Last week Sirius XM Holdings (NASDAQ:SIRI) announced that certain Ford (NYSE:F) customers would be receiving a five year subscription to some of the satellite delivered services beginning with the 2015 model year. The terms of the agreement were not disclosed, and in many ways the press release was quite vague. We don't know the length of the agreement, potential revenue or cash flow impact, costs, or even the number of vehicles involved. However, carefully reading between the lines reveals that the arrangement is probably less than some Sirius investors had hoped.
Ford currently offers most US customers six month free trials to the Sirius All-Access Package. This package includes not only the Sirius line-up of entertainment - personalities like Howard Stern, comedy, major league sports, news and commercial-free music - but also access to other Sirius services including traffic and weather and Internet listening. At the end of the free trial, the expectation is that a certain percentage of customers will continue as self-pay subscribers. So, what's different?
According to the press release,
Ford customers to get a five-year subscription to advanced information and entertainment services delivered via satellite from SiriusXM, including traffic conditions, weather, fuel prices, sports scores and movie listings
The Sirius "Infotainment Services" that include traffic, weather, fuel prices, sports scores and movie listings are part of the current All-Access package and are also offered separately as Traffic, Travel Link and NavWeather. One does not even need to have the basic Sirius subscription to take one or more of these packages.
The press release also notes that
...customers purchasing any Ford brand vehicle equipped with navigation will get a five-year subscription to SiriusXM Traffic and SiriusXM Travel Link, starting with model year 2015.
Not all Ford models come with navigation. Looking at the Ford web site indicates that navigation services currently offered by Ford are, in fact, services currently provided by Sirius:
The available Navigation System with SiriusXM Traffic and Travel Link* combines Global Positioning System (GPS) technology with 3-D mapping and provides voice-guided turn-by-turn directions. With SiriusXM Traffic and Travel Link, you'll get detailed traffic information, plus current and forecast weather, gas station locations and prices, sports scores and schedules, and theater locations with movie listings and times.
*SiriusXM Satellite Radio, Traffic and Travel Link subscriptions sold separately or as a package after trial expires. SiriusXM Traffic and Travel Link service available in select markets. ...
There were several comments on a recent article wondering if these services were somehow related to the purchase of the connected vehicle unit from Agero. It certainly doesn't seem as though this is the case. These features are part of the products that Sirius has been marketing for years and that Ford includes in its current models. The press release also states:
Ford was the first automaker to market SiriusXM Traffic and SiriusXM Travel Link in 2009.
What is new is that these features are to be included as "standard" features in certain vehicles for five years, rather than ending after the initial six month trial. Ford will almost certainly be making additional payments to Sirius for these features. I would assume that these would be up-front cash payments, although it is not at all clear how much the payments would be. The standard three year subscription prices for these packages are listed in the table below,
|Traffic + Travel Link||$185.69|
|NavTraffic + NavWeather||$217.00|
NavTraffic + NavWeather +Travel Link
although when subscribers take the All-access package that also includes the Sirius Internet radio package, the incremental cost is arguably much less. While the news is positive for Sirius investors, placing a value on the arrangement is not at all clear.
We know that Ford is already paying for six months of the services since they are included in the paid promotional six month trials. And, Ford would be entitled to revenue sharing if the services were taken by Ford customers when those free trials end and many customers would convert to self-pay subscribers. Finally, there is a good deal of value to Sirius to have an additional guaranteed 4.5 year revenue stream from 100% of the Ford trials, along with what is probably a full up-front cash payment. Placing a dollar amount on the incremental revenue is difficult, although I suspect that Ford would be reluctant to build too much extra cost into millions of vehicles.
Are there incremental costs? Probably. Unless Sirius created its own software and maintains its own data for these services, it would be obtaining these from third parties. In fact, in the past, when Sirius CFO David Frear and CEO Jim Meyer were asked about acquisitions, they made these comments about vertical integration:
Meyer:I won't say we don't need anything else, but I can also tell you, I don't see what it is today, okay. So we think Agero helps us fill, some key areas that we had to fill to be a leader in this space.
That said, there may be services or there may be things we see in the future that we think it's better to acquire than to build our selves and if so, we'll look at each one of those opportunities; I don't see it today. I think Agero takes us a major step forward in what we needed to be a leader in the connected car strategy going forward.
Frear:You know there are not a whole lot of players to acquire right in the space and one of things you can look at doing is, you can look at going more vertical, on the space that there are some data sources that you can go out and acquire. So we certainly are looking at the vertical stack, as well as the other service providers and just sort of keeping tabs on them, but I would say there is nothing imminent.
These statements don't prove that the company is subscribing to data services today, or if it is, that they include any of the services offered in the new Ford arrangement. Nor do the statements indicate how Sirius might be paying for the services - flat fee, number of users, etc. Still, it seems reasonable to assume that Sirius is currently obtaining many of them from third parties and that there would be an incremental cost to offer them to significantly more customers.
Even though the new agreement with Ford most likely has nothing to do with the acquisition from Agero, it is a positive development for both Sirius and Ford. It should begin providing Sirius with increased revenue beginning next year (although not this year since the 2015 models sold this year would be covered under the six month free trial). And, depending on the payment structure, it could provide a boost to free cash flow in the current year.
Disclosure: The author is long SIRI. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: In addition to my long positions, I have January 2015 $4 covered calls written against portions of my long positions in Sirius XM. I also trade blocks of Sirius XM on a regular basis. I have no position in the other companies mentioned in this article.