iTunes Subscription Model Should Give Sirius XM Some Points To Ponder
There has been a lot of talk lately about “Cloud Computing”. The concept is simple. Your data, in this case videos and music, are stored on the net for streaming from any capable device anywhere. It is a model being considered by iTunes, and is already working with many other services such as MP3Tunes. Simply stated, you no longer need massive amounts of storage to hold your music and videos. With cloud computing, your entertainment is stored elsewhere, and you can access and stream it any time. New smart phones are great, but with all of the apps that users seem to love, space becomes a premium, and users are forced to choose between apps and some music or movies they have on the device. Cloud computing makes that choice easy.
NPD recently polled 3,862 iTunes users and posed a simple question to them. How much would you pay per month to have your iTune library stored for you?
Between 7- and 8 million iTunes users in the U.S. told NPD they would have “strong interest” in one of the paid subscription options. In exchange for paying a monthly fee of $10—the minimum charge that NPD floated—they would want either streaming music or access to their personal music libraries on multiple devices. NPD estimates that there are 50 million iTunes users in the U.S. According to NPD’s music industry research, a model that offers iTunes users free access to their own music libraries would attract in the range of 13 to 15 million subscribers.
It has been rumored that Apple is considering a subscription based model, and if they do, there will certainly be those who would take advantage. For Sirius XM, the numbers could shed light onto what pricing options they may choose to use in the future. As the company moves forward it needs to consider several factors as well as several types of competition. Last Wednesday on the second installment of the Satellite Radio Round Table (a monthly radio show featuring SiriusBuzz, Satellite Radio Playground, and Orbitcast), Ryan Saghir of Orbitcast brought out a very good point. Internet radio has two distinct platforms. The first is the Internet, and the second is the Mobile Internet. The point was a very valid one. People use the Internet differently than they use the Mobile Internet. It is the Mobile Internet that gets all of Sirius XM’s Internet competition into the car.
Yes, it is true Sirius XM has apps on most of the major cell networks. However, the apps are more focused to existing subscribers rather than new ones. The average consumer that is not already subscribed to Sirius XM, when looking at music choices for their smart phone, sees Sirius XM with a fee, and Pandora, Slacker and others as free. There is a reason that Pandora already enjoys over 58 million subscribers. Sirius XM has options, but they need to pick a path soon. In my opinion they should give consideration to a three month free trial for new users that download the app. This model would be much like their OEM model, and would give users a chance to see the amount of content that differentiates Sirius XM from the competition. It also gives users ample time to test out and explore the service.
With the NPD survey we see that while most users would enjoy free, there is a substantial number that would pay $10. A few months from now the FCC will open up for comments on whether or not Sirius XM should be allowed to increase rates. The comment period will last six months. After that period the FCC will decide whether or not Sirius XM will have a cap on their price, and perhaps whether or not the issue still needs to be controlled by the FCC. In my opinion, the marketplace, and not the FCC will determine Sirius XM’s prices. The company may have to strongly consider going for more volume through slightly lower prices. If they feel they can increase revenue through more aggressive pricing, it may be something they act on. One thing that is certain is that cloud computing will change the landscape and Sirius XM needs to have a strategy in place that will satisfy consumers as well as investors.
Only two years ago I would have argued that Sirius XM had some elasticity in their pricing. Since then the economy has tanked and other services have launched or gained traction. Two years ago Mel Karmazin spoke about price elasticity. I have not heard those words from him in quite some time. During the merger process it was often stated that terrestrial radio provided plenty of competition and that Sirius XM had to “compete against free”. The “Free” landscape has gotten bigger, and some of these free services are pretty cool and becoming available in the car via a simple in-dash USB port and a smart phone. Yes AT&T is charging more for data, but the consumer attributes that cost to the cell company, not Pandora, Slacker, or YouTube.
The bottom line is that the issues posed in this article are issues that Sirius XM is already considering (or should be). If they are considering these issues, you can bet that analysts and the street are as well. Isn’t it time that you the investor give this issue some hard thinking as well. I know Sirius XM is a great service. The landscape is morphing and investors need to be aware of this.
Position – Long Sirius XM, No Position Apple
Mel needs to do whatever it would take to get Sirius/XM built into iTunes. Make it simple to login to your subscription, buy a song that is playing with a click. And this should include ALL Sirius XM content – just like having a radio, unlike the iPhone app that is missing key channels and even the web does not have all.
Pricing in this environment is as critical as survival. Under the circumstances, including debt pressure, it would be utterly unwise for siri not to go for a general price increase when the freeze is over as of August 2011. This core group of 16M WILL NOT abandon the siri line cruiser becaue of a $2 or $3 increase. The value of the service is way too attractive compared with the price.
Whenever we discuss competition, we should also make a clear reservation that we are talking only about the music part of siri programming. It would be very smart of siri to give music listeners a break not just for three months but may be for as much a six or twelve months at no cost or just a roylaty fee. I would go even further and offer at least two times reduced fees or may be even free six to twelve months for the entire programming package for non-OEM subscribers if they sign up for two years.
I am confident that siri is engaging these ideas daily and looking for best solutions. Now that their focus is shifting more and more to operations versus survival they will be coming up with a lot of new appealing ideas.
If and when they re-sign Howard Stern, they will certainly include provisions in his new contract that would allow streaming his programming without any limitations to any platform. The same will happen with baseball.
Let us not forget that in earnesty siri is the only true game in town. It would be useful to mention that although the largest “free” service like Pandora has 58M subscribers, there revenue is about 60M a year, with annual ARPU at $1, which puts a huge question mark regarding their survival. And this is the “most competitive” service. It is like comparing GM with a small mom and pop shop.
There is one more point that is being discounted routinely when we talk about siri – Mel Karmazin. The guy is a giant and I would listen very carefully to what he is saying trying to read as much as possible between the lines during his quarterly conference calls. You would probably agree that he does know what is going on with the company and understands its future better that all morningstar geniuses put together. As far as I can recall, he said that siri income would be about $1.2B in 2012. I have every reason to believe him because so far he has only over delivered. Apart from sub growth, I would pay attention this quarter to siri ad and non-OEM revenue streams. As to OEM, siri will be getting much smarter regarding installations and how they make money off them.
Again, provided no economy disasters, the company may generate first 0.5B fcf as early as next year.
Sirius Xm has been handed a lemon (w/ new the new competition over the last several years) that they should make some lemonade from. Go after the whole audio digital market. Compete head to head w/ free(or as close to free as possible)w/ sponsorship. Then as I’ve stated many times before, more tiered offerings to meet different budgets. The sac cost of 20 million idle radios and growing is the part of this biz model that’s too tough to swallow. There are many benefits if Sirius Xm would look outside the box of the current model. It’s coming it’s just a matter of when! Also too an even higher tier could hopefully be part of the future model. There is power in numbers and the idle radios are not effective in any way. They don’t come cheap either!
A person i know with a new “2011” Hyundai sonata was showing me a cool feature on his car equipped with the nav system. there is a USB port you can plug in thumb drive and play music or show pictures that are stored on the drive..
this car is also equipped with XM and HD AM/FM CD player. In reading the article the question was posed about having I-tunes store the music and have it accessible via XM or some other cloud type system and they would be willing to pay 10 bucks a month for the service..
I have to question how accurate that really is seeing how you can get small USB drives in the 4 to 8 gig range that will hold 1000 of songs and more and more cars coming with some form of Hard Drives where all your music could be up loaded to your car.. If you already have I tunes the new song can be download to USB to easy..
At some point people are going to say, enough is enough. You pay for cell phone, data & text service, high internet service, cable and or sat service, I-tune subs, XM service and now cloud computing service.. I think it will get some users just like XM/SIRI, but critical mass will be harder to achieve when you add more and more cost to the mix.
Especially if the tax cuts enacted by congress during the bush years expires after this year.. the rich are going to see the amount they pay out go up as well.. Not everyone is a Gordon Gekko.. (Wall St, the movie) this is all just my opinion.