- While Sirius XM's radio penetration in the new car market stands high at 70%, growth in this metric has slowed down in the last few years.
- As the new car market matures, Sirius XM is turning its attention toward the used car market.
- This market is turning attractive for Sirius XM and the penetration levels could rise in the future driven by the company's efforts to tap this opportunity.
Satellite radio service provider Sirius XM (NASDAQ:SIRI) mainly distributes its radios through automakers (OEMs), retail locations and their websites. The company has contracts with nearly all major automobile manufactures including Ford (NYSE:F), General Motors (NYSE:GM) and Toyota (NYSE:TM) to install Sirius XM's radios in their cars. While Sirius XM's radio penetration in the new car market stands high at 70%, growth in this metric has slowed down in the last few years. The penetration rate increased substantially from 55% in 2009 to 67% in 2011, but it grew by only 3 percentage points in the next two years, indicating that the penetration rate is stabilizing. With a stable penetration rate in the new car market and moderating new car sales, subscriber growth for Sirius XM is getting stagnant. During Q1 2014, the company added just 267,000 net subscribers, which was significantly less than 453,000 subscribers added in Q1 2013. 
As the new car market matures, Sirius XM is turning its attention toward the used car market. Companies like CarMax and Vehix, which sell used cars, report that satellite radio penetration in the used car market is around 30%.  This market is turning attractive for Sirius XM and the penetration levels could rise in the future driven by the company's efforts to tap this opportunity. Over the years, the satellite radio provider has deployed several initiatives such as a two-week free subscription for its pre-owned vehicle program and Service Lane to encourage used car buyers to subscribe to its services. Earlier this month, Sirius XM announced that its services will now be available to auto dealers using a Reynolds ERA Dealership Management System (DMS) via the Reynolds Certificate Interface Program.  By authorizing a greater number of dealers to provide its services, Sirius XM can boost subscriber growth via the used car market.
Our current price estimate for the company stands at $3.44, which is roughly in line with the market price.
New Car Market Might Not Be Able To Drive Subscriber Growth
Historically, free satellite radio trials through new car sales have been the primary subscriber growth driver for Sirius XM. Access to diverse and unique content, rising new car sales and a soaring penetration rate have all worked in the company's favor. However, Sirius XM's subscriber growth has moderated lately because penetration levels are nearing a saturation point. Around 70% of total new cars sold run Sirius XM's free radio trials, but only 40%-45% (self-pay subscribers) new car owners choose to keep the service once the promotional trial runs out. Moreover, self-pay churn also reduces the total number of subscribers for the company. Every month, around 1.8%-2% of Sirius XM's self-pay subscribers discontinue service, which reduces the intensity of subscriber growth.
With new vehicle sales for 2014 projected at around 16.4 million, Sirius XM will run promotional trials on about 11.5 million (70%) of them.  Of this 11.5 million, only 45% (self-pay subscribers) or 5.2 million will continue the services after the promotional period is over. Simultaneously, the company will lose certain subscribers to monthly churn. Sirius XM expects to add 1.25 million subscribers this year, which will take its total self-pay subscriber count at the end of 2014 to around 22.3 million, and average subscriber count for 2014 to 21.7 million. Taking the monthly churn rate at 1.8%, about 4.5 million self-pay subscribers will discontinue the satellite radio provider's services during the year. This indicates that the subscriber decline on account of monthly churn will significantly offset subscriber growth due to new car sales. Therefore, it makes sense for Sirius XM to turn its attention toward the used car market.
Sirius XM Looking To Bolster Its Presence In The Used Car Market
For some time now, Sirius XM has been making serious effort to activate idle OEM-installed radios in used cars. The company would offer two-week free subscription for used car buyers to entice them into paying for the service once the promotional period was over. Sirius XM even kept its introductory prices low at $5 per month for the first five months or $25 for six months. Later, the company decided to target the high-end used car market with its "direct-to-dealer pre-owned program." Sirius XM initially signed contracts with several OEMs to offer free monthly trials to certified pre-owned vehicle (CPO) buyers, but it later extended this service to the sale of any used car which had a satellite radio installed. Back in 2010, only 100 dealers were included in this program, but it increased rapidly to 12,100 dealers at the end of Q1 2014. 
In August last year, Sirius XM launched its Service Lane program in which it offers two-month free subscriptions to car owners who brought their cars for servicing at particular stations.  It also added an extended free trial of Hispanic targeted stations later that year, and kept monthly subscription fees low. The latest development on the used car front is Sirius XM's announcement that dealers who use Reynolds ERA DMS via the Reynolds Certified Interface Program will be able to participate in pre-owned and service lane programs. They will be able to demonstrate Sirius XM's satellite radio service during test drives and subsequently offer a three-month free subscription to used car buyers. Also, servicing dealers can offer two-month free subscriptions to customers who have an inactive OEM-installed satellite radio in their cars. Overall, these efforts are likely to help Sirius XM grow its subscriber base through the used car market as its growth through the new car market is slowing down.
Disclosure: No positions.