Sirius XM (SIRI) at the Bank of America Merrill Lynch Global Telecom and Media Conference (Transcript)

Jun. 3.14 | About: Sirius XM (SIRI)

Sirius XM Holdings Inc. (NASDAQ:SIRI)

Bank of America Merrill Lynch Global Telecom and Media Conference

June 3, 2014, 04:20 AM ET

Executives

David Frear - EVP and CFO

Analyst

Jessica Reif Cohen - Bank of America Merrill Lynch

Jessica Reif Cohen - Bank of America Merrill Lynch

Well, thanks for joining us again for Sirius. We relatively have David Frear, CFO of Sirius XM back this year. Love that you came back to us. Let's begin with some operational questions.

Question-and-Answer Session

Jessica Reif Cohen - Bank of America Merrill Lynch

Sirius currently has roughly 26 million total subscribers with over 21 million in the self-pay category, you guided to one and a quarter million net adds for calendar 2014 and you seem to be tracking -- BoA has that projection, can you remind us how we should look at the new subscribers added to the base now that self-pay and paid promo are converging?

David Frear

Sure. The difference between the two is really sort of a bet on which way paid trial inventories are going at the end of the year. Auto sales continue to grow. Paid trial inventories should rise. If there are flat paid trial, inventories probably won't change very much right.

So that's why the two numbers are converging. I think the big thing about following the subscriber numbers now is trying to estimate what's going to come over used car funnel, right? So we really have three margin funnels that we've got. What we still sell is after-market radios mostly to our call centers. That's a small piece of our business now.

The fastest growing piece of our business is the subsequent owner business. So enabled vehicles -- factory enabled vehicles turning over in the used car market.

The big trick there is getting them on trials. So this year we've talked about the used car business growing to about 2 million gross additions from little over 1.5 million last year, so 30%ish type growth. It's a category we expect to grow for years to come.

And then there is what's still the biggest part of the funnel for us, new cars. So there are 16 million new cars that are expected to sell in the U.S. this year. The 70% penetration rate for satellite radios and they’ll get you to about 11 million new car trials that we'll run this year.

Jessica Reif Cohen - Bank of America Merrill Lynch

Given that solid first quarter number, would you characterize the one and a quarter million net additions as beatable this year?

David Frear

When we did -- when we put it out, we did characterize it as conservative, all right. We did feel like it was a number that we could achieve. We still feel it that way.

Jessica Reif Cohen - Bank of America Merrill Lynch

Is there anything that you could say -- any color you can give us on second quarter sub trends on net adds, how can -- anything you can say about…

David Frear

Before the quarter…

Jessica Reif Cohen - Bank of America Merrill Lynch

No, kind of the current quarter, I would say, it's webcast, so it's forward.

David Frear

Well, I appreciate you asking, but no. We are on track for our guidance.

Jessica Reif Cohen - Bank of America Merrill Lynch

Moving along, you guys have maintained guidance of double-digit EBITDA and free cash flow growth with implied margin expansion of 40%. In your view, what are the greatest opportunities for growth over the next three to five years?

David Frear

It's really the subsequent owner market. I mean that's -- we don't have a great grip on how fast it's going to grow. There aren’t any great resources for forecasting used car sales and most particularly for forecasting used car sales of satellite radio enabled vehicles, which is what matters most to us.

We'll see how the information develops, but we have 60 million cars on the road today. It'll be 150 million in 10 years. It'll be 120 million in roughly five years. And so the prospects for long term growth are quite strong.

The car sales market, total sales of automobiles in the U.S. is roughly 60 million and maybe 44 million-45 million of that is used cars 15 million, 16 million of it is new cars. So the used car market, the turnover in it is roughly triple what the new car market is and there is no reason why our business should look different than that in the long term.

So while we may find that new car opportunities are at an annual maximum, I really don't expect U.S. automotive sales, new car sales to get much above #16 million. I hope they do better than expected. So our new car opportunity should be pretty stable year after year.

But the used car opportunity should grow to be at least twice the size of the new car opportunity over the course of the next 10 years.

Jessica Reif Cohen - Bank of America Merrill Lynch

Given your relatively new focus on sub sectors that -- you mentioned the secondary car market, but you’ve also initiated and also for ethnic groups, Hispanic, how do you think this will affect financials? Will it be lower revenue and EBITDA contributions? Could it be higher margin because for many of these, at least in the used car market, you have the equipment already installed?

David Frear

Right. So there is no SAC load to bear. When you look at our subscriber acquisition cost, it really is a function of new car sales. So we are definitely going to get margin expansion by the fact that revenues will continue to grow and subscriber acquisition costs are probably at a high, that we continue to drive down the unit cost of putting the radio into the car, so there should be some continued improvement in SAC as long as new car installations don't grow again.

In terms -- we have very high contribution margins, so that should augur well for expanding margins in the business. In terms of the micro marketing that, we'll see how that works as an appeal that the content that we have is pretty broadly appealing to all groups in the country and whether or not targeting the Hispanic markets specifically or other micro segments specifically is going to produce a meaningful change in the statistical results that we have overall.

We'll see if that makes a difference. I think we feel confident in new car conversion rate in the sort of 42% to 44% area. We are very surprised that the strength of the used car conversion rate that's seen at the low 30's and we'll see whether or not we can make changes in those numbers with various micro-marketing.

Jessica Reif Cohen - Bank of America Merrill Lynch

Right. As you just -- the stated margin guidance of -- the EBITDA margin is 40%, but the contribution margin is much higher, but may be essentially double, how high could margins considerably go as you kind of go out over the next few years?

David Frear

I don't see them getting higher than 40%. I think that we are already at 34% among the best margins in the media. Certainly at 40%, we would be better than anybody else and I think that there are productive ways to reinvest the money in the business that more than half people to buy a new car don't take our service.

And as you'll see with the low 30's conversion rate, two thirds of the used car market doesn’t take our service. So I think there are plenty of ways to either spend money productively to continue to drive free cash flow growth.

Jessica Reif Cohen - Bank of America Merrill Lynch

And what do you see as the greatest risks for Sirius generating sustained growth over the next few years?

David Frear

I feel good about sustained growth because of the growth of the enabled fleet, right, going from 60 million to 150 million vehicles on the road over 10 years of sort of a great marketing opportunity and I think probably the thing that concerns me the most is what don’t I know?

If I look at all the knowns out there, I have some worries but no major worries, it's sort of the unknowns. Now among the knowns, obviously it's competition. We compete against Terrestrial Radio. They totally dominate the market. We compete against Pandora. We compete against -- to a certain extent against Spotify.

There is going to be growing competition, but when you look at the streaming providers named in FM radio and FM radio is already fully distributing cars, and assuming providers, it's already 150 million smartphones on the street in the United States.

So they're already in the car and it's hard -- I don't see anything in the near term that's going to change the competitive balance.

Jessica Reif Cohen - Bank of America Merrill Lynch

So on competition, as you said that 150 smartphones. Pandora has over 70 million users in a month and now Apple just announced the acquisition of Beats, which comes along with curated music by some pretty significant music executives and some of these companies have international operations, which probably give some additional scale, which you at least currently don't have.

How do you think about that and how do you think about International in general?

David Frear

Well, when you look at streaming landscape, it is unbelievably crowded and that's especially crowded with music-only product. What's really working in that landscape is free that the paid services haven’t done so well?

Spotify has 10 million paid users, but it's global, in the U.S. they have three million and people -- there was a Billboard article a week ago that talks about how great going to three million in less than three years, so Hooper checked for me and when satellite radio launched in 2002, that satellite radio got to about three million paid subscribers in three years as well.

So we'll see what the next eight or nine years holds for services like Spotify and whether or not it will take hold.

One of the things about the streaming business is they tend to be the paid stream intensely occupied by extraordinarily high churn rates and it’s okay as long as your current cost for acquisition as well.

But I feel good about the competitive balance in the United States that Pandora is at 70 million users. They’ve done a great job and I guess the bad thing about that they’ve got for us is that they’ve got 70 million users maybe some of them could be subscribing to us.

The good thing about that is they've got 70 million users, how much bigger can they get in the United States? The competitive effect of them growing from nearly zero to 70 million users is already in our numbers. AM and FM radio have over 200 million users a week and IrRAdio has 40 million regular users. So there is already tremendous amount of listening to internet radio in the U.S.

Internationally, I don't see us launching a satellite radio business outside the United States that we've looked at. We turned down multiple opportunities to do that, that for instance in Europe, I think it would be seven years before you would see the first dollar positive cash flow and you would probably go upside down $4 billion# to launch it and it just seems there are better ways to spend our time.

Jessica Reif Cohen - Bank of America Merrill Lynch

And then you guys have mentioned that streaming will be an important aspect of the end vehicle offering? Can you provide any color on what -- your streaming product?

David Frear

Well it's -- I think that it enhanced on-demand services that we have a lot and not so much on-demand music, but as it is to on-demand talk, news and sports content, that there are a lot of services that we offer through the app today. They'll be much easier to listen in vehicle and a lot of what you see in the app can be easily ported over to a connected vehicle.

So for us, connected vehicles represent not only a deepening of the audio entertainment experience for subscribers, but then it's also a huge business to business new product opportunity with the services that we provide to automotive companies as well as an improved business to consumer opportunity.

Jessica Reif Cohen - Bank of America Merrill Lynch

Switching gears, in mid March, Liberty reversed its course -- reversed course in its bid to buy the rest of Sirius that it did not own, if it had been dropped, you resumed your stock repurchase program, you've guided to $1.1 billion in free cash flow this year and just -- but there are -- some of it is a little higher at $1.2 billion for the current year.

But you also have capacity to gain at least another $1 billion or so if you got to your target leverage, which you said was roughly four times for generally have a return, is there anything holding you back from utilizing all of your capacity to repurchase share this year?

And how much of the $1.7 billion that remains as of the end of the first quarter -- as of the end of the first quarter, can the initial $4 billion stock repurchase authorization, how much of that $1.7 billion would you expect to do in calendar 2014?

David Frear

Well, I'll take the last question first. There is clearly no restraint in terms of liquidity in the stock. Picking up a $1.7 billion of our stock is not a difficult thing to do. Here we think the stock is cheap today.

We are in the market with buyback programs from time to time and I think we go look at the stock as basically just another asset and when we think it's cheap, we should buy it and when we think it's not, we shouldn’t.

Where do we lever up to the full four times just for the sake of stock buyback, that's a dialogue that we continue to have. We like to keep some of the powder dry in our leverage for acquisition opportunities. We are constantly looking at properties that are on the market.

We don't often see properties that we think are complementary to the business plan and attractively priced, but we do maintain a very active book of business and looking at it.

Jessica Reif Cohen - Bank of America Merrill Lynch

And can you just confirm or if you can, is Liberty participating now or not, that they are no longer participating in the pro-rata buyback?

David Frear

You would have to ask Liberty about what they are doing with their ownership interest in us.

Jessica Reif Cohen - Bank of America Merrill Lynch

Right. Okay. And moving on, but still staying with Liberty for a second, they recently announced plans to split into two additional companies with one of them the Liberty Media Group will include their 50% plus stake in you, in Sirius as the chief asset. Can you tell us what in your views, from your perspective what are your views on this move because it changed the apparent timeline for consolidation into a single company?

David Frear

Well, today I don't really see any advantage for the public shareholder in consolidating with Liberty. I don't see anything in particular that Sirius shareholders get out of it.

So from just my perspective, there is no timeline for that. It's -- there is not a strategic connection to it. I don't think there is liquidity issue associated with it. There are no tax issues that are resolved for Sirius XM in doing that. So I don't see any reason for Sirius XM to pursue it.

I can't speak for Liberty in terms of what they do. One of the things that it does do is should Liberty ever be interested in rationalizing the structures, certainly by spinning off the broadband assets, it leaves what remains in Liberty as little less complicated. You could look at it as having less of a differentiation from an investment in just straight into Sirius.

But there are still other issues there that other things to consider. There are some other assets, but it does make the two more equivalent so to speak in terms of your investment in satellite radio.

Jessica Reif Cohen - Bank of America Merrill Lynch

And then on capital deployment, you sort of addressed it a little bit, (inaudible), how would you prioritize the use of capital?

As you look at the competitive landscape, do you think that Sirius is a -- obviously one use is buybacks and you mentioned there is nothing pressing right now, but would you -- as you look at it over the next three years, do you see yourself as a complete company strategically?

David Frear

I don't believe there is a piece that we are missing. I think there are some things that we may be able to do to add to the value of the company, but I really don't think there is any piece that we are missing.

We are not missing some big piece of programming. That we are not missing out on a big opportunity in the streaming market that right now most of the streaming players who we've looked at many times over the years have pretty challenging economics because of the thing that really sells is free and the streaming players out there are really just offering their music service at incredibly low margins.

So we monetize better. We have higher margins and it's a powerful business model. So there isn’t anything we are really missing, but you know what, there is a lot of great ideas out there and so we continue to look and work hard.

Jessica Reif Cohen - Bank of America Merrill Lynch

So in August of last year, you did make one acquisition Agero, that's an asset right and there is finally -- and it's connected vehicle business $530 million, what does the business model look like over the next five years and you publicly said that you expect to drive revenue from roughly $100 million to double that amount, $200 million over the next three years I think with the timeframe.

So what drives that revenue growth and what is their model, how does their model evolve?

David Frear

So today the telematics business is largely a business to business opportunity that the automakers are putting private label brands on platform services and then marketing them to consumers.

And we'll see how that goes. So in acquiring Agero as well as in the contract that we had prior to that acquisition would need some, that we are effectively providing the services platform for the automakers. So it's a business to business application from our perspective, but the automaker having the business to consumer application.

So in the next few years that there is going to be just a huge amount of organic growth in connected vehicle right that penetration rates are going to be taken up pretty significantly. That's a great opportunity for us on the business to business side.

Long term, we really wonder whether or not -- whether or not it makes sense for the OEMs to have individual brands facing the consumer where they are responsible for the marketing to the consumer. They are responsible for the customer retention, to the establishments of price points, retention discounts, win back programs.

We are in the business of providing trial subscriptions, converting people to self-pay, then retaining them and winning them back and it takes a full time focus, we have 2000 people that focus on doing this 24 hours a day, seven days a week, it's not a natural part of automaker distribution to sell that sort of a continuing service. Their dealers who are in the continuing service business, but that's so much the automakers themselves.

So I kind of wonder how it will play out from a consumer facing perspective over the next five years and whether or not automakers will in fact find that somebody like us might be able to produce better results that serve the customer and serve them and that benefit us in the long term.

But if they continue down the private label branding and marketing approach, where we are providing platform services, we're thrilled with that. That will get us some $100 million to $200 million I talked about and it's a great long term opportunity.

Jessica Reif Cohen - Bank of America Merrill Lynch

And then just to back step for a second, we were talking about the used car market earlier and what a big opportunity that is, probably your biggest opportunity over the next five and 10 years as that market grows, you said that conversion rate is low 30's, is that a number that you think that you can maintain because you did say that kind of changing -- the two thirds aren’t taking it? How do you think about moving the dial on that number?

David Frear

It's much higher than I thought it was going to be, right. The conversion rate is much higher than I thought it was going to be when we started thinking about the used car business six or seven years ago and I just didn’t expect low 30's. So I thought it would be like 20% and so I am very surprised by the strength in the number.

I think that the opportunity for us is in getting more used car sales transactions into our marketing funnel that right now we've got 12,000 dealers who report sales of previously owned vehicles that have a satellite radio in them to us and they give us the number of the car. They give us the customer name and address and we give the customer a 90-day trial, take them through a direct marketing program.

But the fact is that there is something like 36,000 auto dealers in the United States. And we have like 12,000 of the 16,000 or 18,000 franchise dealers and then there are another 20,000 or so independent dealers and then you have all the private transactions that don't go through a dealer.

So right now and we don't know the exact numbers, but I would guess that we're probably getting in trial something like I don't know, 30%, 35% of the vehicles that are actually turning over. So how do you get to the rest?

Now one thing that we are pretty sure of is that everybody is researching the vehicle online before they go out and buy it and so are there ways that we can engage people online to raise the awareness of the fact there is a satellite radio in the vehicle that they are researching that, that if they decide to buy the vehicle that they are entitled to a free 90-day trial and can we raise awareness of that and capture more of those transactions that are currently outside of our direct marketing process and I think that's a huge opportunity for us.

Jessica Reif Cohen - Bank of America Merrill Lynch

Really interesting. Can you discuss your service line initiatives and the progress that you are making with that program?

David Frear

Yes, it's currently like the online thing. We keep -- we try to find out -- we want to know who owns the cars all the time and so we're constantly in discussion about how to get that information on that.

So we have the closest to the point of sale, the dealers who report to us. We have at the dealership a service line initiative where a car comes in to get serviced, the dealer personnel check to see if it's a satellite enabled vehicle and check to see whether it has an active subscription and let the customer know if it doesn't and then get a free trial.

So we do that. We buy lists from third parties and we'll see what we can do to invade the online world, but the service line initiative is just one of many efforts that we have out there to capture information about who's got the car.

Jessica Reif Cohen - Bank of America Merrill Lynch

80% of cars, car-owning households in the U.S. have two or more cars. Do you have any idea if there is penetration within those secondary and tertiary car households where you already have at least one established relationship?

David Frear

Let's see. I've got it a little bit differently than I think we asked a question, a little over 20% of our subscribers are multi radio households. And therein I think lies the great opportunity because as you said, 80% of households have two or more cars.

Now only 20% of households have new cars only, to not only the 80% have two or more cars, 80% have used cars in the household. So I think we have a great opportunity to take that 20% number on multi radio households towards the 80% over time.

And I did ask about ARPU a lot and to be honest, it's not a measure I spend a lot of time focusing on. I do focus on the price structure of the business, but when you think about it, with 80% of households having two or more cars, if we were really successful, ARPU would drop, because we offer a multi-radio discount, which is below our current ARPU.

So we would love to end up with lower ARPU, but a lot more subscriptions in the long run.

Jessica Reif Cohen - Bank of America Merrill Lynch

And over the past few years you've done a remarkably good job of reducing programming expenses, are there any additional opportunities available to reduce programming expenses or this is it?

David Frear

Well, here you never say it's it. We're always looking hard at content that appeals to our customer base as well as content that is making sure that it's priced properly. There isn’t anything that we've wanted to keep that we haven’t kept. We have great relationships with all the major sports leagues.

I would add that the NHL is the only contract we have that is still at its pre-merger – it’s still a pre-merger agreement that comes up in about a year. So we'll see what happens there.

Next, we continue to add to the program in line up and so we just announced that we've added Joel Osteen to the programming. Joel has a phenomenal following in the U.S. that he is having an event I think this week. He has sold out Yankees stadium and he has got a huge television ratings and there is just a lot of interesting and innovative content and we try to continue to invest and invest wisely to make the content unique and compelling on radio.

Jessica Reif Cohen - Bank of America Merrill Lynch

That is one of your most significant assets is like the broad range of programming from talk, especially Howard Stern , but others as well Oprah, Martha Stewart etcetera, to news, to sports, to obviously noncommercial music, within that the context of what do you view as the most important content out there?

David Frear

Well, that's hard to what's most important to me. We have fantastic brands and it's hard to ignore the singularity of Howard Stern. He is just a phenomenal talent and there is nobody -- anybody like him. I don't think there will be anybody like him again.

Howard is great. There are a lot of other great brands that we are associated with the NFL , Major League Baseball, the NBA, it's just -- the news programs, I love the fact that when you leave your house in the U.S. and you get into the car that you can carry Fox, CNN and CNBC with you as well as the BBC.

So it really is -- its unique slate of programming. There is always something for everybody and we put up the village old channel and temporarily took down the 40's on Four that I had a lot of -- well, we all had a lot of subscribers complain to us about the 40's on Four coming down to who would have guessed, but am sure, you'll remember Denny Levett. Denny got me on the train and…

Jessica Reif Cohen - Bank of America Merrill Lynch

Oh my God.

David Frear

…and complained about (inaudible). But he'll back up late this month.

Jessica Reif Cohen - Bank of America Merrill Lynch

So actually on Howard Stern , how -- he is obviously a very unique piece of content, can you remind us when his contract comes up and how important -- do you expect him to renew or anything -- any color you can give us on that?

David Frear

It comes up at the end of 2015. Howard said before he did the last deal with us that he has never been less unhappy on radio than he has been at Sirius. When he signed the contract, he said he couldn’t believe he did it again because how early you have to get up, but I do think that he loves what he is doing.

I think that for instance in town hall he did recently with Billy Joel, which was just a phenomenal event and both Howard and Billy were incredible.

I think he loves the creative freedom that he gets on the Sirius' platform. I think he loves the reach that he gets and as long as Howard wants to work we would love to have him on air.

Jessica Reif Cohen - Bank of America Merrill Lynch

Scott Weinstein, who you had a programming -- has done an amazing job, he has been really innovative, can you talk about any other kinds of initiatives you guys are working on to make sure that your content remains compliant?

David Frear

Well it's a good question and it's sort of a ceaseless effort. So Steve Blatter, who runs music programming, is constantly on the hunt for new music to put on the air. There are different ways to approach music genres that we've become a real force in country music, which is huge in the U.S. now.

We have three channels dedicated to it that we break a lot of new axe and it is a -- it's just an incredible platform for all artists. And Terrestrial Radio does not represent an awful lot of music formats, they just can't afford to. They've got limited bandwidth that they have got to sell ads and so they have got to put formats up that speak to the greatest number of people in each market.

We get to assemble national audiences. So the fact that New York didn’t have a country music station for 20 years, which is hard to believe, and we always had three, LA didn’t have a country music station for a long time and it's just -- it goes to show you how tough the ad-based business can be.

So on the talk side, we're always doing new things and again I think the Joel Osteen announcement this week is a great example of how we are constantly reinventing the line-up.

Jessica Reif Cohen - Bank of America Merrill Lynch

I'll ask one more question and then we'll open it up since we're running out of time, but you are talking about how a smartphone -- how many smartphones there are and people who bring it into the car, how do you think about the rising use of video because smartphones also have video outside of the home and Greg was just up here talking about Wi-Fi and people using Wi-Fi not just data, but for video as well.

How does it impact listening to Sirius? Is video something that you guys might be interested at some point?

David Frear

Well, video -- look for any car experience in most parts, it's hard to imagine video in the car. Right now -- although I don't know if you guys saw the news here yesterday where they had the picture of a woman who was reading a book while she was driving along the M-4 or something like that, to circle it is a great picture. She has kept the book on top of the steering wheel, maybe she will convert over to video and watch video while she drives next week.

It's hard to imagine video on the car right now, but I do believe that self driving cars are coming and it may take a while. There is absolutely no reason why our platform can't be used for mobile video. We are in fact specifically designed to deliver sort of 5 to 10 megabits of data to a moving vehicle, no matter where it is in the United States. It can be audio, it can be data, it can be video, it doesn’t really matter.

Jessica Reif Cohen - Bank of America Merrill Lynch

Okay. Let's open it up for the audience if there are any questions? One here.

Unidentified Analyst

David, in terms of your music royalty cost, I was just wondering whether you could speak to that cost side and prospectively where you think it's going and also for your competitors in the streaming space?

David Frear

Okay. So our music royalties are set for another few years. I think we got three years left on the sound recording side and a couple of years left on the publishing side. For the satellite radio royalties and they are for us. They totally dominate royalty payments. It's well over 90%.

On the webcasting side, the webcasting proceeding is getting underway now. Direct cases are due this fall. The hearings themselves will be next year and the rate will go into effect beginning the 2016.

We are coordinating with the other people in that proceeding. Clear Channel through IrRAdio is participating there and Pandora is participating in it and there are a bunch of other companies, an organization called Edema and we are all under the webcaster rate.

In the last webcaster proceeding that when they quintupled rates, the Congress stepped in put something out called the Webcaster Settlement Act and so Pandora settled, IrRAdio settled, we settled and Edema settled on its own and everybody has different rates now.

I'll tell you that our rate, Edemas and IrRAdio's are pretty much about the same, Pandora is pure play, got a rate that was 40% below the rest of us. I don't know -- there is certainly no -- I don't expect Congress to step in this time. I think that I would like to say that since Pandora sort of dominates the payments under the Webcaster Act that Sound Exchange will find it in their constituent's best interest to settle before the proceeding.

All that being said, my experience has been that Sound Exchange is now prone to settlement that they are sort of born to litigate so to speak. So I do expect them to go through the full proceeding and I am hard pressed to see how the Webcaster rates don't stay about where they are.

I think there is an opportunity they could come down a little bit, but that's likely to mean a significant increase in the rates for Pandora.

Unidentified Analyst

Is the one that's carrying a connected [caller] initiative a threat, a compliment, or not relevant to Sirius?

David Frear

Well, I think it's a -- first of all, an opportunity through our connected vehicle business where we have relationships with 40% of North American automotive manufacturers that's going to be significant growth in connected vehicle services and we'll benefit directly from that.

I think that it's complimentary in that it gives us not only the broadband pipe that we have in to the car today through the satellite, but it also then adds an interactivity feature for our product set. And then it's a bit of a threat in that it does enable other competition in the vehicle, but I think that that competition is largely present in vehicles today.

The smartphones are very easy to connect up through the vehicle today, whether you do it through Bluetooth, whether you do it through an iTrip, you plug into the cigarette lighter, it's easy to take your smartphone and your smartphone apps into the car today.

So I think the real question is, are the competitors that are currently operating over cellular networks, are they going to modify their product that makes it more competitive? We are commercial for music, music talk, news, sports and entertainment content.

And it's very diverse product offering that I think people are interested in and I think the single product formats like music only have an interest and interest to some, but not broad enough to dislodge us.

And then the last piece of it is that if you were to listen to a streaming service across 3G in the same way that you listen to radio or satellite radio today, that you would consume at least $30 of data based on the best plans you can -- best price plans you can get in the market.

So all this is free. Streaming services are not free. It will cost you $30 a month of data.

Unidentified Analyst

That's in the satellite radio business model work outside of the United States?

David Frear

Well it's not that the model won't work. A lot of people think it will, all right. The reason why we decided not to invest in it is because of the amount of time it takes, how deep you have to go on negative cash flow and then ultimately the markets are in fact different.

Now if you look at the demographics of much more broader conception in Europe and just the EU that the beam pattern would cover roughly from Ankara to Belfast. From Stockholm down to Morocco and you’ve got a half a billion people in there and the income demographics are actually pretty good.

But think of the number of cultures. So between -- Sirius XM has 150 channels it's bringing to its spectrum today. We could get about the same amount of spectrum in Europe and provide 150 channels, but we are doing it largely to one culture in the U.S. So, we have a 150 channels in every market we are competing against three channels, 12 channels, 30 channels.

Take those 150 channels and break it up by how many cultures in Europe and do you have 30 channels in each city? Do you have 50? You are not going to get much more than that. And so I think it's a less compelling product offering as you move outside the United States from a consumer perspective, at least to get people to pay for it.

And then going negative $4 billion or $5 billion in cash flow for seven years that it just seems to me that we can spend their time and money better in the U.S. and in other product.

Unidentified Analyst

How do you determine that you are paying, charging the right price of your products and that you're not over earning?

David Frear

In that we are not over-charging for it.

Unidentified Analyst

Yes.

David Frear

Well, it's a great question, right. And there is no clear way of knowing whether you are optimally priced. You can do all the research you want and then the question is do you believe the research. So we've done the research over the years and said that we could really sort of jack the price up.

But quite honestly, we've never really believed it and so we think we've got a fair price today. We think it's a good bargain with the content that people get that generally I would say that most households spend more at Starbucks every month than they spend on our product.

And so -- and it's something that's affordable by every household in the United States. People ask us a lot about income sensitivity and there is definitely a difference. So people who have the highest incomes convert higher and churn less and you can see a drop by a couple of points in every $25,000 of income.

Zero to $50,000 a year households comprise believe it or not, a significant portion of new car sales in the United States and a very significant portion of used car sales.

And so these are households that we are sensitive too as well. The average household income in the United States is roughly $51,000 or $52,000 a year and we want to make sure that we are pricing in a way to make the product relevant to everybody.

Jessica Reif Cohen - Bank of America Merrill Lynch

Great. In fact, we are actually out of time. Thank you so much.

David Frear

Thank you, Jessica.

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