When companies are contemplating things like price increases things can get out of hand pretty quickly. Sirius XM (NASDAQ:SIRI) knows about this first hand. With their recent settlement of a class action lawsuit, the company saw just how bad things can be. There were erroneous reports about exactly what the “class” was as well as all kinds of reports assuming that a $2.00 across the board price increase was going to take place. Reports even came out heralding the settlement as a method for the company to gain millions upon millions of subscribers. All of the reports neglected to consider a few key elements, and all of these reports can now serve as a lesson for how Sirius XM should handle a price increase. Another lesson can be learned with digital music distributor TuneCore, which recently changed their pricing and saw a whiplash effect due to inaccurate reporting, very bad assumptions, and the viral aspect of the Internet.

TuneCore Lessons Sirius XM Can Learn From

Tune Core is a company that allows artists to record and distribute albums. It is a popular site that handles distribution for up-and-coming music acts. The company recently raised the flat price it charges to distribute an album for one year to $49.99 from $19.99. On its face this seems like a massive price increase, but reality is much different. The company used to have various line item charges and a-la-carte fees that charged per store, etc. They now added 34 services and features and eliminated line item pricing to create a easier to manage one time charge of $49.99. They kept prices for singles and ringtones at $9.99 per year.

Tune Core CEO Jeff Price was stunned to learn that the new pricing was receiving such negative press when the new pricing took effect. He indicated that users were informed about the pricing changes in March, well ahead of the mid May changes. The company communicated to their users through email, on their web page, and in renewal notices sent to all users weeks ahead of the change. Despite all of these efforts, the perceived benefits of the new pricing structure, and the company doing everything possible to explain the reasoning of the pricing change, Tune Core got slammed on the Internet and their competitors took advantage.

Some competing services went so far as to begin campaigns about the price increase. CD Baby created cdbabylovesyoumore.com and themed the campaign “no $49 annual fees ever” as well as offering a 50% savings on album submission fees to artists switching from a competing service.

In defending his company’s actions, Price stated, “TuneCore customers now get distribution to an unlimited number of stores (as opposed to a per-store fee), an unlimited number of songs per album (instead of extra per-song fees), faster upload times, and expanded accounting systems.”

What frustrates TuneCore is that there is a ton of misinformation out there despite the company making every effort to inform users of not only the change in pricing, but the new benefits users would have. The company has lost an edge now, and that is unfortunate.

Lessons Sirius XM Can Learn From The Class Action Suit

During the Q1 conference call CEO Mel Karmazin spoke of the pending expiration of the FCC price cap and the company’s ability to finally raise prices. Remember, in this context Mel is speaking to investors and not consumers. The trick here is that many investors also happen to be consumers.

Subsequent to the conference call the stock rose sharply, mostly on consideration that the company metrics looked good, and that with price increases they would look even better. Prior to the call, but after the numbers were released, some thought the news numbers were terrible, and even called for the stock to tank to levels in the $1.60’s. The fact was the numbers were decent and for the most part what was anticipated by the street. Mel did a wonderful sales job during the call and the stock immediately began to appreciate. Those that listened and acted on advice of people calling for the stock to tank were in for a surprise. Thankfully the conference call was in the pre-market and most were able to see the stock appreciate and ignore poor judgement.

Fast forward a couple of weeks, and Sirius XM settled a class action law suit. Even a simple thing like a class action settlement saw a web of confusion. People were debating on exactly what the class was (when the class definition was quite clear) because some reported as being much different than it actually was. There were even heralding the settlement as a way for the company to add millions upon millions of subscribers. Interestingly some reporting magically changed with invisible edits when the actual facts were borne out by those that take the time to research properly. Even this site was attacked by other sites for characterizing the class as nearly every self-paying subscriber existing today as well as everyone who has churned in the last couple of years . As it turns out, the class is indeed nearly everyone.

The next aspect of the settlement involved a potential price increase. It is this potential increase that the company used as a negotiating point in the suit. Essentially Sirius XM told the plaintiffs that they were “contemplating” raising the price of satellite radio across the board by $2.00 in August of this year when the FCC mandated price cap expires. As part of the settlement the company agreed to freeze prices through the end of 2011. The $2.00 increase comment seems to have been taken as gospel across the web, when what the suit states is that the company was “contemplating” a $2 increase. While Sirius XM may indeed increase prices by $2.00 across the board, the number certainly is not cast in stone. During the merger process Sirius XM actually stated that they would be more inclined to lower prices.

What we have now are consumers and investors alike assuming a $2.00 increase across the board with Sirius XM being silent on the matter. The potential increase and news surrounding it is being controlled not by Sirius XM, but rather the web. Consumers and investors are already making assumptions, and this sets up potential disappointment for one or both groups. We have seen what happened to TuneCore when they were out in front of the pricing issue. What is happening to Sirius XM now is just the beginning.

Another issue garnering a lot of confusion is the settlement agreement that offers churned out subscribers the chance to resubscribe with no activation fee, or by getting a free month of service. Some see this as a sort of “golden opportunity” for Sirius XM, and that millions of this group of 4 million will return to the fold. Realistically this is not the case. This group of 4 million churned out for a reason. Churn happens every quarter to the tune of at least 1.6 million subscribers. Likely, before these people churned they were offered even bigger incentives to stay with Sirius XM and still did not take the company up on these better deals. Even Sirius XM offering these people 5 months for $20 (a common incentive the company offers churned subscribers) does not seem to move the bar for this group. These are churned subscribers just like in any other quarter. Over the years millions upon millions have churned. What makes this group so special that a free activation will entice them. The REAL answer is nothing. These 4 million are simply anyone who deactivated for any reason from a date in 2009 until now. They are simply members of a class in the law suit.

What we can learn from TuneCore and the coverage of the class action suit (as well as the suit itself) is that a bunch of misinformation makes its way around and that misinformation sets up improper and sometimes outlandish expectations. What we can see is that a company has to deal with news and price increases in a very calculated way in order to avoid confusion, false expectations, and angst. The key is for the company to be out in front of the issue. The last time the company “increased prices”, it brought a class action suit.

Position – Long Sirius XM Radio