Serious OEM Potential For Sirius XM Radio
Now that the merger between Sirius and XM is complete, it is now time for everyone to focus what what will happen going forward. For those that listen to SiriusBuzz Radio, you have heard me discuss some of this potential before. This piece will focus on the OEM potential.
Each year 15,000,000 cars are sold in the United states. Some manufacturers have satellite radio as standard equipment, while some are barely getting started with SDARS installations. Up to this point we are familiar with promotional periods, take rates, and OEM subsidies.
The basic structure of the satellite radio deals with auto manufacturers involves satellite radio subsidizing the radios as well as installations. In return, the OEM’s for the most part pay part of the promotional period subscription. The consumer is exposed to satellite radio for “free” for a period of time. Half of those exposed to the service elect to become self paying subscribers. Those self paying subscribers generate revenue, and a portion of that revenue is shared with the OEM.
One of the problems with this business model is that all of those consumers that elect to forgo satellite radio represent costs for subsidies, etc. and no revenue for either the satellite radio company or the OEM going forward.
What if there were to be a shift in the OEM business model?
What if the price of a five year subscription was built into the price of the car? The first year delivers the standard $12.95 satellite radio service. Years 2 through 5 deliver the “Pick 50 Channels” service at $6.99. This represents a value of about $500.
If that $500 value were put into the price of the car, the consumer would see about a $10 per month difference in their monthly payment month, but would never really equate it with satellite radio. From the perspective of the consumer, the satellite radio simply came with the car.
BENEFITS OF SUCH A SHIFT
1. All radios would generate revenue. As things are now, only half generate revenue.
2. Better churn metrics. These will be 5 year subscribers. They will not churn, and the churn metric will improve dramatically.
3. Everyone wins. 100 installs with the current business model gets 50 subscribers paying $12.95 per month for a total monthly revenue of $647.50. Using a general assumption of 40% revenue share, the OEM gets $259 and Sirius XM Radio keeps $388.50. This is virtually a month to month (consumers can churn any time) business model and means that cash flow can vary an projections become more difficult. Assuming these subs stay on for a full 5 years (they wouldn’t), the OEM will collect $15,540. Sirius XM Radio would get $23,310, and this is the best case situation with no churn.
100 installs with the new method gets 100 subscribers that in the first year generate revenue of $1295 per month. Years 2 through 5 generate $699 per month. Using the same 40% revenue share, the OEM gets $518 per month for the first year, and $279.60 per month for years 2 through 5. For the Sirius XM Radio, the first year would bring $777 per month, and years 2 through 5 would be $419.60. Over the five year period, the OEM collects $22,992, a minimum of a 48% improvement over the existing business model. For Sirius and XM the revenues are $29464.80.
4. Consumers who get used to the full lineup can upgrade the service delivering even more revenue.
5. The subscriber numbers will bolster meaning that Sirius XM radio can charge more for advertising.
This type of business model delivers direct benefits from costs that already exist. The company invests dollars into every radio. To have radios that are not delivering revenue is a waste. If Sirius XM Radio were to establish this type of program, the bottom line would benefit on almost an immediate basis. If OEM installations were to reach 70%, there would be over 10,000,000 new subscribers per year coming out of the OEM channel instead of just 5,000,000. All of this by simply getting the OEM to build the price into the car.
Come Back to Sirius Buzz for more looks into what the Sirius XM Radio future may hold.
SiriusBuzz Radio airs Thursday at 9:00PM EST
Position: Long Sirius XM
But that is the problem with the car dealerships as well: Cars do not come ala carte.
In most vehicles, if you want a navigation system, you also have to get leather seats, a sun roof, and an upgraded stereo system (usually with XM/Sirius). You do not get an option.
There are so many packages, that you can easily hide/cover the added on cost of the radio. Usually, they are charging for the radio anyways.
I think this would be a great idea to implement.
Tyler, great thoughts. I think it is like any option on an auto. It usually comes down to a few dollars per month. And the best part for SDARS is you do not have to do anything for three to five years to continue it. I have never liked the current plan. Except Lamborghini: life of the car.
Whatever, Mel better start doing something quickly to get the share price up. He has had 17 months to put plans together in the event merger approval was granted. I just hope the Sirius people were just sitting around during this time.
Newman, I am starting to see what you are saying. I agree that in most cases you have to get the “premium package” to get the savings. It always made more sense to get it all. The 3 or 4 items that you really wanted of the 8, almost cost as much as the 8.
I keep wondering if they will discontinue the lifetime subscription model?
you pay roughly $500 for a lifetime subscription. Why would you pay the $500 for the five years when you can pay the same price for a lifetime subscription?
I’m excited by the merger completion, and don’t see the doom and gloom of many “pundits.” Mel K. is a bull when it comes to bringing a company to profitability. I believe the long FCC battle hurt, but it will only make Sirius XM act in a more aggressive manner. Some of you have excellent ideas and I have to believe that the pros steering the ship are thinking along the same lines. I’ve been a SIRIUS sub long before Stern came over and I see awesome potential. I get the music I want as well as the variety. Now with XM on board I have even greater variety. I also own a iPod. OK, good product, but there are many times when I listen to Sat radio instead (in my car, at the beach, camping, out for walk, laying by the pool, etc. What keeps me listening? The fact that I know what’s on my iPod and I want to hear new tunes. Look at all the product possibilities. I think this company will kick ass and expand into more markets then the analysts geeks realize.
Shrink those radios, add SD memory expansion with mp3 playback capability, add some heavy metal and let’s get to the kids. There is a huge profit future at hand.
oh yeah… forgot porn… is there a playboy channel yet? We all know how much profit adult programing would add…..oh yeah… and downloading streaming video to that great under used screen on my Stiletto 100.
I’ve got 19,100 shares…. think I’ll buy some more!