The Hidden Asset Of Sirius XM

| About: Sirius XM (SIRI)

Before Sirius and XM merged, each company had FCC licenses covering 12.5 MHz of Satellite Digital Audio Radio Service, or SDARS, spectrum. After the merger formed Sirius XM Radio (NASDAQ:SIRI), the company had licenses that covered 25 MHz of SDARS spectrum. Since the two companies had broadcast similar programming, it would seem like there is an extra 12.5 MHz of bandwidth, doesn't it? It should be extra bandwidth that the company can use to increase programming or sell.

This is a common misconception. Not only do the current satellites only broadcast to a specific band, but the receivers only are capable of receiving from that band. The company will be launching Sirius 6 later this year and starting the replacement cycle for the XM satellites in 2016. While the XM satellite replacement cycle could provide satellites capable of broadcasting on both bands, there is the issue of the receivers only being able to receive on a single band. That hasn't stopped questions from being raised in articles at Seeking Alpha, or at investor conferences where Sirius XM has presented. On March 12, at the Piper Jaffray Technology, Media and Telecommunications Conference, Sirius XM CFO David Frear was asked the following:

James Marsh, Piper Jaffray: OK. When do you reclaim -- you've got two networks up there, you got the XM network and the Sirius network, what kind of timetable could you reclaim that network for other purposes, or is it just a -- we've got too many…

David Frear, EVP, CFO: I mean, no. It's an issue that we have been talking about for years and planning for and I think but it's -- for this audience it's probably a long way out, right? When I sit and I talk to my satellite team, it's not such a long way out because they do that kind of planning. But it's in the sort of in a little more than 10 years time we'll probably be making an active decision about whether or not we want to continue to uplink the 80s channel twice, to do two different satellite platforms. And we will look at the legacy universe. We are moving things off of one platform on to the other platform; we're overwhelmingly likely over time to build an interoperable chipsets into vehicle. So there is a whole -- maybe at stage four or five of growth, there is a whole different monetization opportunity associated with that. But it's not in the next 10 years.

Note that Frear was discussing migrating the OEMs to interoperable chipsets in the future and a single platform, but even that isn't likely to occur for many years. The comment also doesn't fully address the other important issue, even if all the OEMs migrate to XM platform: the "legacy universe" or the used car segment.

Significance of Used Cars

As most investors know, last year Sirius XM began to aggressively pursue the used car opportunity. There are currently more than 8,000 dealers participating in the program that offers 90-day free trials to the purchaser of any vehicle with an OEM installed satellite radio. Last year, the program contributed the equivalent of more than 1 million gross subscribers and it is projected to generate the equivalent of 1.5 million gross additions in 2013. These free trials from 2012-13 would eventually contribute 750,000 to 1 million self-pay subscribers if they convert at 30%-40%.

As penetration rates for new cars has increased from 50% to nearly 70% in the past five years, and as new car production continues to increase, the pool of cars with OEM installed radios has climbed to more than 50 million. Less than half of these radios are active, and as more and more cars are produced with satellite radios, the pool of inactive OEM-installed satellite radios will also continue to rise. During the call, Frear also noted the following:

The next phase is as those cars begin to turn over into the used car market and, by the way we continue to build the new car production, so in the next, we have gone from zero to 50 million cars in the first 10 years of factory installed radios. In the next 10 years, we'll go from 50 million to a 150 million enabled vehicles. But the real story and I think the next 10 years is going to be about access to the previously owned car buyer. 80% of the households in the countries have a previously owned car in them and 70% of the cars sold in the country every year are previously owned vehicle. So, it's a market that we have not really tapped in this first 10 years of execution and I think we are going to have a great long-term growth story in the next 10 years.

It's a theme that has been spoken about by former CEO Mel Karmazin, current CEO, Jim Meyer and Liberty Media's (NASDAQ:LMCA) Greg Maffei, the CEO of Sirius XM's majority owner. The plan certainly has merit, but for it to work, Sirius XM must continue to broadcast to the receivers that operate in both the current bands.


OEMs expect their cars to be in use and supported for a decade or longer, and no subscriber is going to be happy if their satellite radio suddenly stops working. And, with the increasing importance of the used car market, even migrating the OEMs to a single platform won't address the need to support the older, single platform, chipsets. A 90-day free trial in a used car that does not receive a signal won't gather any subscribers.

More than four years ago, Liberty's Maffei said:

The great dream, perhaps, is that you have ... 150 audio channels on one consolidated Sirius XM platform that only consumed [half] of the spectrum, and [the other half] becomes therefore available for mobile video. That would be a great intersection of where the skills of Sirius XM and DirecTV (DTV) reside.

While the duplicate spectrum is a hidden asset, it is not one that will easily be monetized by Sirius XM. It is still a dream, and if one believes Frear, it is still a decade away before the question becomes relevant to investors.

Disclosure: I am long SIRI. I also have $3.50 January 2014 covered calls against most of my SIRI position, and I may initiate (or close) a buy stock/sell option position in SIRI at any time or day trade blocks of shares at any time to take advantage of the price volatility. 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.