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On the most recent Sirius XM Radio (SIRI) quarterly conference call, the following exchange took place:

Benjamin Swinburne - Morgan Stanley, Research Division

You mentioned investing in customer service, I was wondering if that's what drove the increase sequentially in customer service costs, David? If that's sort of a reasonable run rate for that line item as we move into the next quarter and next year?

David J. Frear - Chief Financial Officer and Executive Vice President

Yes, it is most of what drove the increase. When you think about the business we're running that we are sort of a fairly aggressive and large-scale direct marketer, right? We get all these names from auto dealers and from auto companies about who's bought new and used cars, and then we market to them with a variety of campaigns that are all oriented towards driving people to contact us, whether they come onto our online account center and serve themselves across the web or whether they call into the call center or are part of our outbound telemarketing campaigns that we have, as you should expect the customer service and billing costs to continue to rise as we continue to sort of grow the funnel of opportunities that we're after and grow the customer base that we are serving.

Customer Service has become an increasingly important function at Sirius XM. As the number of Gross Additions continues to grow, not only from improved new vehicle sales by OEMs, but also from the growing used car opportunity that was expected to generate the equivalent of one million gross adds in 2012, there will be more contact with current and potential customers. Customer Service is part of a single line item in the income statement - "Customer service and billing" - that totaled $77.8 million in Q3, an increase of 21% over last year's Q3 total of $64.2 million, and a sequential quarterly increase of 13% from the Q2 level of $68.7 million. Year to date Q3, the CS&B expense increased 10% to $212.6 million over the prior year period total of $192.7 million. The recent 10Q notes the following about CS&B:

For the three months ended September 30, 2012 ... customer service and billing expenses ... increased as a percentage of total revenue. For the nine months ended September 30, 2012 ... remained flat as a percentage of total revenue. These increases were primarily due to longer average handle time per call, higher contact rates and higher technology costs. The increase for the nine month period was partially offset by fewer calls per subscriber, lower bad debt expense and lower third party collection costs.

We expect our customer service and billing expenses to increase as our subscriber base grows.

If anecdotal evidence is any indication of the Q4 number, call times are still long. The following comment appeared on a recent Seeking Alpha article:

I would consider paying again if customer service weren't so awful. The cancellation process alone takes away from any value proposition currently offered by any promotional/retention discounts. I was just offered a $25 for 5 months service retention discount after having just received 2 additional free retention months, and would have considered it.....had I not waited on the phone for almost 30 minutes to talk to someone.

and,

I was offered the $5/month retention deal over the phone when I expressed my desire to cancel (yesterday). Previously, I had a 6 month, $30 early renewal deal plus 2 free months for retention. Like I said, I would have been inclined to take the offer had I not waited on hold for almost half an hour to talk to someone - it's not something I want to do every 5 or 6 months when retention discounts are set to expire since I have zero willingness to pay full price for a service I really only need once every couple of months.

Is Sirius a good service? Absolutely but until they make it more customer friendly for people who would be casual listeners, it's not one I'm going to pay for.

Whether or not the extended wait time was due to staff shortages during the week between Christmas and New Year's holidays, activity related to activations from recipients of subscription Christmas gifts or a heavy end of quarter or end of year push to bring in large subscriber numbers will never be fully known.

What we do know is that the costs are high and growing and the wait time was unacceptable. We also know that the time taken to handle each call has increased and the number of contacts is growing (per the 10k). The growing number of contacts is fine as it indicates the funnel for new subs is increasing. The increase in call times is not.

Summary

The experience of "biobat," who wrote those comments, is a problem that needs to be addressed. I suspect that it was not a holiday related issue because the 10Q reported that the call times and contacts had been growing during the third quarter. Here's another disturbing number from the 10Q:

Customer Service and Billing Expenses, Per Average Subscriber, is derived from total customer service and billing expenses... divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. ...

For the three months ended September 30, 2012 and 2011 , customer service and billing expenses, per average subscriber, were $1.12 and $1.01 , respectively. These increases were primarily due to longer average handle time per call, higher contact rates and higher technology costs. For the nine months ended September 30, 2012 and 2011, customer service and billing expenses, per average subscriber were $1.04 and $1.03 , respectively.

This is a monthly expense that jumped 11% per subscriber, and the length of time spent on calls increased. It is an increasing expense that still resulted in decreasing efficiency as measured by the time spent on calls. It is an expense that resulted in a wait time that one subscriber found so intolerable he passed up the opportunity to keep his subscription at a steep discount.

It is a data point worth following carefully and is a two-edged sword. It could be considered great that the call center is so busy that it can't keep up with the business, but it's not so great if the staffing is such that customers are leaving because of wait times. Hopefully it is also an opportunity for savings from improved operational efficiency in the coming year, a year for which I wish everyone health, happiness and prosperity!

Source: Sirius XM Customer Dis-Service

Additional disclosure: I have $3 January 2013 covered calls against most of my SIRI position. I also have a variety of other covered call positions. I may initiate (or close) a buy stock/sell option position in SIRI discussed in a recent article at any time. Also, in addition to long-term holdings, I have recently begun day trading 10,000 share blocks of SIRI and may continue to do so.