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