Sirius XM Radio (NYSE: SIRI) has 20.1 million subscribers and is the only satellite provider in the United States. The high costs associated with satellite radio programming and subscriber acquisition cost (the price of recruiting new subscribers) are the real culprits of Sirius XM's negative margins.
Sirius XM is dependent on the automotive market because some auto makers include satellite radio units in their cars, which adds to Sirius XM subscription revenues. SIRI has partnerships with notable car companies such as Ford, GM, and Toyota. The company's heavy ties to the automotive market gives it big exposure to the health and cyclicality of the automobile industry.
Sirius XM's major competition comes not from other satellite radio providers but from other producers of mobile entertainment devices: MP3 players, the iPod and iPhone, internet radio stations, and traditional AM/FM radio are all challengers to satellite radio. Sirius XM relies partially on major celebrity endorsements (Howard Stern for $500M, Oprah, Martha Stewart) and also on sports broadcasting, including MLB and the NFL to distinguish itself from many of its competitors.
Sirius and XM merged in July 2008 to form the only satellite radio provider in the United States. The new company offers about 300 channels and has deals with Howard Stern, Oprah, Martha Stewart, the MLB, the NFL, among other major partners. Sirius XM radios are distributed by original equipment manufacturers (OEMs) as well as retail channels. Sirius's primary source of revenue is subscription fees; therefore the company focuses on constantly increasing the number of subscribers as well as lowering the churn rate (turnover rate). Lowering the churn rate is significant because there is cost associated with acquiring subscribers (the cost of advertising, for example), thus, if a person subscribes but quickly unsubscribes, SIRI loses revenues.
Sirius generates 94% of its revenue through subscriptions, mostly through deals with automobile manufacturers which install Sirius radios pre-sold in cars. Approximately 53% of Sirius's subscribers were from OEM automobile sales. Sirius has contracts with many major automobile manufacturers to include Sirius radios either as a standard feature or option, some including limited or lifetime subscriptions. The company shares a portion of subscription revenue with the automobile companies.
Trucks: Freightliner, Sterling, Peterbilt, Kenworth, Volvo and International offer SIRIUS radios as a factory-installed option on the trucks they manufacture.
Boats: Various recreational boat builders, including Sea Ray, Four Winns, Chaparral, Larson, Glastron, Ranger and Formula, offer SIRIUS radios and a prepaid subscription to their service as a standard or optional feature on their boats.
Recreational Vehicles: Several leading manufacturers of recreational vehicles, including Fleetwood, Monaco, Winnebago, Coachmen, Tiffin and Alfa Leisure, offer SIRIUS radios as a factory-installed option.
Since its inception, Sirius and XM have operated with significant losses. SAC is mostly composed of subsidies and commissions paid to its manufacturers, distributors, and partners in the automobile manufacturing industry for the sale and installation of Sirius radios. SAC also includes other costs such as those related to product warranty, but does not include other costs such as pure production costs or marketing expenses.
Lowering SAC must be done in conjunction with maintaining a customer retention rate high enough to move the company to positive operating margins. When customers deactivate early, Sirius loses money. Sirius calculates churn by taking the number of deactivated subscribers divided by the average quarterly subscribers. This gives Sirius a average monthly churn calculation.
Sirius XM had to agree to certain conditions so the merger would be approved. The most notable conditions include:
The cap on prices presents the largest potential danger as Sirius XM will lose pricing flexibility and limit its ability to respond to market conditions.
A crucial facet of Sirius's satellite radio service is the programming content with which it provides its subscribers. Sirius has a wide range of audio content - including sports broadcasts, Howard Stern, and Oprah - that attracts consumers to its service. The quality and diversity of its programming is integral to Sirius in its quest to gain new subscribers and keep its current subscribers from ending their service. Content additions such as the NFL and Howard Stern correlated with a significant number of incremental subscriptions.
Sirius also has radio talk show host, Howard Stern, one of the most popular media figures in modern history, with his terrestrial radio show being ranked #1 in many major cities throughout the country. They also have an exclusive contract with Martha Stewart, on the Martha Stewart Living Radio, which is dedicated to all things Martha and features shows hosted by Martha herself, Alexis and Jennifer, Dr. Marty Goldstein, Tracie Hotchner, Greg Kleva, Dr. Shawn Messonnier, and Sandy Gluck.On the Oprah &Friends channel, Oprah Winfrey hosts her "Soul Series" program. The channel features highlights from the Oprah Winfrey Show and includes regular guests, Gayle King, Dr. Maya Angelou, and Dr. Robin Smith.
Terrestrial AM/FM radio has had a well established market for its services for many years and offers free broadcast reception paid for by commercial advertising rather than by a subscription fee. Many radio stations offer local programming, such as local news and sports, which Sirius does not offer as effectively. On average every U.S. household has five AM/FM radios, and radio comes as a standard feature in every vehicle manufactured without an additional cost to the consumer.
While most traditional AM/FM radio stations broadcast by analog signals, the radio industry has made significant strides in rolling out advanced digital transmission technology. Digital broadcasting offers higher sound quality than traditional analog signals and has multicast of as many as five stations per frequency. Digital radio broadcast services have been expanding, and an increasing number of radio stations in the U.S. have begun digital broadcasting or are in the process of converting to digital broadcasting. Over 1,500 radio stations in the United States currently broadcast digitally. Digital radio is generally offered to subscribers without a service charge. BMW offers factory-installed HD radio receivers as an option across all of its models, Ford offers HD Radio as a dealer installed option for the Ford, Mercury and Lincoln brands and recently announced the availability of factory installed HD Radio technology as a standard or optional feature on Ford, Mercury and Lincoln vehicles, and retail HD radios are available nationwide at many large retailers. A number of leading radio broadcasters have joined together to form the HD Digital Radio Alliance to accelerate the successful rollout of digital radio.
Sirius faces stiff competition from various digital music devices and their associated services. The Apple iPod ®, a portable digital music player, allows users to convert music on compact discs to digital files and to download and purchase music and video through Apple's iTunes ® Music Store. iPods ® are compatible with many car stereos and home speaker systems. Apple has reached agreement with automobile manufacturers to pre-install equipment in vehicles which allows users to play music from their iPod through the automobile sound system. Many MP3 players can be connected to online music subscription services, such as Real Network’s Rhapsody and Napster 2.0. Slacker, a recently launched private company, has introduced a device and music service that continually updates the device based on a user’s preferences, serving algorithmically determined playlists that are direct substitutes for radio programming.
Consumers are increasingly turning to Internet radio. Internet radio broadcasts have no geographic limitations and can provide listeners with radio programming from around the world. Improvements from higher bandwidths, faster modems, wider programming selections, and industry consolidation have made Internet radio a more significant competitor for listening in the home and office. Technologies like WiMAX will also make Internet radio more pervasive. In addition to the many free Internet streams offered by radio companies like Clear Channel, CBS Radio or other smaller companies, subscription Internet music services, such as Rhapsody and Pandora, offer unlimited and fully-customizable play lists for a small fixed fee per month. These services may be used for listening at PCs or home media centers.
Several of the largest wireless providers currently offer music to mobile phones. Additionally, many phones now contain FM radios. Sprint Nextel currently offers streaming music from a variety of providers plus a music store for purchase. Verizon Wireless offers the VCast music service that can be played directly on a phone. AT&T offers a variety of streaming content and has also partnered with Apple to offer the iPhone. Several subscription music services, including Rhapsody and Pandora, are offered over mobile phones.