As Sirius XM investors know, one main component of getting new subscribers is through the production and sale of cars that are equipped with satellite radio. With car sales suffering badly for a prolonged period, the issue finally caught up with Sirius XM in Q1 of 2009. It was Q1 where the company reported a decrease in subscribers of 404,000.
As the auto industry continued their struggle, and companies like Chrysler and GM went through bankruptcy, it became clear for many that until there was a substantial change in the pace at which cars were being produced and sold, that the satellite radio company would see lees promotional subscribers coming into the picture.
The Cash For Clunkers program seems like a ray of hope for many, but as with anything, their are pluses and minuses to any issue. Rather than debate the merits of the program, I will focus on what it means to satellite radio, and more specifically, satellite radio investors.
On its face, it would seem that a boost in car sales would mean that the end of the downward trend is approaching. Some have even gone so far as to say that this will mean good numbers in Q3 for satellite radio. A simple formula of 1 million cars with a satellite installation rate of 50% will add to the sub number and reverse the negative trend. Unfortunately, it is not that simple.
Yes, the sale of cars will add to the sub number totals, but one MUST understand that it is not sales alone that matter. For brands such as Chrysler, Ford, and Mercedes, the subscription is gained at production. Functionally, the Cash For Clunkers program is serving to clear out a vehicle inventory that had swelled to massive numbers because of a lack of sales. While sales of GM's will add to the promotional subscriber line immediately upon the sale, a Ford sale will simply get a radio already counted as a subscriber into the hands of a consumer.
Already, there is discussion that the program is out of funds and may need to be suspended, but only time will tell. UPDATE - It is being reported that the program will continue. The impact to satellite radio will be more of a small boost in promotional subs in the short term, and a more normalized car inventory going forward. It is perhaps a normalized inventory that will carry the most importance to satellite radio and its investors. Stability will allow people to better model the performance of the OEM channel, as well as allow the company to avoid roller coaster movements in metrics which lead to investor uncertainty.
So if we assume that 1 million cars were sold in the program, and 500,000 of them had satellite radio, where does that bring us in very rough terms?
- About 100 to 150K new promotional subscribers.
- The sale of about 100K to 150K cars that were already being counted as promotional subscribers.
- The sale of about 100k to 150k of cars that have uncounted promotional subscriptions.
- Stabilized production and stabilized inventory.
While seeing a boost in promotional subscriptions is a good thing, the issue, in terms of subscriptions, is not as substantial as many think, or would like to think. Normalization of the OEM channel is the most important factor. Normalize the channel, and the metrics will follow suit.
Position - Long Sirius XM, No Position OEM's