Sales And Marketing At Sirius XM: Where's It Headed - And Why?

| About: Sirius XM (SIRI)

For the last year or so, I have been paying $12.95 a month for an Internet-only stream of Sirius XM (NASDAQ:SIRI). I subscribed primarily for Bruce Springsteen's E Street Radio, Howard Stern and audio simulcasts of Bloomberg and CNBC.

Over the last several weeks, I have not been using the service quite as frequently as I once was. On Wednesday, I finally got around to canceling.

The process went much more smoothly than I anticipated. I called Sirius XM's toll-free number, followed a few voice prompts and within 45 seconds I was letting a friendly and live person in on my plans to cancel. He asked why. I replied, "Because the quality of the stream is bad and I have been using Pandora (NYSE:P) more frequently." Without missing a beat, the customer service representative informed me that, in an effort to keep me around, he could offer me two months of the Internet-only stream for free.

I accepted. And I was impressed that the rep gave me a direct line to customer retention that I can call into two months down the road if I still would like to cancel. I intend to call back, but mainly to see if Sirius XM offers me another deal to stay.

Granted, I provide anecdote here, but these types of retention programs tend to be the norm. In other words, if you call in tomorrow with the same request, you'll likely be able to get the same deal. I presume that users calling in to deactivate radios receive the same or an even sweeter deal.

I also wonder if what I experienced can help shed some light on Sirius XM's curious sales and marketing spend and Q2 revenue miss.

Here's what the company had to say about sales and marketing in its most recent quarterly report: (click to enlarge)

Click to enlarge

In a nutshell, sales and marketing expenses continue to be on the decrease and the company blames the downtick on "reductions in consumer advertising and event marketing, partially offset by increased subscriber communications and retention programs." The 10-Q goes on to note that Sirus XM" expect[s] sales and marketing expenses to increase as we increase advertising and promotional initiatives to attract new subscribers in existing and new distribution channels, and launch and expand programs to retain our existing subscribers and win-back former subscribers."

Consider this from glass half empty and glass half full perspectives.

On the pessimistic side, my experience coupled with the sales and marketing disclosure implies that Sirius XM continues to do a poor job of marketing its service through advertising and promotions. I've beaten this drum in quite a few Seeking Alpha articles about the company. It's one area where some SIRI permabulls and I actually see eye-to-eye. Furthermore, I do not see it as a positive sign that a good chunk of the sales and marketing money Sirius XM does spend goes toward retention.

In fairness, I recently called DirecTV (DTV) and threatened to cancel without any intention of actually doing so. I asked for a free DVR. The customer service rep declined, but then threw out several bones. I walked away with a $10 bill credit for six months and could have received three months free of HBO and Showtime as well as DirecTV's sports pack, but I declined.

Companies like Sirius XM and DirecTV have quickly come to represent the old guard. They must be aggressive in terms of retention in the face of the new and varied competitive threats they face. Say what you want about Netflix (NASDAQ:NFLX), but as a relatively new disruptive offering it clearly does not see the need to play nice with its subscribers.

Viewing the sales and marketing disclosure from a SIRI optimist's perspective would lead me to focus on the part about the expected increase. It's been in there for several quarters, but has yet to occur. While the company will continue to focus on retention, it will also spend money "to attract new subscribers in existing and new distributions channels."

An educated guess leads me to believe that this has something to do with CEO Mel Karmazin's plan to attack the Hispanic market and SatRad 2.0. "New distribution channels" gives hope to those of us who believe the company has focused on the automobile at the expense of online and mobile.

At day's end, this is something to keep an eye on. The big concern from my experience and the above-cited numbers is that the company is working aggressively on retention. Surely, that's the nature of the beast in any subscription model, but it can also be a bad sign, particularly when that money is not spent nearly as aggressively on growing the subscriber base in the face of formidable and fast-growing competition.

Disclosure: I am long P.