SiriusXM raised the bar on net subscriber guidance today from 1.5 million to 1.6 million. That would appear to be a great thing. However, if you follow the company closely you would have noticed that SiriusXM, just three quarters into 2013 already has 1,681,730 subscribers. Are they really projecting a net subscriber loss in Q4 of this year? The simple answer is yes. The big question is why.
Losing subscribers is bad, so what is happening that would cause a company that has added almost 1.7 million subscribers in the last 9 months to lose 81,730 in the next three?
The answer is General Motors. No, GM is not ceasing with satellite radio installations. In fact, the auto giant is probably installing more satellite radios than it ever has. What has changed is the deal between SiriusXM and GM.
The Past Deal
In the past every GM car equipped with a satellite radio came with a three month trial when that car was sold to a consumer. At the time the car was sold, the radio was counted as a subscription. More specifically, it was counted as a paid promotional subscription. A paid promotional subscription is on in which the auto maker (in this case GM) pays SiriusXM for a trial subscription.
At the end of the three month trial, the consumer would be asked by SiriusXM if they wanted to keep the service. If the consumer keeps the service, they continue to be counted as a subscriber. More specifically, they are now counted as a self-paying subscriber. If the consumer does not keep the service, they are dropped from the subscriber roles and become a part of the deactivation statistic (not the churn statistic, as churn is only the self-paying subscribers that cease service).
The example is as follows:
- GM sells 750,000 cars in a quarter
- Of that 750,000 cars, 525,000 are satellite radio equipped.
- The net subscriber additions would appreciate by 525,000 during the quarter
- At the end of 3 months 44% will keep the service.
- In this case 231,000 would shift to the self-pay category after the trial, and 294,000 would become deactivations. However, the subsequent quarter would deliver another 525,000, and the cycle would continue.
The New GM Deal
In the new GM deal, the satellite radio equipped cars are NOT counted as subscribers when a customer buys the car despite the fact that the consumer gets an unpaid 3 month trial subscription. The key term here is unpaid. GM is no longer paying SiriusXM for the trial subscription. That would seem bad, but it is not. The exchange for that concession is that SiriusXM does not have to pay as much to GM on the back end.
GM, Ford, Chrysler, and a few other manufacturers get a share of the revenue derived from subscribers for the life of the car. Essentially, for every dollar SiriusXM collected on that subscription, $0.40 would go back to GM. The new deal has a substantially lower revenue share. While the exact number is not disclosed, it could now be as low as $0.25. In the longer term, and from a financial perspective, the new deal is a very good thing. From the perspective of counting subscribers it is not good.
This quarter GM will go from supplying several hundred thousand subscribers on cars sold to ZERO. That is correct, the GM deal (relative to new cars) will not deliver a single subscriber this quarter. The double whammy is that the GM deal will also see the deactivations form Q3. Thus, the impact in Q4 is the lack of 525,000 in the supply chain, but also the impact of about 300,000 subscribers deactivating from the previous quarter. That is an 800,000 subscriber swing relating to the shift in the GM deal.
The good news is that the major impact will be absorbed in Q4. We should get used to some lower sub numbers moving forward as well. There you have it. The reason we may well have no net subscriber additions in Q4 is that it makes financial sense for the long term goals of the company.
For SiriusBuzz Premium members, the technical update and valuation models will be published in the morning.