Satellite Radio 2.0 and On Demand = Some Sirius Price Appreciation Ahead

| About: Sirius XM (SIRI)

Sirius XM Satellite Radio (NASDAQ:SIRI) announced several months ago that Satellite Radio 2.0 would be launched in time for the holiday season of 2011. Quarter after quarter has passed, and while we have seen no real specifics on the product, we have seen a little color about what it may offer.

The immediate consideration most often discussed is the fact that Sirius XM will have to be able to more efficiently use its bandwidth. Mel Karmazin, CEO of Sirius XM, has stated that the new technology will allow the company the ability to offer up to 40 new channels. Karmazin has also promised that included in these channels will be a suite of Latino channels. This is a direct effort to capitalize on one of America's fastest growing population segments and fill what has been a massive hole within Sirius XM's content line-up. Among the new Latino channels will be one hosted by Christina Saralegui, the queen of Spanish Language television. Some have referred to her as the Spanish language Oprah Winfrey, high praise by any standard.

There are a few aspects of the Saralegui deal that should be music to the ears of Sirius XM investors. The first is that she is a MAJOR talent that will now have a channel on satellite radio. The second is that Sirius XM Satellite Radio is not footing the bill for this channel. The Christina Saralegui channel is part of the FCC mandate that allowed for Sirius XM to lease diversity channels. It will be National Latino Broadcasting (NLB) that hires Saralegui, not Sirius XM. The downside is that it is NLB that keeps any ad revenue derived from the station. But it could be argued that the benefit of having Saragleui exclusively as a marketing tool and having enough channels to attract a Latino loyalty, outweighs any ad revenue on the channel.

Consider that the new Latino programming will take up only about five to seven of the new channels, and you can see that the company still has a lot of flexibility to seek out other valuable markets, improve sound quality and make satellite radio a more valuable service than ever before.

Another benefit that Satellite Radio 2.0 will deliver is "On-Demand" type services and the ability to buffer your listening. This type of feature is exciting in that it now lets Sirius XM offer, for the first time, types of functionality that we had only previously seen by Internet radio competitors. Features such as these will allow the company to offer consumers perceived value as it considers raising prices. Internet Radio service Slacker recently added "On-Demand" to its line-up and valued it as a $6 per month premium over its current subscription price. Slacker's new premium tier, including "On-Demand", sells for about $10 per month.

Compare Slacker's price to what Sirius XM has in sports, news, talk, and entertainment, and Slacker actually helps Sirius XM justify a possible price increase. Sirius XM can offer the same thing Slacker does, but even more. Sirius XM can point to Stern, NFL, MLB, NBA, NHL, NASCAR, soccer, CNN, Fox, CNBC, ESPN, Opie & Anthony, Cosmo, OutQ, Oprah, Rosie, College Sports, Martha Stewart, BBC, Playboy and much more as distinct reasons that its service is worth $15 per month over the $10 per month Slacker is seeking.

It is satellite Radio 2.0 that gives Sirius XM the best chance of creating perceived value while increasing prices. Think about it. A company is announcing about 40 new channels, delivering "On-Demand" capability and bolstering its current line-up. All by simply asking for a couple of more dollars per month. What consumer could actually argue that the price increase is not warranted at that point?

Another blessing for Sirius XM may come with the Blessing class action lawsuit. The Blessing lawsuit has earned preliminary approval from the court and part of that approval is that Sirius Xm has agreed not to raise prices until after December 31, 2011. While investors may look at this as bad, it actiually may help the company with consumer perception issues. The company can now market the fact that prices will be increasing, and look good in that it is holding off until the end of the year to do so. This will allow consumers to get used to the idea of a price increase months before it actually happens.

The actuality is that settling this case may be the best thing for Sirius XM to do. For what equates to $13 million in legal fees, Sirius XM gets to market to nearly every subscriber that there will be potential price increases with the new year, and that existing subscribers can "lock in" existing rates by signing up for a long term subscription prior to December 31, 2011. Talk about bang for your buck! Sirius will also likely try another last ditch effort to get about 4 million churned subscribers, but the offer for these members of the class (a free month and no activation fee) is likely a lot less than other offers that these people were already temped with. Remember, these people all churned for a reason. If the company were to get half of 1% (20,000 subscribers) of these churned subscribers it would be considered a success. By settling this case, the company also ensures that it can not be sued for these same issues again. It effectively puts all pricing issues since the merger behind them.

Sometimes timing is everything, and even with lawsuits, silver linings can present themselves. What we have happening in the next seven months could be very compelling for investors in Sirius XM: Satellite Radio 2.0, perceived added value with "On Demand" and new channels, potential price increases with "court ordered marketing" and an increase in sales from the auto channel. All of this can add up to some serious appreciation in Sirius XM's share price.

Disclosure: I am long SIRI.