What Does the New GM Deal Mean to Sirius XM?

It did not get a lot of fanfare in analyst reports, nor did it seem to be a huge topic of discussion, but the new GM deal means a lot to Sirius XM Radio (SIRI). To fully grasp this, we need to go back in time to when the GM deal was first struck.

When XM Satellite Radio reached a deal with General Motors, it was a big win for satellite radio in terms of “getting onto the map”. It was the GM deal that paved the way for other OEMs to follow suit. In many ways, the success of satellite radio happened because of that deal. That being said, it turned out to be quite an expensive deal for XM satellite radio, and now the merged Sirius XM.

At that time, XM Satellite Radio was not 100% commercial free music. The price of a subscription was also less expensive at $10 per month vs. Sirius’ $13 for commercial free music. XM’s business plan called for subscription revenue PLUS ad revenue. The thought was that the ad revenue would bolster the money brought in in a substantial way. What XM promised GM was that it would get a percentage of the SUBSCRIPTION revenue (capped and based on the $10 subscription rate) that would eventually get to 50%. This is not a real problem for XM if it was getting an additional $3 or $4 in ad revenue. It became a huge problem because that type of ad revenue never came to fruition. Eventually XM abandoned the ad supported music business model, raised prices, and went commercial free on music.

What happened with the GM deal was that it was basically a break even proposition at best. GM added plenty of subscribers, but only half were keeping the service. Thus, subscription numbers looked great, but realistically nothing that came from GM was trickling down to the bottom line.

This is why hearing that a new GM deal exists with better financial metrics for Sirius XM is a huge plus. Without having seen the deal, all we can really surmise is that the subsidies are better, and the revenue share is more friendly to satellite radio. What this means is that GM subs will finally help more than just the subscriber numbers. It also means that Sirius XM has more negotiating power with other OEM partners to improve on those deals as well. We can also surmise that because this is a long term deal (through 2020), Sirius XM was happy with the terms of the deal. One special item of note is that the old deal was tied to the radio. Thus, even when the car was sold and a new person activated the radio, GM would STILL get its revenue share on that radio. Whether this changed in the new deal is unknown, but it is important to bear this fact in mind.

As we are all aware, the OEM channel is important to Sirius XM Radio. It is the mechanism by which the most people are exposed to satellite radio. The company announcing a change in its biggest OEM partner is huge news that cannot be underestimated. It is perhaps one reason why, despite lower car sales, Sirius XM was able to raise its guidance for adjusted EBITDA from $300 million to $350 million for 2009.

As with most OEM deals, we will not get to see all of the details. However, we will be able to measure the impact through certain metrics such as revenue from subscriptions in promotional periods, etc. The cost savings in the GM deal was not the only piece of information offered up by Sirius XM. It also indicated savings in the talent that appears on its service. We will be able to see that impact going forward in the programming cost metrics.

Investors should bear in mind that this will all take time to pan out. The bottom line is that it now seems possible that GM can contribute to the BOTTOM line rather than just the subscriber roles.

Position - Long Sirius XM Radio, No position GM

Comments

[BChargers:]

Sirius PAYS GM to put their radios in GM cars. If GM makes less cars Sirius doesn't have to pay for as many radios to be installed...
Of course Sirius will spend less this year.
It has NOTHING to do with running the company better.
Are all SIRI "investors" this dim, or are all of these "SIRI is great posts" the same person?
PEOPLE DON'T WANT IT
LET THAT SINK IN

May 10 12:47 PM

[wholesalecd:]

This headline just came out, "GM BK Inevitable"

Just more BAD news to stir the pot even more.

The trickle down will continue for the next several days. It will be back at .30 by the end of the week.

Sell now and get back in at .25 but you gotta sell now.

JAY BOY BILLY

May 10 01:44 PM

[ex GM emp:]

A few points left out.
Compared to the old XM, the new Sirus/XM sucks and costs more.
Subscribers dropped for the first time.
Car sales have been cut in half.
Unemployed numbers still rising.

Good luck going long with this stock.

May 10 01:48 PM

[burnout:]

Charts point to the stock going down short term but with the manipulation that goes on with this stock and you sell because it looks like there may be a small dip you take the chance of missing a big move up.
If you love the product and think the stock will be higher in a week or a month or a year, do you really want to sell at .4 for the chance to buy back in at .3 and then have it jump to .6 before you can buy?

People think for yourselves, read what the bashers have to say but also read the replies to their posts that show facts and figures you can confirm for yourselves to be true.
I am long SIRI and think it will be over a dollar within the next year. I am not telling anyone to buy or sell. If the stock goes to zero I will lose money but won't go hungry. If the stock goes to $2.00 I will be able to retire in 2 years at 55 and should never have to worry about money as long as I live.

May 10 03:45 PM

[PDinATL:]

Good points Tyler. However, has anyone considered what effect a GM bankruptcy would have on this new agreement with Sirius? I have heard that a debtor-in-possession in a Chapter 11 bankruptcy has the right to accept or reject executory contracts. If GM filed bankruptcy, could GM then reject the new Sirius deal, at least in an attempt to get more favorable terms?

May 10 10:18 PM