If you are a bit savvy you noticed that when Sirius XM (SIRI) issued guidance for 2013 that it gave both net subscriber additions of 1.4 million and self pay additions of 1.6 million. It appears that the company is shifting focus to the self pay subscriber line and there is a good reason why.
Sirius XM has several "categories" of subscribers. Some are counted in the overall number and some are not. Depending on how a deal with an auto partner is structured, a promotional subscription may or may not be counted. The easiest way to understand this is by breaking the promotional category down to two components, "Paid Promotional," and "Unpaid Promotional."
Paid promotional subscribers are promotional subscriptions that are included with a new car which Sirius XM receives a payment from the car manufacturer. With an unpaid promotion the subscriber is not counted even though they are enjoying the service.
Both paid and unpaid promotions are consumers that will be faced with a choice at some point. That choice being whether or not to become a self-paying subscriber. If a paid promotional subscriber keeps the service they simply remain counted in the subscriber totals. If they elect to cancel the service they are not counted in churn but rather deactivations. An unpaid promotional subscriber gets the same choice. If they keep the service they are now counted for the first time. If they do not keep the service they are not counted as churn or as a deactivation. Confused yet?
The biggest car seller in the U.S. is GM. GM is likely also the biggest installer of satellite radio equipped cars. In Q4 of 2013 the GM deal will shift from supplying "Paid Promotional" subscriptions to "Unpaid Promotional" subscriptions.
GM supplies about 400,000 gross Paid promotional subscriber additions that are counted in the overall subscriber number each quarter. That dynamic will now be going away. While this throws a wrench into the sub number mix, the financial impacts of the deal are more positive for Sirius XM.
The key here is that investors need to begin to think a little differently when it comes to analyzing metrics of Sirius XM. The shift in this deal will impact metrics like subscribers, paid promotional subscribers, Average Revenue Per User (ARPU), revenue, deferred revenue, as well as revenue share and royalties.
Specific to the subscriber dynamics, investors should begin to watch the self pay subscriber line more closely. It actually has made sense to do this all along, but typically the focus has been on the higher overall subscriber numbers. After all, there are some 4.3 million paid promotional subscribers being carried, and it is better to say that subscribers are at 23 million instead of 19.
What we know from history is that about 55% of the paid promotional subscribers will not become self paying. We also know that about 75% of the self pay subscribers will stay with the service. Essentially the company deactivates about 55% of paid promotional subscribers as compared to 25% of the self pay. Self Pay subscribers are more sticky.
If you think about things, GM is responsible for about 20% of the subscriber number each quarter through "Paid Promotions." That is a big number. It does not simply get lost in the shuffle even with higher auto sales and a growing used car market. It appears that Sirius XM is well aware of this and wants to get the street thinking along the right lines. I look for this distinction to be made clear in each quarterly call this year.
I have had some readers inquire as to whether the new Toyota announcement of more installs would offset this dynamic. The answer is no. First, Toyota is still well behind other auto makers in terms of satellite radio installation percentages, and secondly Toyota is already a partner that is in the "Unpaid Promotional" category.
Beginning in Q4 of this year the big players in each category will be:
Unpaid Promotional - GM, Toyota (TM), Nissan
There are financial and other impacts as well. While some revenue does go away, the cost side will decrease as well. That is a subject for another day. The key at the moment is to understand that we should be shifting focus to self paying subscribers.
Disclosure: I am long SIRI.