Yesterday Sirius XM Radio (NASDAQ:SIRI) CEO Jim Meyer spoke at the Bank of America-Merrill Lynch Media, Communication and Entertainment Conference. Meyer was questioned on a variety of topics, ranging from the recent lawsuits and content agreements to the purchase of the Connected Vehicle Unit of Agero purchase. There are aspects to each of these items that are intriguing, but the one that caught my attention the most revolved around tiered pricing.
This is not something radically new. Sirius XM has had a $7.99/month Sirius A La Carte option for years. This would permit the subscriber to pick 50 channels from a pre-selected group, and if additional channels were desired beyond 50, they could be added at $0.25/month. The subscription had certain drawbacks, with many of the more popular offerings excluded. For instance, premium channels and live games were not available, and it was only available with certain radios.
Nearly two years ago, former CEO Mel Karmazin even discussed the possibility of offering a limited group of free, ad-supported stations, as a way to monetize the tens of millions of idle radios on the road. I had written about this at the time, and noted:
One intriguing idea shared by Karmazin at the Liberty meeting was the possibility of offering a free service where the stations would carry ads and the number of stations offered would be limited. This type of program has the potential to generate additional advertising revenue and has the potential to make Sirius more valuable as a distribution channel to certain content providers. It also has the risk that it could cost Sirius some of its current self-pay subscribers.
This program has not been implemented, although the company has begun to aggressively pursue marketing efforts to capture a portion of these idle radios through its used car and Service Lane programs. What all these programs have in common is that they are going after a market where the satellite radio is already in the car and not generating any revenue for Sirius XM.
During the interview, Meyer noted that Sirius XM is not doing particularly well in certain market segments:
I think there are some groups of potential subscribers that were not doing as well as we should and in particular the two areas where I think we can do a lot better are Hispanics and women and I think your [sic] going to see us taking more action there to improve that.
One new program, expected to be ready in October, is designed to go after the Hispanic market with a very low monthly rate.
We will be doing an update to our channel line-up in the middle of October and when we do, I'm pleased to announce that we'll have an Hispanic package, including [Piolin] that we just signed a couple of weeks ago, who we're very excited about for an Hispanic morning show. We'll have that package available for every radio, virtually on every radio on all of our platforms going forward.
Furthermore, once we launch that package in October we will also be launching a special package aimed at the Hispanic tier, which will primarily be Hispanic programming with some other limited English content around that for $5.99 a month and we'll see how we do. So we are going to talk, dedicate more of our bandwidth to this segment and we are going to go out there with what we think is a pretty attractive price and see if we can expand the size of the pile in the market.
One of the very positive aspects of this marketing program is that it will be offered "virtually on every radio", instead of specific hardware that A La Carte requires. It will also be targeted to a particular demographic. And, perhaps most important, is that it comes at a much lower price. The lower price point also represents a risk, one that Meyer recognizes.
A follow-up question by an analyst at the conference was whether the $5.99 price would be a fore-runner to other tiered pricing options. Meyer's response:
So I would say not right this moment, but I think we are realist, okay. I think we understand as the size of the pie grows and the demographics of the targeted customer base grows, that we may have to impact evaluate other plans.
What I will tell you, we are quite comfortable with we have today and so I'm only willing to do those plans if in fact they are incremental to what we already have, right. I mean a good plan for us is not going add a lower tier service at the substitution of higher tier subscribers.
So we are looking at lots of things, I wouldn't expect any near term announcements on our part in this direction in the near term. I think the Hispanic step that I announced today is the good step for us to put our toe in the water. I'm really positive that the lion's share of any subscribers we get to that $5.99 tier are subscribers we are not getting today. And so I truly see that as truly incremental and I think that's the way we are going to try to balance it going forward.
Considering the potential size of the Hispanic market, the disclosure by Meyer that the company's Hispanic subscribers are under-represented, and the investments that Sirius XM has made in acquiring content targeted at this market, something needed to be done. Still, the $5.99 price point is a bold move on the part of Meyer. He recognizes that there is the risk that other full-pay subscribers may trade down to the lower tier option, and is willing to take that risk.
It will be interesting to follow whether this move is successful, if it will be a unique program or expanded to other vertical markets, and how aggressively the program will be advertised. Regardless, it is a creative way to address an under-penetrated market, and with the company's growing free cash flow, Sirius XM can certainly afford to take that risk.