It did not get a lot of fanfare in analyst reports, nor did it seem to be a huge topic of discussion, but the new GM deal means a lot to Sirius XM Radio. To fully grasp this, we need to go back in time to when the GM deal was first struck.
When XM Satellite Radio reached a deal with General Motors, it was a big win for satellite radio in terms of “getting onto the map”. It was the GM deal that paved the way for other OEM’s to follow suit. In many ways, the success of satellite radio happened because of that deal. That being said, it turned out to be a quite expensive deal for XM satellite radio, and now the merged Sirius XM.
At that time, XM Satellite Radio was not 100% commercial free music. The price of a subscription was also less expensive at $10 per month vs. Sirius’ $13 for commercial free music. XM’s business plan called for subscription revenue PLUS ad revenue. The thought was that the ad revenue would bolster the money brought in in a substantial way. What XM promised GM was that they would get a percentage of the SUBSCRIPTION revenue (capped and based on the $10 subscription rate) that would eventually get to 50%. This is not a real problem for XM if they were getting an additional $3 or $4 dollars in ad revenue. It became a huge problem because that type of ad revenue never came to fruition. Eventually XM abandoned the ad supported music business model, raised prices, and went commercial free on music.
What happened with the GM deal was that it was basically a break even proposition at best. GM added plenty of subscribers, but only half were keeping the service. Thus, sub numbers looked great, but realistically nothing that came from GM was trickling down to the bottom line.
This is why hearing that a new GM deal exists with better financial metrics for Sirius XM is a huge plus. Without having seen the deal, all we can really surmise is that the subsidies are better, and the revenue share is more friendly to satellite radio. What this means is that GM subs will finally help more than just the subscriber number. It also means that Sirius XM has more negotiating power with other OEM partners to improve on those deals as well. We can also surmise that because this is a long term deal (through 2020) that Sirius XM was happy with the terms of the deal. One special item of not is that the old deal was tied to the radio. Thus, even when the car sold, and a new person activated the radio, GM would STILL get their revenue share on that radio. Whether this changed in the new deal is unknown, but it is important to bear this fact in mind.
As we are all aware, the OEM channel is important to Sirius XM Radio. It is the mechanism by which the most people get exposed to satellite radio. The company announcing a change in their biggest OEM partner is huge news that can not be underestimated. It is perhaps one reason why, despite lower car sales, that Sirius XM was able to raise their guidance for adjusted EBITDA from $300 million to $350 million for 2009.
As with most OEM deal, we will not get to see all of the details. However, we will be able to measure the impact through certain metrics such as revenue from subs in promotional periods, etc. The cost savings in the GM deal was not the only piece of information offered up by Sirius XM. They also indicated savings in the talent that appears on their service. We will be able to see that impact going forward in the programming cost metrics.
Investors should bear in mind that this will all take time to pan out. The bottom line is that it now seems possible that GM can contribute to the BOTTOM line rather than just the subscriber roles.
Position – Long Sirius XM Radio, No position GM