that comes with it. Additionally, the marketing efforts will offer longer term benefits as the company goes into the all important fourth quarter.
While this is a napkin sketch overview, Cash Is King. Get some cash into the company, and gain leverage.
Position: Long SIRI