The issue of a price increase for Sirius XM (SIRI) has been a hot topic for at least the past year. While the company has never raised their "base price" of $12.95, they have instituted a royalty fee, charge more for the family plan, and charge for internet streaming. The basic effect of these charges is that consumers are paying more for satellite radio than they were before.
As most know, the company was unable to raise prices for a period of three years as a condition of the merger. That issue is now behind them, but a proposed lawsuit settlement has the company holding pricing the same at least until January of 2012.
It goes without saying that if you are going to raise prices, the best way to accomplish it is to offer perceived value to the consumer. A flat out price increase can be risky, whereas if the consumer feels they are getting value, they are more acceptable to the concept of paying more.
For the past year or so it has been difficult for the company to add perceived value to consumers. The company has maxed out their bandwidth, and is at a point that in order to add a channel, they will have to remove one. Thus, while some may be happy about a programming change, others will be disappointed. You can see the frustration of this in consumers when Willie's Place removed Bill Mack from the air. Although months old, the article I wrote about that gets comments to this day. Another example turned up when Sirius XM took BBC Radio 1 off of the satellite service and replaced it with Studio 54. Sirius XM ultimately returned BBC Radio 1 to the Internet feed, but consumers are still very frustrated about the change.
This whole dynamic will change with the launch of satellite Radio 2.0. The company, in theory, will be adding 25 new channels and improve capabilities. It is an event like this that opens the door for the company to raise prices without rocking the boat.
Over the past six months the company has been bolstering up their internet radio side of the business. At this point the Sirius XM Internet Radio has 20 additional channels over the satellite feed. The change has been subtle, but when you consider that Satellite Radio 2.0 is around the corner, you can begin to see a dynamic where the company can increase prices while at the same time give the consumer perceived value.
Of Sirius XM's subscriber base, about 25% are in the family plan which costs about $8 per month. While having these customers is a great thing, they do drag down the average revenue per user. I would estimate that 25% of the base pays an additional $2.99 per month for the Internet feed. This assumption comes from the fact that despite pricing changes, ARPU has remained pretty constant over the years (if one accounts for the royalty revenue). With this understanding comes method by which Sirius XM can raise prices without rocking the boat.
Consider that out of 20 million subscribers, 5 million are paying less with the family plan and 5 million are paying more with the Internet plan. What if the company sold a price increase in this manner.
"Sirius XM announces Satellite Radio 2.0. Listeners can now enjoy 25 additional channels, better sound quality, have added functionality like "On-Demand" content and time shifting capabilities, as well as being able to purchase songs that you love. Many of these great capabilities are best utilized on new retail radios or by using our Sirius XM Internet Radio service which offers over 20 additional channels above and beyond the 25 we are adding on the satellite service. Over the past several years, despite adding additional content we have not raised our base price. Beginning January 1, 2012 the base price for Sirius XM will be $15.95. All listeners will now have Sirius XM Internet Radio included and can utilize the service at home, at work, and even on the go with mobile devices. We understand that some consumers want to keep a lower price, thus between now and January 1, 2012 listeners can lock in the current rates by pre-paying up to three years. Thank you for your dedicated listenership, and we look forward to delivering you the Best Radio on Radio."
You see, a move like this makes it easier for the consumer to accept a price increase. They are getting the Internet feed, getting 25 new satellite channels, 20 new internet channels, and better sound quality. The $3 per month does not seem so steep then. But what would this do to the revenue line?
It would be an instant increase beyond what many people even realize. Take 17 million self paying subscribers and multiply that by an addition $3 per month. That is $51 million more each month for the revenue line, or $153 million per quarter. Even if the price increase is only $2, we are looking at over $100 million more each quarter.
The key here is that while satellite Radio 2.0 has some exciting features, it is also the vehicle from which Sirius XM can raise prices without rocking the boat. It all comes down to how the company presents the price increase. Getting the base subscription higher is what we as investors want to see. Sirius XM may have a bit of a tough road in Q3, but as the price increase develops, the Q3 dips may be wonderful buying opportunities.
Disclosure: I am long SIRI.
