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Sirius XM's (NASDAQ:SIRI) purchase of Agero Inc's connected vehicle service unit for $530 million will have a dramatic effect on broadening Sirius XM service offerings and positively impacts the future trajectory of the company. This unit will form the cornerstone for Sirius XM's future growth strategy. Although the news of this acquisition has gained attention in the media, analysts and investors seem to be seriously underestimating the impact that it will have on the future growth of the company. Agero's connected vehicle offerings will not simply be an add on service which Sirius XM will use to upsell to subscribers. The unit will enable Sirius XM to dominate the connected vehicle market of the future and move Sirius XM away from being simply a consumer electronics and entertainment company. It will become the leading in-vehicle technology and service provider.

Differentiation

The key for Sirius XM to establish itself as a solid brand and value proposition to all users is, and has always been, differentiation. When Sirius XM started out, it's goal was to offer commercial free radio with national coverage - two things which traditional radio broadcasters were unable to do. As Sirius XM grew, it further increased its value proposition when it began offering exclusive live coverage of sports and entertainment events. This offering clearly separates Sirius XM's products from competing streaming radio services such as Pandora and Spotify.

Going forward, Sirius XM will further solidify its dominant market position by offering subscribers a complete in-vehicle connectivity solution. Sirius XM knows that it's radio service will always face intense competition as companies offer thousands of different apps to bid for listeners attention. Although radio will remain a central piece of Sirius XM's business, the company will shift its attention towards offering a complete suite of car connectivity solutions. Sirius XM will be the in-vehicle source for radio, weather updates, traffic alerts, navigation, emergency services, etc, while generating loads of driver data which can be used to modify product offerings and predict future user needs. The Agero service will enable Sirius XM to branch out from being a pure play satellite radio provider to becoming an entertainment and telematics giant.

Becoming a Leading Tech Company

One thing must be made perfectly clear - Sirius XM's entry into the connected vehicle market is not an evolutionary process, it's a revolutionary change to their business. Investors and analysts have long been wondering if Sirius XM would ever offer in-vehicle internet service or video streaming. With Agero's connected vehicle services, Sirius XM would be able to offer such services and hundreds more.

In many ways, this move to evolve the company into a telematics provider mirrors Google Inc's diversification strategy. Google (NASDAQ:GOOG) leveraged its position as the leading source for consumers internet search results into becoming a player in the navigation and big data generation and storage market. Sirius XM will leverage its monopoly in the satellite radio market to enter and dominate the connected car market of the future.

Sirius XM may also eventually develop a business relationship with Google. For the last 8 years Google has been developing and testing a self driven vehicle which it claims will revolutionize the American driving experience. Analysts agree that the technology will be a game changer. Although rollout is probably still 5 to 10 years away, by that time Sirius XM will have a firm hold on the connected car telematics market and fostering a meaningful business relationship with Google would be beneficial for both companies.

Telematics - The Next Hot Thing

The car market of today is like the mobile phone market 10 years ago. There are currently over 250 million vehicles on the road in America. Almost all of them would be considered "dumb" vehicles in that they have none or limited connectivity or communication ability. But this landscape is rapidly changing. The smart vehicle revolution is aiming to turn cars into "mobile data devices on wheels." The term used to describe the technology deployed in connecting a vehicle to communication and internet services is "Telematics," and it's something that you will be hearing a lot more about in the near future.

Verizon, one of the largest telecom companies in the world made headlines in 2012 when it purchased one of the leading telematics developers, Hughes Telematics, for $612 million. While Verizon has long acted as a cellular network provider which enabled in-vehicle communications to occur, Verizon is now taking steps to actually own and manage the technology, platform and intellectual property to connect an automobile to the internet. Furthermore, Verizon sees value in providing services such as call centers and live human being interaction in the event of emergencies. Verizon has realized that the real profit to be made from the connected car revolution is not in simply providing a communication network but by providing a seamless end to end solution.

With the acquisition of Agero's connected vehicle unit, it is clear that Sirius XM has seen this same potential. Agero may not be a household name but it is in fact the largest roadside assistance provider. Ninety percent of new passenger vehicles sold in the United States are covered by a rebranded Agero roadside assistance service. The company has exclusive bundling contracts with GM, Ford and Lincoln, Mazda, Toyota, Chrysler as well as providing its services to insurance companies such as USAA, and Progressive.

Agero will allow Sirius to "strengthen its position in telematics, as well as build closer ties with car manufacturers it already works with in its satellite radio services." Sirius XM will be able to leverage Agero's current offerings to become the default vehicle industry telematics provider. Since Sirius XM already has 26 million subscribers and a great brand awareness among consumers, OEM vehicle manufacturers will be eager to fully integrate their new telematic technology into their future vehicle lines. Sirius XM will be able to upsell the additional communication services to subscribers and gain a stranglehold of the connected car market.

Estimates

Sirius XM will probably be able to offer a base connected vehicle option to its current subscribers for about $5 to $10 per month. Considering that Sirius XM currently has over 26 million subscribers, even if just 20% opt to subscribe to this telematics service, it would represent an additional $26 million to $52 million per month, or $312 million to $624 million in revenue per year. And that is only a short term forecast.

Longer term, we must consider that even with conservative growth estimates by 2020 Sirius XM is forecast to have over 40 million paying radio subscribers. By that date, the connected car market should be in full roll out mode with in-vehicle connectivity likely being offered as a standard offering in most new vehicles sold in the United States. If Sirius XM can offer its telematic services to 20 million subscribers at an average monthly price of $15, this would represent an opportunity worth $3.6 billion annually. That is approximately the same size as Sirius XM's total current satellite radio subscription business.

Market Reaction

Surprisingly, the market reaction to the Agero acquisition was rather muted. Investors chattered about the possibility of integrating more services into the current Sirius XM product offerings, but they largely have not realized the full scope of the emerging connected car market. Analysts were positive on the acquisition, mentioning that "telematics [would] develop into a meaningful business," but by and large, there full scope of the potential has not be envisioned. Even the company itself has not been extremely vocal in promoting the importance of the acquisition. Sirius XM CEO Jim Meyer simply commented "the transaction accelerates Sirius XM's development in architecture supporting connected-vehicle services, as well as the ability to provide services over both satellite and cellular networks."

Committed shareholders would be best served by reading between the lines in order to decipher Sirius XM's true motivation. A company like Sirius XM, controlled by billionaire John Malone and Liberty Media (NASDAQ:LMCA) does not simply spend $530 million in cash on a company unless they have a clear plan for the business to be both disruptive with its technology and massively important for Sirius XM's future. Regardless of the markets reaction, the Agero acquisition will forever change the face of the company and be the main growth driver for Sirius XM in the future.

Conclusion

The connected vehicle market is in its infancy but Sirius XM has positioned itself well to capitalize on the huge opportunity it represents. The telematics revolution that will occur over the next 10 years will be akin to the current smartphone revolution. Many players will race for a piece of the pie, and competition will be fierce, but the players who establish a dominant position early on will be best able to capitalize on the future growth. Sirius XM is making all the right moves. With the acquisition of Agero's connected vehicle unit it can leverage its dominant position within the radio and vehicle industry to take aim at the connected car market. The telematics business line will be worth billions to Sirius XM in the future and while investors and analysts have been relatively quiet about its prospects, they will soon start to take notice and the stock price will get a well deserved boost.

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.

Source: Sirius XM - Telematics Worth Billions