If you are invested in Sirius XM (SIRI) you are likely aware that the company has its version of personalized radio in beta testing right now. The official launch date has not yet been announced, but by this time many people that have used the beta have a decent understanding of what Sirius XM's personalized radio is, what it is capable of, and how it will fit into the audio entertainment landscape.
Sirius XM's personalized radio has been dubbed "MyControl", but it appears that the company will brand the service under the name "MySXM". This service is delivered and used via the internet rather than satellites. In fact, the functionality of MYSXM makes satellite delivery virtually impossible at this point. Thus, the product will be utilized more with smartphones and PCs rather than through a satellite radio receiver.
The first thing that investors need to understand about MySXM is that it is more of a defensive move than one designed to become the "be-all and end-all" of audio entertainment. As such, investors should not think about this service as bring mass subscribers into the fold. Instead, it is better to think of MySXM as a service that will help hold onto existing subscribers.
As compelling as satellite radio is, the gap between satellite delivery and other audio entertainment is fading with the more widespread availability of internet capability on smartphones and in the car. This gap will continue to narrow. Just 5 year ago the choice was a handful of AM and FM stations vs. hundreds on satellite. Now, with Internet capability, consumers have a lot more choice. Simply stated, Sirius XM had to ramp up its internet offering to remain one of the most relevant services available.
The biggest reason that MySXM is not a Pandora (P) killer, a Slacker slayer, or will nullify Spotify is that it is simply not being marketed that way and it comes at a cost greater than those services. If you want to sign up for Sirius XM Internet Radio you will need to shell out at least $15 per month. All of the other services are free or less expensive. Where MySXM will excel is with existing subscribers already paying for a service. MySXM is a value added service that will help keep subscribers on board and even get them listening more.
MySXM is a churn reducer, a conversion creator, an ARPU (Average Revenue Per User) enhancer, and a listening hour generator. It reduces churn by making the service more valuable to consumers. For many years I would actually listen to Sirius XM in my car, but other services in my home and at work. Other services gave me more variety and control and thus became my de facto choice when not in the car. Sirius XM's "On-Demand" and station caching began to change my listening habits and MySXM is changing them even more.
Perhaps a brief description of what MySXM is in comparison to other services may help illustrate my point.
MySXM takes an existing curated Sirius XM channel and makes it even more customizable by allowing the consumer to control three attributes of that channel. By example the attributes that a user can control on an 80s channel are "Depth", "Style", and "Era". Each attribute slide bar has 5 levels. The "Depth" slide bar is a scale from "more variety" to "top hits". The Style slide bar ranges from "dance/R&B" to "pop/rock". Meanwhile the "Era" slide bar "early 80s" to "late 80s".
As you can imagine there are a lot of choices and variables. Let's assume that a typical 80s playlist includes 10,000 possible songs during a given week. Sliding the bar toward top hits may filter out a few thousand songs, while going to more variety keeps all possible songs in the proverbial juke box. Sliding the "Style Bar" may narrow the field a bit further, and the "Era" bar even more. Essentially the end result is that a consumer can instantly refine an existing channel to play more and more of the music you want.
Let's compare this to Pandora. First things first. Pandora is free, so it has a very wide following. With Pandora a consumer starts off with a channel that has a very vast library of music. As you listen you give songs a thumbs up or a thumbs down. When you like a song Pandora tries to feed you more songs similarly to those you like. When you dislike a song it tries to remove similar songs from your rotation. I am oversimplifying what happens, but if you "like" an Ozzy Osbourne song, you will get more Ozzy, more Black Sabbath, and more Metallica. By contrast if you "dislike" an Ozzy song you may get less of these. Whereas Pandora builds over time, you can instantly get what you want with any mood from Sirius XM. However, whereas Sirius XM will cost you over $15 per month, Pandora is free.
The comparison to Slacker is perhaps the most relevant one. I love Slacker and use it frequently. Slacker has music, news, talk, comedy, and sports. Some of these categories are not as robust as Sirius XM, but Slacker does have a compelling line-up of content that is perhaps closer to Sirius XM than anything else (iHeart Radio has a massive library of content, but it is internet streams of terrestrial stations). The Slacker premium service comes in at a price point of $9.99 per month. This removes commercials and allows for greater customization.
A user can customize their news feed, sports experience, and even select a song that they want to listen to instantly, a feature that MySXM lacks. Sirius XM's MySXM actually serves to catch Sirius XM up to Slacker in many ways, surpass it in others, and be slightly behind in still other areas. Slacker lacks the slide bars, while Sirius XM lacks the instant access to a specific song. If I were a consumer the capabilities of Slacker and Sirius XM are compelling. Slacker however is less expensive to a consumer, and that is a major consideration.
Now, with that bit of data to consider let's look at exactly how MySXM will help Sirius XM.
A few years ago I actually had 3 satellite radio subscriptions. There came a point in time when I sat down and considered how often I use these subscriptions. I came to the conclusion that, for me, two of the subscriptions were not necessary. What I considered was my use and my listening habits. As I mentioned above, I was using Slacker more often in my home and office. I still had Sirius XM Internet Radio as an option on one of my subscriptions, so I was not giving up the capability, but I simply did not see the value in a second or third subscription. Had "On-Demand" and "MySXM" been available back then I might have kept one of my subscriptions.
What MySXM does is give existing subscribers more value. It makes the listening experience more special and more customized. With MySXM a subscriber is now more likely to actually use the service outside of the car and in the hole or office. If you commute 15 or 20 miles a day you may barely see value in a satellite radio subscription. If you can use that subscription in a really cool manner at the office and at home it becomes more valuable. A more valuable service makes it more "sticky". A more "sticky" service means you are more likely to keep it.
To be clear, I do not see MySXM bringing churn down by a huge number. The company had churn of 1.8% in the most recent quarter. What I see MySXM doing is helping to keep churn at 1.8% whilst helping to keep the average revenue per user up, and assisting in conversions.
The term conversion is an important one for Sirius XM. The company invests dollars into satellite radio chipsets that are installed into cars. currently the sweet spot for installations is between 65% and 70% of cars. That number is not likely to change dramatically any time soon. One reason for that is the conversion rate. The conversion rate measures the ability of Sirius XM to convert a promotional subscription to a self paying subscription. Currently the company is able to convert about 44% of promotional subscriptions into self paying ones. That is the reason that the installation rate will not move substantially.
If 100 cars are manufactured, 67 will have satellite radio. The company will get 29 of those 67 to become self paying subscribers. Until such time that the conversion rate begins to increase in lower end cars, it makes little sense to install more radios. It is a fine balance.
MySXM will help tip the scales in favor of increasing installations by creating more value to a consumer. If a consumer sees that a Sirius XM subscription is more useful than just the car, they are more likely to subscribe. The service may not be worth $15 per month to a person that spends little time in their car, but with a compelling service that makes smartphone, PC, and tablet listening more accessible, a consumer is more likely to jump at becoming a paying subscriber.
Again, the shift will not be substantial, but it will help the company out in a positive way. It is more of a process than many realize, and the shifts will be gradual.
ARPU is the average revenue per user. It is a metric used to determine what people are willing to pay for the service. If ARPU increases, people are willing to pay more. If it decreases, people are willing to pay less and getting discounts. Believe it or not, in the most recent quarter Sirius XM's ARPU decreased from the previous quarter. This is a sign that retention efforts via discounting were coming into play.
MySMX will enhance ARPU gradually because it is a value added service. This service allows Sirius XM to have yet another marketing tool when seeking to convert promotional subscribers or stave off a consumer that is thinking of canceling the service. It could even have the impact of a consumer not getting to the point of calling the company to cancel, and simply keeping the service because it now has more value.
Where this helps is with consumers that are on the fence. At the moment a consumer makes the decision to call Sirius XM, the ARPU line is threatened. A consumer that makes the effort to place a call is typically going to get a steep discount from Sirius XM. In many cases this will be about $5 per month. Think about what a $5 per month customer does to the average that sits at $12. Every time a consumer gets a discount the ARPU line suffers.
More value means that some consumers are less likely to pick up the phone. While MySXM will not stop all subscribers from cancellation, it will have a gradual impact of helping to keep the ARPU line steady and have a better shot at growth.
Listening Hour Generator
Listening hours is not a metric used or offered by Sirius XM. However, the fact that it is audio entertainment means that listening hours are being racked up. The fact is that on the satellite delivered side the company has no way to know who is listening or how often. The satellites deliver to the consumer. They do not take back any data.
From a business standpoint, the more someone uses your product the more satisfied they are likely to be. If a listener is tuning into Pandora at the office, they are not tuning into Sirius XM.
MySXM creates a better user experience and means that those already willing to pay a subscription become more likely to use it more often. This is a good dynamic.
MySXM is a compelling product for existing satellite radio consumers. It is a value added service for those considering a satellite radio subscription after a promotional trial. It is not an instant game changing shift for the investment, nor is it for the consumer. It is a big positive that will deliver results in a very gradual way. MySXM allows Sirius XM to maintain a spot at the top of the audio entertainment heap. In the future, as IP delivered content in the car refines itself, we will have a seamless experience of Sirius XM Satellite Radio and Sirius XM Internet Radio. When that day arrives it will give Sirius XM some substantial advantages.
Disclosure: I am long SIRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have no position in Pandora.