GM is closing plants, and it is speculated that Gietner will put Chrysler into bankruptcy as early as next week. Bad news from the OEM channel typically means bad news for Sirius XM. After all, the bulk of subscribers for satellite radio are delivered via the OEM channel. Thinking a bit deeper, GM and Chrysler woes may actually be somewhat of a blessing in disguise for Sirius XM Radio.
Now for clarity sake, I am not saying that thousands losing their livelihood should be celebrated by those invested in SDARS. I feel bad for those that will be impacted by this whole mess, but in the end, I must look at what is happening in the OEM channel from a business perspective.
It is no secret that the GM deal is was and is an expensive deal for satellite radio. The Chrysler and Ford deals are also expensive. These are the deals that carry larger installation subsidies, and carry large revenue share agreements.
A slow down in production, and fewer installations by OEM partners that are more costly to SDARS means that the vacuum left by GM and Chrysler will need to be filled by other auto manufacturers. This translates to a larger mix of installations that do not carry heavy revenue share deals. For satellite radio, this means that they get to keep more of the revenue from subscribers. This change will not be instantaneous. It will take time to flow into the metrics, but in the end, the more money that SDARS gets to keep, the better.
Now, the other consideration is that while the company is keeping more money, will other OEM partners step up in SDARS installations to a point where it can be material to Sirius XM Radio? For years, I tracked vehicle sales and estimated how production and sales translated to subscribers. That exercise has become more difficult because of the merger, as well as the fact that OEM sales have been decimated. The "constants" that once existed simply no longer exist in such a way that the data can deliver anything meaningful. OEM sales are down across the board. the main question is where installation rates are with each respective partner, and what the average revenue from OEM subs is now and will become in the coming quarters.
For now, Sirius XM should be able to realize some savings on installations. This will be the more immediate metric that investors will see changing. The real potential in the revenue share averages will take time to come to fruition, but if GM and Chrysler wind up being substantially downsized, two of the bigger OEM deals in SDARS will be contributing less to the cost side of the OEM channel.
Investors in Sirius XM would be well served to monitor ARPU, SAC, as well as CPGA in the coming quarters to see how these numbers are trending. Even if the subscriber numbers suffer, positive news on these metrics can demonstrate the effectiveness of the company in getting to profits.
The OEM channel as we once knew it no longer exists. Investors, if they have not already done so, need to rethink how deals such as GM and Chrysler impact satellite radio. If the car buying public shifts to other brands, the metrics of the OEM channel as it relates to SDARS will need to be re-thought.
Car sales are important. Getting new subscribers exposed to the service is important, but what is most important is how the revenues from subscribers in this channel get to the bottom line, and how much cost is associated with making that happen.
Position - Long Sirius XM, No Position OEM's