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Sirius XM Radio (NYSE: SIRI) is the only satellite provider in the United States with 18.6M subscribers as of 2Q08.[1] The company claims that the combination of Sirius and XM will cut costs by about $400M as a result of the merger - a must after Sirius and XM lost $4B combined between 2005 and 2007. The high costs associated with satellite radio programming (23% of revenue in 2007)[2] and Subscriber Acquisition Cost (SAC) (i.e. subsidy and commission costs) are the key drivers of Sirius XM's negative margins.
Sirius XM is dependent on the declining automotive market, where auto makers include satellite radios in cars at their dealerships which create subscription revenues for Sirius XM. Sirius and XM radios were in 35% of new cars produced in 2007 and 80% of new subscribers were accounted for by original equipment manufacturers (OEM).[3] Of the new trial subscribers it is estimated that only about 50% turn into long term subscribers.[4] The company has partnerships with notable car companies such as Ford, GM, and Toyota. Its heavy ties to the automotive market makes it vulnerable to the health and cyclicality of the industry.
Sirius XM's major competition comes not from other satellite radio providers but from other producers of mobile entertainment devices. MP3 players, theiPod and iPhone, Internet Radio, and traditional FM/AM 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.
- Note: Statistics prior to 2008 is Sirius data unless it is specified as specifically XM data or it is specified that it is a combined statistic of the two companies past results.
Contents |
[edit] Company Overview
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[8] 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 (OEM) as well as retail channels.
| Company | Subscriptions | Total Revenue | Operating Income (Loss) | Operating Margin (Negative) | Average Monthly Churn | ARPU | SAC |
|---|---|---|---|---|---|---|---|
| Sirius [10] | 8,321,785 | $922,066,000 | ($565,252,000) | (55.2%) | 2.2% | $10.34 | $101 |
| XM [11] | 9,027,000 | $1,136,542,000 | ($511,437,000) | (55.0%) | 1.75% | $10.15 | $121 |
Note: All figures as of end of 2007.
| Total Gross Adds | OEM Gross Adds | Retail Gross Adds | Net Adds | Total Subscribers (as of 2Q08) |
|---|---|---|---|---|
| 8.1M | 5.3M | 2.8M | 3.7M | 18.6M |
[edit] Services Offered By Sirius
- Internet Radio Sirius offers subscribers the ability to listen to music channels and select non-music channels over the Internet as part of the base subscription price.
- Commercial Accounts SIRIUS Music for Business, is a music service for commercial establishments, and is available through Applied Media Corporation, Dynamic Media, Turn Key Media and Info Hold Inc. Subscribers to commercial accounts are included in subscriber counts.
- SIRIUS Backseat TV In 2007, Sirius introduced SIRIUS Backseat TV, a television service offering content designed primarily for children from Nickelodeon, Disney Channel and Cartoon Network in the backseat of vehicles. Chrysler was the only automaker to offer SIRIUS Backseat TV in its 2008 model-year vehicle lineup. Aftermarket units capable of this service were introduced in the Fall of 2007 through Directed Electronics. Subscribers to SIRIUS Backseat TV are not included in subscriber counts.
- Travel Link In 2008, Sirius will launch SIRIUS Travel Link, a suite of data services that includes real-time traffic, tabular and graphical weather, fuel prices, sports schedules and scores, and movie listings. SIRIUS Travel Link is expected to be standard on Ford’s next-generation navigation system and is anticipated to be offered on select Ford, Lincoln and Mercury vehicles in 2008. Subscribers to SIRIUS Travel Link are not included in subscriber counts.
- Traffic and Weather Sirius offers a service that provides graphic information as to road closings, traffic flow and incident data to consumers with in-vehicle navigation systems.
[edit] Trends and Forces
[edit] Auto Maker/OEM Contracts
Sirius generates more than 90% of revenue through subscriptions,[13] mostly through deals with automobile manufacturers which install Sirius radios pre-sold in cars. In 2007, approximately 44% 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.
- General Motors: Sirius has a deal with GM extending until September 2013 to install XM radios in GM vehicles. About 2.5M vehicles will have XM Radio installed for the 2008 model year[15] and offers XM in over 50 2008 models.
- DaimlerChrysler (DCX): Sirius has a contract with DaimlerChrysler to offer Sirius service as a factory-installed option with its automobiles. This feature was included in approximately 40% of DaimlerChrysler's 2007 vehicles.[16] In 2008 production penetration through Chrysler is expected to be 70%.[17] The exclusive deal with Chrysler is good through 2017. Chrysler was the first OEM to launch Siris Backseat TV in 2007. The Chrysler deal covers the Chrysler, Dodge and Jeep brands.
- Mercedes Benz: Mercedes Benz has agreed to include Sirius radios and service as a standard feature in many of its 2007 models, including its upscale SL and CL class sedans. Mercedes includes Sirius in 90% of their production.[18] The contract runs through September of 2012.
- Ford (F): Sirius has an exclusive deal with the Ford Motor Company and its brands, including Ford, Lincoln, Mercury, Volvo, Land Rover, Mazda, Aston Martin, Jaguar, and Mazda, until the fall of 2016. As of the end of 2006, Sirius radios were offered as a factory-installed option in 19 vehicles from Ford, Lincoln and Mercury. In 2007 Sirius became standard in the Lincoln line. For production penetration is expected to reach 70% for the 2009 model year.[19] In 2009 model year Ford will be the first manufacturer to introduce Sirius' data services suite called Travel Link.
Other Partners:
- Toyota including Lexus and Scion.
- Kia
- Bentley
- BMW
- Volkswagen, including Audi.
- Mitsubishi
- Hyundai
- Nissan
- Hertz, Avis, Alamo, and National car rental.
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.
[edit] High subscriber acquisition costs
Since its inception, Sirius has operated with significant losses, both companies had combined losses of $4B between 2005 and 2007. Sirius has seen decreasing net losses over the last three years as subscriber acquisition costs have fallen and revenue per subscriber has increased. 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.
Sirius's SAC in 2007 was $101 for every gross additional subscriber, compared to total revenue per subscriber of $153 (these costs don't account for other hefty costs such as marketing and programming costs). For the first time since its inception, Sirius saw higher revenue per subscriber than subscriber acquisition cost. The merger with XM could help Sirius achieve profitability as the two companies combine their subscriber base and lower redundant operating costs.
[edit] Low customer retention rates
Lowering SAC must be done in conjunction with maintaining a customer retention rate high enough to move the company to positive operating margins. For instance, the average customer would generate $210 in revenue over a 2 year period given 2006 figures--ostensibly enough to make up for a $114 SAC and cover other operational costs. As seen in the table below, the number of customers deactivating their service has grown as a percentage of new customers signing up from 2004 to 2006.
Sirius Churn Rates (1000s of Subscribers)
| 2004 | 2005 | 2006 | 2007 | |
| Beginning Subscribers | 261 | 1,143 | 3,317 | 6,025 |
| Gross Subscriber Additions | 987 | 2,519 | 3,758 | 4,184 |
| Deactivating Subscribers | 104 | 346 | 1,050 | 1,887 |
| Ending Subscribers | 1,143 | 3,317 | 6,025 | 8,322 |
| % of Deactivating to Additions | 11% | 14% | 28% | 45% |
Source: Annual Report
Sirius calculates churn by taking the number of deactivated subscribers divided by the average quarterly subscribers. This gives Sirius a average monthly churn calculation. By this method, the average monthly churn for 2007 was 2.2% per month.[21] This figure is termed as "Fully Loaded Churn" because it includes deactivations of subscribers coming off of OEM trial periods that elect not to continue the service. Sirius discloses their "Self Paying" churn as 1.6%. Self Paying churn includes only those subscribers that deactivate that are paying for the service themselves. The self paying churn has been consistent over the years, while the "Fully Loaded" churn has increased. The increase in Fully loaded churn is attributable to a larger amount of subscribers coming from the OEM channel and getting a trial subscription that they do not have to pay for.
[edit] Risk from satellite damage
Sirius is completely dependent on its satellites in order to provide service to customers. The newly formed Sirius now has combined 4 broadcasting satellites and three more in orbit that can serve as spares.
If one of its satellites were to become damaged and either need substantial repairs or replacement, its service capabilities would be seriously impaired for at least six months after the damage was done. The odds of any of its satellites failing are uncertain, but in the past they have had problems with circuit failures in their satellites' solar panels. Sirius has not released any statistics on the likelihood of more problems with its satellites but has recognized that there are uncontrollable elements to the operation of their satellites that could cause them to cease functioning.
[edit] Conditions of the Merger
Sirius XM had to agree to certain conditions so the merger would be approved. The most notable conditions include 1) a cap on subscription prices for 3 years post transaction 2) both XM and Sirius compatible receivers within the first 9 months 3) no exclusivity for equipment manufacturers and 4) new programming packages including a la carte and family friendly options. 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.
[edit] Programming content quality
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. In 2007, Sirius spent $236 million (25% of revenue) on programming and content for their service.[22] This is significantly less than the $550 million (or 82% of revenue) the company spent in the same area during 2006.[23] 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.
[edit] Sports coverage
- NFL: Sirius broadcasts play-by-play commentary for all pre-season, regular season, and post-season NFL games as the official satellite radio partner of the NFL. The NFL is one of the most popular sports in America, drawing over 120 million viewers for televised games throughout the season and with over 140 million viewers tuning in for the most recent NFL Championship Super Bowl game.
- MLB: Through 2012, Sirius has rights to both the regular season and post season of Major League Baseball. This also includes the World Series.
- NBA: Sirius broadcasts play-by-play commentary for over 1,000 NBA games and is the official satellite radio partner of the national Basketball Association. Sirius' NBA coverage also includes all playoff and the championship games.
- NHL: Through the 2014-2015 season, Sirius has rights to the regular season, post season, and Stanley Cup of the National Hockey League.
- NASCAR: In 2007, Sirius became the official satellite radio partner of NASCAR and now provides coverage of all NASCAR Nextel Cup Series, Busch Series, and Craftsman Truck Series races. NASCAR has been growing quickly in popularity across the US in recent years, with its most-popular race, the Nextel Cup Daytona 500, drawing over 12 million viewers for the television broadcast.
- Soccer: Sirius is the exclusive partner to Barclay's English Premier League soccer. The relationship gives sirius the ability to broadcast matches from the top 20 teams including Manchester United. Additionally, Sirius broadcasts Chelsea Football Club Premier matches, the UEFA Championship League, and the Celtic games from the Scottish Premier League.
- NCAA: Sirius broadcasts many NCAA football,basketball and other sports from schools in 18 Division I Conferences. Sirius is the exclusive provider of the NCAA March Madness College Basketball Championships through 2009.
Other Coverage:
- Indy Racing League
- PGA Tour
- US Open Tennis
- ESPN
[edit] Howard Stern
In October of 2004 Sirius signed popular radio talk show host Howard Stern to a five-year $500 million exclusive contract to host a show four days a week on Sirius satellite radio starting in January 2006. Stern is 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 before he switched to Sirius in 2006. A large, albeit incalculable, portion of the 3.7 million subscribers Sirius added in 2006 came from fans of Stern signing up to listen to his show.
[edit] Martha Stewart
In April of 2005 Sirius satellite Radio signed a 4 year $30 million exclusive contract with Martha Stewart. The deal created Martha Stewart Living Radio. The channel 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.
[edit] Oprah
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.
[edit] Competition
The only satellite radio providers in the United Staters are Sirius and XM Satellite Radio (XMSR). Sirius bought XM for $2.76B in July 2008.
Terrestrial AM/FM Radio 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.
HD Radio 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 2008 model year vehicles, 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 beginning in calendar year 2009, 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.
Digital Music Devices such as iPod and MP3 Players 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.
Internet Radio 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.
Wireless Phones 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.
Sirius XM Radio Inc.
[edit] References
- ↑ JPMorgan, Reinitiating Coverage 10/4/08, pg.5
- ↑ WSJ.com, The Sirius XM Merger Now What, 8/27/2008
- ↑ Morningstar, Sirius XM, Analyst Research
- ↑ Morningstar, Sirius XM, Analyst Research
- ↑ Sirius Radio, 2007 10-K, pg.F-4
- ↑ Sirius Radio, 2007 10-K, pg.29
- ↑ XM Satellite Radio (XMSR) Form 10-K, Fiscal year 2007, "Management's Discussion and Analysis of Financial Condition and Results of Operations", p. 37-38
- ↑ afp.google.com, Sirius, XM merger completed, creating US satellite radio giant, 7/29/08
- ↑ Sirius Radio, 2007 10-K, pg.F-4
- ↑ Sirius Radio, 2007 10-K
- ↑ XM Satellite Holdings, 2007 10-K
- ↑ JPMorgan, Reinitiating Coverage 10/4/2008, pg.5-6
- ↑ Sirius Radio, 2007 10-K, pg.F-4
- ↑ Sirius Radio, 2007 10-K, pg.29
- ↑ XM Satellite Holdings, 2007 10-K, pg.4
- ↑ Sirius Radio, 2007 10-K, pg.7
- ↑ Sirius Radio, 2007 10-K, pg.7
- ↑ Sirius Radio, 2007 10-K, pg.7
- ↑ Sirius Radio, 2007 10-K, pg.7
- ↑ Sirius Radio, 2007 10-K, pg.29
- ↑ Sirius Radio, 2007 10-K, pg.29
- ↑ Sirius Radio, 2007 10-K, pg.F-4
- ↑ Sirius Radio, 2007 10-K, pg.F-4
- ↑ 2007 SIRI 10-K: Pg 29
- ↑ 2007 SIRI 10-K: Pg 33
- ↑ 2007 SIRI 10-K: Pg F-4
- ↑ 2007 SIRI 10-K: Pg F-10
- ↑ 28.0 28.1 2007 WRSP 10-K: Pg 52
- ↑ 2007 WRSP 10-K: Pg F-4
- ↑ 2007 WRSP 10-K: Pg F-28
- ↑ 31.0 31.1 2007 XMSR 10-K: Pg 35
- ↑ 2007 XMSR 10-K: Pg F-4
- ↑ 2007 XMSR 10-K: Pg 31