tyler1.JPGWhen you talk about OEM (automobile channel) subscribers for Sirius XM, there are many things to consider, and the difference in the deals with OEM partners can make even the staunchest follower of this equity confused. Some brands count as subs during the promotional period while others do not. Some brands count as subscribers just after manufacture, while with others it is at the time of sale. Some brands have a three month promotion, and some one year. With all of the factors at play, it can be difficult, but not impossible, to model the OEM channel. As if all of that is not confusing enough, we now have the emergence of certified pre-owned programs to add to the mix.

When Is A Subscriber A Subscriber?

The answer is actually quite simple. A radio is counted as a subscriber when the company receives a payment for a subscription. The problems for those trying to estimate subscribers comes from understanding which OEM's are paying when.

In general, most of Sirius' deals involved the company receiving a payment at the time of manufacture. This included brands such as Chrysler, Ford, Mercedes, BMW, and Volkswagen. As soon as Sirius XM received payment for the subscription, that radio became part of the overall subscriber numbers. Thus, while the car was on a dealer lot, it was being counted as a subscriber. The structure of this deal is churn and cash flow friendly, but takes a toll on ARPU. Sirius such as that with Kia differ. Kia does not pay for part of the promotional subscription. This means that a sub who is in a promotional period is not counted as a sub. The only time they will be counted is if at the end of the trial they elect to keep the service. It should also be noted that because they are not counted as a sub, that they would not be counted in churn either. Thus, translating Kia car sales into subscribers requires that the analyst understand that the lag from sale to subscriber could be at least a quarter, and as much as two quarters on a three month trial.

XM's bigger deals were with GM and Honda. Those companies did not pay for a subscription (part of a subscription) until the car was sold. XM partners like Toyota, Nissan and Hyundai are similar in structure to the Kia deal mentioned above. There are people in trial periods in these brands that are not being counted as a subscriber, so again, analysts need to consider the time lag.

So How Are Certified Pre-owned Trials Counted?

With various announcements coming in the Certified Pre-owned (CPO) segment of the OEM channel, there is a growing supply line that analysts will have to take more seriously going forward. One might logically assume that the OEM deal structure will be mirrored in the CPO deal. This however is not likely the case. Instead, Sirius XM is "footing the bill" for the trial period. Because no money is changing hands, these trial periods will not, as a general rule, be counted in the overall subscriber numbers. There will always be a one to two quarter lag from the time of sale of a satellite radio equipped CPO car to when it can become a self paying subscriber. With this type of structure, no promo that drops off will be considered in churn.

While some may be disappointed that these trial periods are not adding to the subscriber roles, there are positive impacts from this type of structure. It is churn friendly, as there will be no churn if the consumer decides that they do not want the service. It also keeps the deactivation's metric lower. This structure will also help the mix of self paying subscribers as compared to the promotional subscribers.

What Does A ll Of This Mean?

Think of the OEM channel as a bucket. The OEM bucket was being supplied by one hose, new car production and sales. Sirius XM has now added another supply hose with the Certified Pre-owned market. Currently the CPO hose is small, but over time it will become bigger and more meaningful.

In Q1 the company stated that overall penetration was a bit over 50% with the goal being to get overall penetration to the high 50's by years end. It would likely be a safe assumption to use an overall penetration of 55% for Q2 and Q3 SIRI models.

If one were to consider that most CPO cars are three years old or newer, it would make sense to develop what type of mix that channel will deliver. If we were to assume an overall penetration of 30% for a three year old car, 40% for a two year old car, and 50% for a one year old car, you can begin to see that the CPO channel will see its more major impacts a year from now. The other wild card is that it is extremely difficult to gage the number of CPO sales happening. This will require analysts to build assumptions going forward or seek out a reasonable way to ensure that their assumptions are grounded in reality.

Simply stated, the future of the OEM channel has a new supply line to consider, and going forward that supply line will become more important to the subscriber roles, the company, as well as investors. I would caution against any thought that the numbers will be substantial in 2009, but beyond that, they will begin to show a noticeable boost that will improve ARPU, SAC, Churn, and subscriber numbers.

Position - Long Sirius XM, No Position OEM's