Satellite radio is a wonderful service that delivers unique content appreciated by nearly 20 million subscribers and about 35 million listeners. The service is growing with each passing quarter, but the days of exponential growth are now behind them. Investors who enjoyed the initial runs up for Sirius XM and the run from the $0.05 to to current levels perhaps do not know how fortunate they were to be able to participate in what was a growth story. Yes, there were runs down as well, but the question that should be on the minds of investors is where growth in this company will come from going forward.
I often hear the words of passionate fans of Sirius XM who say that satellite radio is so awesome that it can't help but grow. I also hear all of the arguments about unique content that is not available anywhere else. I get it. I understand that satellite radio is something special, and that they are capable of delivering a wide range of audio pleasure to listeners. However, I refuse to ignore that progress will happen, and other forms of entertainment will be competing with Sirius XM. So how might Sirius XM grow?
DEEPER PENETRATION IN THE OEM CHANNEL
This is an obvious candidate for growth. Currently satellite radio is installed in about 60% of all cars manufactured. Yes, this a lot leaves room for more satellite radios to be installed, but the issue runs deeper than that. Sirius XM pays for each of those installations and by extension cash flow becomes a factor weighing on deeper penetration. With a 46% take rate on the service after the promotional period the company has to grow here carefully. In addition, the lower priced cars may not present the same take rate delivered by the current cross section. Growth here will most likely be measured and careful. That is the prudent move for Sirius XM.
I hear this argument all the time. The fact of the matter is that this company is not yet mature enough to take on that task. Via the Internet, they already have a global presence, but to manufacture satellites, launch them, get political permissions, and then market the service on a larger scale would be a costly endeavor that Sirius XM simply can not afford now. It should also be considered that there are countries that have perhaps soured on the satellite radio concept after the failure of World Space. I understand the enthusiasm, but the costs would be enormous. Sirius XM is just now getting their balance sheet in order and such an expansion would send things into a literal tailspin at this juncture.
This is another obvious choice. Aside from the royalty fee, and some modest moves in family plan, etc., Sirius XM has remained at a stable price for quite some time. The company is still under a price freeze that was a condition of FCC approval from the merger as well. That price freeze ends in the Spring of 2011, but will be under review by the FCC beginning this Fall when the FCC will open up a comment period on pricing. There is no guarantee that the FCC will allow a price increase. In addition, other services that cost less are becoming more widely available. Smart phones stream all kinds of content, and speeds on these networks are improving. Yes, I can see the argument that you need to pay for the cell phone data plan, but people are doing that anyway. The consumer perception is that all of these wonderful apps are free. or less expensive. Prices can increase, but the elasticity in pricing that existed only a few years ago is eroding.
What may actually deliver growth is not a price increase but a price decrease. If the service is priced less expensively, and the company can garner a higher number of subscribers, it could have the effect of actually allowing more revenue in the door than at a higher price. This situation would be about higher volume, would take the FCC out of the picture, and would deliver more ears to advertisers on non-music channels. The key for growth with lower prices is that in getting more subscribers on board that deliver higher overall revenue.
Most merger related synergies have already happened. Yes, there are many aspects that could still see synergies. Customer Service consolidation is one area. realistically though, the cost savings of the remaining facets are not that substantial. The biggest synergy left on the table would be the consolidation of the Sirius and XM platforms. This will happen some day, but likely it will not happen soon.
EXPANDING BRAND TO BIGGER DEMOGRAPHICS
In my mind this is a key area of growth for Sirius XM Radio. Satellite radio tends to appeal to males between 25 and 44 that make in excess of $60,000 per year. This is not to say that people outside of this range do not use the service, they do. What I am saying is that Sirius XM currently has a narrow focus of appeal that could be broadened to attain growth. In this section I will outline some data supplied by Alexa.com. The data breaks down the demographics of Internet users that visit websites. I am drawing a comparison between Sirius XM and some other popular audio entertainment alternatives.
Sirius XM appeals to the most populous segment of the age demographics (click image to enlarge) and that is good. However, there is a key segment that the company should work on appealing to for several reasons. The ages 10 to 24 are also a large segment, and they are building their brand loyalties now. This segment are the ones using the Pandora's, Slacker's, and Last FM's. If Sirius XM were to become relevant to this segment of the population, they would be able to not only build brand loyalty going forward, but be able to grow as well.
As you can see by the age data from Alexa (click to enlarge image), Sirius XM Radio enjoys a good cross section of users age 25 and up. Interestingly XM Radio has above average demographics for people over 45. This is good. Between the two brands (Sirius and XM), the coverage from 25 to 65+ is good. What we can also see is that the competing Internet Radio services are appealing to the younger audience, as well as the female audience. Both of these ares are segments where Sirius XM could and should improve, and thus grow.
As stated earlier, Sirius XM tends to appeal more to males than females. While this may seem logical to most at first blush, we can see something glaring in the data provided by Alexa. Internet radio services like Pandora and Slacker have a larger than average appeal to females. Pandora in particular seems to be highly enjoyed by females. Sirius XM has plenty of programming directed toward females. Fro Oprah to Martha, to Cosmo, they would seem to have all of the bases covered. I found it interesting that a company with such strong programming geared toward females seems to have a hard time garnering their attention when it comes to audio entertainment. After thinking about it for a while I began to poll several women about the subject. The answers I got were interesting. On a whole, men seem to enjoy talk radio and news more than women. Women want simplicity, and want that simplicity to be budget friendly. It seems that Slacker and Pandora fit that bill more-so than Sirius XM. This is not to say that Sirius XM should abandon the programming geared toward a female audience. On the contrary, they should keep it and find a way to appeal to those that are using Pandora and Slacker. This may come through more promotion of their tiered services. If Sirius XM can get them into the door, they can market upgrades to them later.
Satellite radio is a subscription service. Subscriptions cost money, and in today's economy money is tight. Most Sirius XM subscribers come from income levels that are greater than $60,000 per year. According to 2006 data from the government, only 29% of individuals make over $50,000 per year. The segment of $25,000 or more is a larger segment and equates to 36%. The easiest and quickest way to appeal to these people is bring down the price to a level where they are enticed to subscribe. This can happen through tiered services or a simple price reduction to rely on volume. While lower prices may seem counter-intuitive to most, it may actually pave the way for Sirius XM to grow at a rate that will be acceptable to investors. It is a question of household economics. People can not live without their cell phone. Cell phone bills have virtually doubled over the last 5 years, but people willingly pay because there is a perceived need for cell phones. Satellite radio does not yet qualify as a NEED-TO-HAVE service in the minds of consumers.
In looking at the Alexa data we can see that Sirius XM has below average participation from people between $30,000 and $60,000 (click chart to enlarge). By contrast, the other Internet radio services enjoy an above average participation from those same people. It is obvious that there is vast growth potential by getting to a younger audience that makes fewer dollars. Sirius XM simply needs to figure out the best way to maximize the demographics between age 10 and age 60.
In summary Sirius XM can continue to grow, but it has to happen at a reasonable pace that the company can absorb and work with. The growth not only has to be smart, it has to be profitable. Investors thinking of exponential growth at 20% per year need to consider that such growth is unrealistic. Yes, in years past Mel Karmazin has grown many companies, and maintained effective EBITDA growth year after year. That happened through expansion and aquisition. What is left out there for Sirius XM to buy? Those that think outside the box may envision partnerships with terrestrial or HD radio in some way, but that is outside the current scope, and would require an FCC process that may make the merger process Sirius and XM went through seem trivial.
Bear in mind that the company can grow through efficiencies, and many other things, but that the pace of that growth will be how the company is valued. Currently Sirius XM trades at 18X EBITDA growth. There are those that feel that this multiple is justified, and those that feel it is aggressive. Until Sirius XM can demonstrate through concrete plans how they intend to grow, the debate will continue to be waged, and longs and shorts will continue to fight it out each trading day. As an investor in this equity, you owe it to yourself to consider with a realistic approach where the audio entertainment marketplace is and how Sirius XM, as a segment of that space, will continue to grow in a profitable manner.
Position - Long Sirius XM Radio