Sirius XM: Take Rates In Connected Cars 'Higher'

| About: Sirius XM (SIRI)

There has been an inordinate amount of speculation over the years surrounding Sirius XM (NASDAQ:SIRI) and competitors such as Pandora (NYSE:P). That speculation? That the ominous "connected car" would be the end of Sirius XM.

Is this proving true? Well, if you believe David Frear's words from the Piper Jaffray Technology, Media and Telecommunications Conference on Tuesday, then no, it is not. My thanks go to Seeking Alpha user wwtimewarp for pointing this out in the comment section of my article here.

So what was said, exactly? Two important things. Let's take a look at each one at a time.


Unidentified Analyst

You kind of touched on it a little bit but do you think 10 years down the road what does entertainment look like in the car. I mean what is (inaudible) streaming (inaudible) need for satellite down the road. How does that play out?

David Frear - EVP, CFO

I tend to think that you can't have too much capacity, right? And I really don't see it as all streaming, I think that you continue to burden a wireless network that was fundamentally built for different purposes, they organize it for different purposes, when traffic get stopped on the GW Bridge, they are not going to split that cell again while you are sitting there. So you are going to busy out and end up with latency and all the rest.

So, offloading networks with things that can be naturally offloaded is just a smart thing to do. I don't see broadcast platforms disappearing and in fact I think that the value in having a broadcast platform married with two-way interactivity is a great opportunity and it's very cost efficient for consumers because you can bet that data plans - certainly they're already mobile, but also at home are going to be variable based.

This goes with what I have been saying all along. Mobile IP is ill prepared for a rush of connected cars all streaming radio through its networks. It may be fine for now, as users stream in limited capacity, but multiply that by a factor of two, then four, then eight. Now add that users are simply using their plans for more and more data overall, and you run into a problem. Network speeds slow down. Latency builds, and you end up with holes in the stream.

Is this a huge issue for streaming audio? Not entirely. They buffer, and holes are handled by that buffer. But it introduces issues in switching songs and between songs, if the connection speed drops too much or the holes become too large, you end up with gaps in your audio. How frustrating. When you just want to listen to the radio on the way to work, you don't want songs skipping in and out.

I live in New England, and drive extensively for my job. I've tried several streaming services to mixed results. Even in the Boston area which is heavily populated there are locations with spotty 3G data service at best, and some with no connection available at all. Will this be fleshed out over the years? Of course. But that takes time, and in the meantime the current network is ill prepared for the masses to adopt free radio over IP in quantity. That's a problem for "streaming only" services, in my opinion. It puts a cap on potential users, and further puts a cap on users who might be willing to pay for commercial free access.

The winner here really is Sirius XM which can provide seamless satellite audio, in addition to providing customized IP radio all under one subscription plan. Sirius XM has the only hybrid system on the market and is the only system capable of bridging that gap while mobile IP is built out over the coming decade.

On to the second point:

James Marsh - Piper Jaffray

We have got time for one more…

Unidentified Analyst

Yeah, so I know it's early days, but some cars have started shipping - there's decent number out there that are pre-ready for Internet radio, Pandora etcetera, are your take rates in those cars higher, lower or same?

David Frear - EVP, CFO


Unidentified Analyst

One word answer.

David Frear - EVP, CFO

They are higher.

Unidentified Analyst

They're higher.

David Frear - EVP, CFO

They are higher so you tend to - it's another one of those things where I tend not to believe the data, right. So what I think that is, is I think it's a set of very technology forward people who want that kind of car, want that enabled vehicle and they are already consuming across multiple channels. We have surveyed our customers a significant component of our customers, stream and stream regularly just like they listened to AM and FM radio; we don't expect to get them exclusively, all right, but we do expect to deliver value so they believe we are worth paying for.

Pretty clear and direct. The take rate, or conversion rate, of cars which are connected and come with Pandora and the like built into the dash are higher for Sirius XM. Simply stated, Sirius XM sees a higher percentage of these cars convert to paying subscribers. That's pretty darn important, because the data is not showing that the connected car is hurting Sirius XM, but rather it is helping Sirius XM.

Note that Frear also goes on to state that:

We have surveyed our customers a significant component of our customers, stream and stream regularly just like they listened to AM and FM radio; we don't expect to get them exclusively, all right, but we do expect to deliver value so they believe we are worth paying for.

And this points to the notion that the customer who uses many services still elects to retain Sirius XM. A customer may listen to both Pandora and Sirius XM, for instance, but does this matter? If the customer chooses to retain Sirius XM, the subscription is paid. It matters not if the user listens 10, 50, or 200 hours per month.

I'd caution those such as Dan Weidelich, who are placing short bets and buying puts expecting the demise of Sirius XM at the hands of "social radio" to do their research a little better. Listening to statements such as these by David Frear, and paying attention to current subscriber growth at Sirius XM, is a better idea than simply throwing money at an idea and a hunch. Short Sirius XM is a risky bet in the long term, and given Frear's words, being long should be just a bit more comfortable going forward.

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 am long SIRI January 2014 $2 calls.