GM Restructuring Beneficial To Sirius XM
When Sirius announced that it had signed Howard Stern at a price tag of 100 million dollars a year, many thought that price tag was high. As the years have past, pundits have continued to point at that deal as an example of the competitive over-spending that occurred while Satellite Radio was in its infancy. As it turned out, the deal Sirius inked with Stern proved to be a very good move for the company as subscribers flocked to the Sirius Satellite service.
To understand how such spending began, one needs to go back in time to the contract signed by the former XM Satellite Radio with General Motors. At that time, there was no proven market for Satellite Radio and no one could be assured of its success. With that thought firmly in mind, XM and GM came to terms that brought the Satellite Radio market to reality at the expense that is, of XM’s own profitability. Highlights from the agreement include:
- (xm) has agreed to subsidize a portion of the cost of XM radios;
- to make incentive payments to GM when the owners of GM vehicles with installed XM radios become subscribers
- share with GM a percentage of the subscription revenue attributable to GM vehicles with installed XM radios
- As part of the agreement, GM provides certain call-center related services directly to XM subscribers who are also GM customers for which the Company must reimburse GM.
Under the terms of the current contract which is not set to expire until 2013, the costs to Sirius XM are approximately 350 million dollars annually.
For the three and six months ended June 30, 2008, the Company incurred total costs of $86.5 million and $169.0 million, respectively, under the distribution agreement; while for the comparable periods in 2007, the Company incurred costs of $70.5 million and $131.8 million, respectively
Any GM slowdown in sales benefits Sirius XM as costs are reduced substantially, directly adding to its bottom line. Now that the market for Satellite Radio has been established, a renegotiated contract would again benefit Sirius XM Radio.
I’m sure some will point to lower subscriber numbers that may result. That argument is moot now that Sirius and XM have merged. The American consumer will buy approximately 10 million vehicles this year. GM and Chrysler’s loss for that matter is Ford and Toyota’s gain. Satellite Radio has penetrated every make and every model vehicle sold in the United States.
Position: Long Sirius XM
Great Read!!! Now that is what I call reporting! (unlike that old bs that businessweek put out) It is
a great thing for US and the market trades us down??? It’s just BS. Go Siri, release the iphone app ASAP and show the country that the auto market will NOT bring us down anymore!
GM needs to burn through Chapter 11. Gov’t needs to keep their paws off the private sector.
whether you are right or wrong, “the horses have left the barn….” Also wasn’t it the “Private Sector” that went to Washington with it’s hand out after “F kn” things up with unregulated derivative transactions that were about to collapse the financial markets… Wasn’t it Detroit that flew in on Lyre Jets needing loan guarantees and cash to survive? Granted Government has had its own fair share of meddling with Fanny and Freddy, but to blame any one entity, public or private at this point just seems to be pointless and naive…. The two are so Incestuous at this point, everyone is someone’s third cousin
Also interesting to look back & see how the Bush admin.in its early years worked w/ the American auto industry to decrease cafe standards and to also offer tax incentives for those wanting to buy SUV’s & Trucks. Then Pres. Bush had the gall to announce a few years ago that we were………(ready for this?) “ADDICTED TO OIL”!!! Becareful what you wish for,you might just get it. Well they got it and we get the tab to fix it! We need a real 3rd political party. Let’s call it the Common Sense Party.
which means what for SiriXM?? we’re down 15% in premarket due to possibility of negated current contracts? wouldn’t renegotiating contracts be possitive for SIriXM aside from the fact, other in dash entertainment companies can now also make better deals since we lose our exclusive rights??
Brandon, good article and thanks for your persistent and enthusiastic efforts in keeping people informed so they can make decisions based on facts and not confusion breeding fear. Events like this shake out the uninformed causing them unnecessary losses… Its hard to understand as a new comer that a metric like “New Subscriber” can actually be bad for the bottom line….
how does this help? the car companies get to renegotiate terms and could ask for HIGHER returns. There are too many in dash choices biting at the bit to get into cars. Obama and his hoods want to make internet widely accessible so they could just as easily ask the auto industry to make sure internet radio is installed in all cars.
So you are suggesting that the administration would support the pirating of music?
the point is, we are not assured the new contract…or any contract…will be renegotiated or show increased favorability to SiriusXM.
In all likelihood, GM would assume the XM contract in any bankruptcy as they would not likely be able to obtain a better one under current negotiations.
The benefit to Sirius-XM, however, is not from contract re-negotiations, but as Brandon suggests from the fact that auto customers will go to GM’s competitors who have contracts more favorable to Siri-XM….
The other thing to consider is that a bankruptcy for GM likely voids the distribution agreement. As you note, that removes some number (though not likely high, given GM’s declining market share) of gross adds, but it also voids GM’s revenue share on the radios that have gone self-paying.
XM never confirmed nor denied that the revshare on a GM self-pay sub amounts to $5 a month, but that’s a reasonable guess that I’ve seen from a number of analysts over the years (it is known that the actual rate ramps up based on the total number of installs and may or may not be tied to the original $9.99/month XM rate). If it’s $5 a month in revshare, then (with somewhere around 3 million self-paying radios in GM vehicles) being freed from having to pay it would save Sirius XM from paying out $180 million a year in revshare, which will basically flow straight to the bottom line.
Hey Brandon,
WHAT HAPPENED TO YOUR NICEMAC ARTICLE YOU POSTED YESTERDAY?
DID SIRI OR NICEMAC MAKE YOU TAKE IT DOWN?
THANKS FOR THE GREAT ARTICLE!!!
I was wondering the same thing
Hey Vapor. Back in. Felt sure you needed a good laugh. later.
Well, so this where all my old friends from Seeking Alpha wound up! Cos, thanks for the invite to come over. I’ll try to live up to your expectations of me.