Seeking Alpha
Media, income investing, telecom, value
Profile| Send Message|
( followers)  

I have rarely been a fan of buzz words, and this is especially true when it comes to investing. In the case of Sirius XM Radio (SIRI) the latest buzz words are "the connected car" and "telematics." It's as though the Sirius XM place in the dashboard of two thirds of the cars sold in the US and its more than 50 million vehicles on the road with OEM-installed satellite radios or its satellite delivery system of audio entertainment, will give it an edge in the in the world of automotive information communications and control, and a prominent place in the car of the future.

Many of us have seen the "old" demonstration (circa 2007) where the Toyota Lexus parallel parks itself. The one where the car would steer itself into a tight space... How about this more recent, and very funny, video for Star Trek fans? In The Challenge, starring Zachary Quinto and Leonard Nimoy, Audi takes on Mercedes, and the "car of the future" makes a brief appearance, drops off the driver and goes off to find its own parking space. It will later return to pick up the driver when he "calls" for the car Will Sirius XM get an opportunity to play in this arena?

The Audi connect car at the end of the video is a prototype design that is partially controlled by an iPhone app. It all sounds pretty cool, and it is. Early this year Audi became the first car manufacturer to be:

granted a license to drive or operate autonomous cars in Nevada. Nevada passed a law last year making it legal to test self-driving cars in the state, and other companies, such as Google, have been granted licenses as well. Audi says it expects the technology it's working on to be commercially available in the next decade.

That's correct. It's about a decade away from being commercially available from Audi. Other car manufacturers are already incorporating bits and pieces of this type of technology.

Most of us are familiar with the idea that the car of the future should allow us to sleep while it drives itself to our destination. While that is probably even further in the future, other safety type features are being road tested today.

Driverless cars would also need to communicate with one another, to enhance safety. That, too, is coming. A number of carmakers are developing wireless networking systems through which vehicles can exchange data, such as their speed, their steering angle and even their weight, to forewarn anti-collision systems and safety devices if an accident looks likely.

Ford, for example, recently tested a brake light that can provide an early warning to other motorists. If the brakes are applied hard in an emergency, a signal is broadcast. This illuminates a warning light in the dashboard of suitably equipped following vehicles, even if they are out of sight around a bend or not immediately behind the vehicle doing the braking.

Ford has been testing this system as part of a collaborative research project with several European carmakers. They have put a fleet of 150 experimental vehicles on the roads. When it tested a group of these, Ford found the technology let drivers brake much earlier, helping avoid collisions. A driverless car would be able to react even faster.

Sirius XM may be able to participate in some of these efforts, but the recent announcements by Apple (AAPL) about iOS 7 integration into a dozen new vehicles and the work underway by major cellular players like AT&T (T) indicate that the field will be hotly contested and a Sirius XM satellite enabled service may have difficulty gaining traction. AT&T describes the benefits of Machine-to-Machine communication:

Machine-to-Machine (M2M) solutions wirelessly connect millions of diverse devices to a network, enabling two-way communication. From trucks and turbines to heart monitors and vending machines, M2M allows network-ready devices to connect and share reliable real-time data via radio signals. Monitored and managed remotely, M2M automates processes in industries from transportation to healthcare.

...Organizations connecting M2M devices to a network can quickly see the potential savings in time, cost and labor. Transmitting information wirelessly at its source - from a vehicle, instrument, house or business - and receiving valuable feedback not only automates manual processes, it helps to streamline service provisioning and billing. Multiply the number of connected devices you have, and you can see the powerful possibilities.

While one aspect of these vehicles is their sensing devices, the other is the capability to communicate. The one-way communication delivery system of the satellites and the limited bandwidth available to Sirius XM would seem to make the company a less than ideal partner. It's why Sirius XM plans to participate in the IP based segment of the market. From a recent conference call, Sirius XM CEo Jim Meyer made several comments:

...We hold the strong belief that having satellite connectivity and IP connectivity in vehicles will prove to be a durable advantage versus IP only connectivity as we move into a connected car world. We are already working closely with several OEMs on the development of in-car apps that will provide the initial integration of Sirius XM streaming services. So stay tuned for announcements in this area as well.

I should briefly note that much has been said about the potential threat to our business from in-car streaming. But owners - no one has recognized that broader and improved streaming also gives us a much better opportunity to better serve our customers in their homes, offices and on the go...

...I believe over a mid and long period of time, you can define how many years that is, you will see automakers move to what I will call embedded connectivity that will be LTE based that will give them lots of options for what they want to do for their customers and their vehicles. I think it's very important that Sirius XM participates in that rollout of technology as it occurs over the next three to seven years and that's exactly what were all about when we referred to our connected car strategy. This is something that as I mentioned in our last call I want to reiterate again today that we're moving and reprioritizing a lot of our technical resources and frankly now our commercial programming resources towards making that goal happen as we go out over time. So, I think that's all I want to say about at this point, but believe me we fully understand what's going on right now. ...

...I don't see today one single emerging competitor in the connected car space, I think that today the connected car platform is more of the strategy and I think what's so crucial about it is that I think everybody is looking for a chair at the table right now and I think its really important that Sirius XM occupy one of those chairs and so that's where the majority of our effort is going....

Obviously, in this area one of the key strengths we bring is years and I mean years of hard work and most importantly credibility of bringing new technology and technical platforms to the OEMs entertainment and infotainment platform and that's exactly what you're going to continue to see us do....

...I think that it's really unclear who is going to get what. Remember one of the things that both excites you and frustrates you about the world we play in, we're in conversation with automakers about the 2017 and 2018 model year right now. That's how far out these choices are. I can tell you the technology in many cases these auto companies are going to choose is still wide open,...

Summary

I regularly receive comments from investors in Sirius XM that think telematics and the connected car will be the next big revenue and earnings growth opportunity for Sirius XM. There would appear to be several flaws with this argument.

First, while the Sirius XM hardware is currently being installed in approximately 2/3s of the vehicles sold in the US, that also means that fully 1/3 of all cars don't have the hardware platform. The hardware is not installed in the remaining 1/3 because Sirius XM and the OEMs feel the conversion rate is insufficient to justify the investment. If the idea is to have cars communicate with each other, as in the Ford example, then it would be important that the functionality be available in all cars, rather than just 2/3s.

Second, if as Meyer states, "you will see automakers move to what I will call embedded connectivity that will be LTE based," Sirius XM's satellite delivery system is not a particularly strong advantage. Going up against experts in two way communication like AT&T or Verizon would be a decided disadvantage, especially when one also considers the telecoms are currently partnering with both Apple and manufacturers of Android based handsets.

Third, this is an opportunity that Meyer refers to as 3-7 years away and Audi thinks of in terms of a decade away. While there may be some revenue from its announced partnership with Nissan, even there the opportunity seems limited. Meyer stated:

I can tell you we're proud of what we've undertaken to deploy at Nissan which is a strategy where the technology is 100% based on our technology and our kind of - our innovation as it rolls out. Who exactly will provide what specific services on that platform is something that Nissan will ultimately decide. And obviously we're hoping by being a co-developer and a developer of that technology, it gives us an advantage in some of those key services as they roll out.

Sirius XM will be just one of those competing to provide the, as yet, undisclosed add-on services.

Clearly, Sirius XM does not want to be shut out of the connected car space, but just because they have a long-standing relationship with the OEMs would seem to be a relatively weak credential. And, over the next three to five years it would seem to be more of a drain on resources than a growth opportunity for revenue and earnings.

That doesn't mean that Sirus XM's earnings won't be increasing over that time period from the entertainment services it provides or the cost savings that it may generate. It's just that investors probably should not be counting on much contribution to the bottom line from the connected car or telematics before the start of the next decade.

Source: Sirius XM And The Connected Car

Additional disclosure: In addition to my long positions, I have January 2014 $3.50 covered calls written against most of my long positions in Sirius XM. I also trade blocks of Apple and Sirius XM on a regular basis. I may sell other $3.50 covered calls against my Sirius or calls against my Apple position at any time. I have no positions in any of the other companies mentioned in this article.