Sirius XM's (NASDAQ:SIRI) average annual revenue per customer for satellite radio subscription is derived from total earned subscriber revenue and net advertising revenue, divided by the daily weighed average number of subscriptions for the period. From $103 in 2007, the company’s average revenue per user (ARPU) declined to $83 in 2008 primarily due to the Sirius and XM merger, which resulted in 100% rise in subscriber base, but just 81% growth in revenues. Change in mix of discounted OEM promotional subscriptions, subscription win-back programs, second subscribers and a decline in net advertising revenue per subscriber were also responsible for this decline.
The figure jumped to $122 in 2009 as Sirius XM increased multi-package subscription rates and introduced Internet subscription packages. New packages bundling the best of Sirius and XM also boosted the satellite radio provider’s ARPU. During the next two years, the company’s ARPU declined slightly but it bounced back to $129 in 2013 driven by increased subscription rates. Being the only satellite radio provider in the country with unique and diverse content, the company has the liberty to increase its subscription fee from time to time without putting its subscriber growth at risk. This is likely to help it improve its ARPU going forward. Although Sirius XM’s churn rate has been more or less stable over the past several quarters, it is likely to come down in the future with the improving economy, the success of retention and win-back programs, as well as a reduction in non-pay cancellation rates. This should have a positive impact on the company’s ARPU. Moreover, with royalty fees expected to increase in the future, Sirius XM is likely to pass this burden onto its customers, which will bring in additional revenues per user.
While the aforementioned factors will drive Sirius XM’s ARPU higher, its increased focus in the used car space can have a mitigating impact. As the new car market is maturing for the satellite radio provider, it is eyeing the used car market to continue its subscriber growth. To attract customers, the company can provide free or discounted subscription rates for used car buyers (as it has done in the past), that can put a downward pressure on its average revenue per user.
Our current price estimate for the company stands at $3.44, which is roughly in line with the market price.
Increasing Subscription Fees
Sirius XM’s key selling point is its diverse and unique content spread over numerous channels comprising of commercial free music, sports, talk shows, news stations etc. Since the satellite radio provider’s business model is based on subscription fees, it is able to afford unique and exclusive content that separates it from other radio services. This is the reason why the company is capable of increasing its subscription fees without much threat to its user base. For instance, Sirius XM increased its base subscription fee from $12.95/month to $14.49/month in 2012, and still witnessed steady rise in number of subscribers.
Interestingly, Sirius XM’s ARPU in 2012 was $124, implying more than $10 per month per subscriber overall. This indicates that the company’s base subscription is the most popular choice and its month ARPU was lower than base subscription fee due to presence of free subscribers. The impact of base a subscription price increase was notable in 2013, as well with all of Sirius XM’s subscribers transitioning to new pricing. Earlier this year, the company announced another price increase which is likely to push its ARPU higher in 2014 and 2015. We believe that Sirius XM will add more appealing content to its channels in coming years, which will put it in a good position to introduce another fee hike.
Royalty Fee Increase
Under the terms of the Copyright Royalty Board’s decision, Sirius XM paid royalties of 6.5%, 7.0%, 7.5%, 8.0% and 9.0% of gross revenues, subject to certain exclusions, for years 2009, 2010, 2011, 2012 and 2013, respectively. Going by this trend, it would not be surprising if royalty fee continues to increase in the future. If it does, Sirius XM may try to pass on these costs to listeners in form of subscription fee increase or more advertising, resulting in higher ARPU.
The Copyright Royalty Board has set royalty rates for Sirius XM’s Internet radio that do not apply to satellite radio, since the Internet is a different medium. These rates are on a per-performance basis, meaning that if 100 users listen to one song, it is counted as 100 performances. The board increased these rates steadily from $0.0016 per performance in 2009 to $0.0021 in 2013. For 2014 and 2015, the Copyright Royalty Board has set the royalty rates at $0.0022 and $0.0024, respectively.  With increasing royalty rates, Sirius XM is most likely to pass some cost burden to its listeners, which will result in more revenues per subscriber.
Elevated Focus On used Car Market
Historically, trials through new car sales has been the primary subscriber growth driver for Sirius XM. However, the new car market appears to be maturing due to moderating new car sales and a stagnating penetration rate. In response, Sirius XM has elevated its focus on the used car market to continue its subscriber growth. For some time now, the company has been making serious efforts to activate idle OEM-installed radios in used cars. The company would offer two-week free subscription for used car buyers and keep its introductory prices low at $5 per month for first five months or $25 for six months. While this helps Sirius XM entice subscribers, it weighs on its average revenue per customer. Going forward, to compensate for slow subscriber growth through new car sales, the satellite radio provider might look to increase its reliance on free or discounted subscriptions for used car buyers. This will have a mitigating impact on its ARPU growth.
How Significant Is This Metric?
We currently forecast Sirius XM’s ARPU to increase from $129 in 2013 to $172 over the course or next five-six years. However, if the company aggressively promotes its services in the used car space through low subscription fees, limiting its ARPU to $160, there can be more than 5% downside to our price estimate. On the contrary, if the company continues to increase its base subscription fee, pushing the figure to $185, there can be more than 5% upside to our price estimate for Sirius XM.
- Determination of Royalty Rates for Digital Performance Right in Sound Recording and Ephemeral Recordings, Federal Register, Apr 25 2014
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