In Sirius XM’s Q1 2011 conference call the company CEO, Mel Karmazin, spoke of the possibility of increasing prices of the service. This is not the first time that Karmazin has addressed the issue, but this time it seems more real than ever before. On April 28th SiriusBuzz broke the news that the “Best Of Sirius” and “Best Of XM” packages had received new titles of “Sirius Premier” and “XM Premier”. While the change may seem innocuous, it is likely a precursor to some possible pricing changes the company may be making. Along with the re-branding of the “Best Of” packages the company has also changed the name of the base services. “Sirius Everything” has become “Sirius Select” and “XM Everything” has become “XM Select”.
The slight changes in names will allow the company to move forward in a more unified fashion under the Sirius XM name, ease consumer confusion, and change the perception of what people are getting for service. Psychologically the terms “Sirius Select” and “XM Select” give a consumer indication that they are receiving only part of what they otherwise could. The “Premium” moniker insinuates the full spectrum of programming available on the service. Previously the “Best Of” was followed by the other satellite radio company prior to the merger. It caused consumer confusion. Consumers oft stated, “If the companies merged, why cant I get all of the content?” By renaming the packages the company can effectively ease that confusion and make things much more straight-forward for consumers while the reality is that the offerings are essentially the same as before the channel line-up changes.
The ability of the company to raise prices is now in the hands of the FCC. Sirius XM agreed to a three year price freeze, controlled by the FCC when the company merged. A removal of the price freeze is not automatic. Instead, the FCC is reviewing the matter and will be issuing a decision about whether or not pricing controls need to remain in place. Sirius XM has been lobbying for removal of the freeze. A decision on the matter may get a slight delay due to the recent surprise announcement by Commissioner Meredith Attwell Baker that she is resigning her post effective June 3rd. This will leave the commission with only four members until a new member is appointed by President Obama.
When looking at pricing Sirius XM is quite clear that they have not raised the base service fee of $12.95 for years. While this is true, the company did add a charge for Internet streaming, increased the family plan price, and added royalty fees. A consumer wanting the entire package is now paying about $21.50 per month including the royalty ($12.95 base, $2.99 Internet, $4.04 Premium, and about $1.50 royalty fee). The company approaches these things in an interesting way. The royalty fee is never included in the price packages, but rather an add on (like a tax) after the fact. Internet radio is brought up below the line making it appear like an option, when in reality, if you plan on streaming through a smart phone or at the office is necessary. The appearance is that you get everything for $16.99 per month which seems reasonable, but reality is that you need to spend over $21 to get all of the features you would want (satellite and internet).
Investors love the news of a price increase, but the company needs to address the issue very carefully. The channel changes, and new names of packages help this process. The key for Sirius XM is presenting price changes as a value to consumers. With competitors offering Internet Radio services for far less money, and terrestrial radio being free, the landscape is getting more and more crowded with less expensive alternatives. The trick is getting the big dollars out of the people that do not care about cost while at the same time getting the smaller dollars out of the masses that have a budget to worry about. The best way to accomplish that is offering real and/or perceived value to consumers.
What we may see is an increase in the base price that narrows the delta between the “Select” and “Premium” packages. Right now the cost to go “Premium” is $4.04 more than the base cost. If the delta between the two was narrowed to $2.99, the odds of people going “Premium” increase, as the incremental cost at less than $3 does not seem as steep as a $4.04 up-charge. Thus, a modest $1.04 increase in the base price could have the impact of actually having more consumers upgrade to the “Premium” tier. The effect would be an additional $1.04 out of many consumers and an additional $4.04 out of others simply from perception.
A $1.04 increase in the base service will add substantial revenue to the bottom line immediately. With 17 million self paying subscribers there is an additional $51 million in the coffers each quarter, or over $200 million per year. This would have an immediate impact on Average Revenue Per User (ARPU). The company could then garner continued ARPU benefit over time as subscribers begin to renew and see the delta between “Select” and “Premium” is so narrow that the additional cost is inconsequential. The impact of such a strategy is far more substantial than people may realize.
Certainly there are many factors at play. The first step is getting pricing freedom from the FCC. The second is finding that magical price range that is appealing to new consumers while not alienating existing ones. The third is marketing their services in a way to get existing subscribers to upgrade.
Position – Long Sirius XM Radio