Sirius XM Raises Rates, But Blows Opportunity

| About: Sirius XM (SIRI)

In Sirius XM’s (SIRI) second quarter conference call, CEO Mel Karmazin said the following:

  • "We continue to believe it would be appropriate for us to increase our pricing to be able to continue investing in and delivering the best audio content in the world."

Karmazin also highlighted that Sirius has never increased its base price of $12.95 since its service launched about a decade ago.

  • “Early next year, for the first time since the merger, we will be able to price our service as we see fit,” he added, highlighting that the company’s inability to increase prices despite an expanded content lineup has kept a lid on revenue and average revenue per user.

The comments came just days after Sirius had received a regulatory order that ensured the end of pricing restrictions on the company that have been in place since the merger of Sirius and XM in 2008. But the thought I keep grappling with is, what he meant when he said Sirius XM would price its service “as we see fit?” I could not locate anything else on the earnings transcript that hinted at the possible size of the increase. But at the time I thought it would be a huge mistake to think that Sirius had not already decided on what an “appropriate price” would be; particularly one that fits its growth projections and its desire to return value to shareholders.

A couple of weeks ago, I told you that Sirius XM was due to raise its base subscription rate by $2.00. All indicators were pointing to what I then considered “the perfect number”; this to go along with its release of satellite 2.0. In fact, I’ve been talking about $2.00 as far back as April in an article titled “the Sirius XM Two-step.” On Wednesday, investors learned that the increase to its base subscription rate is actually going to be at $1.50. As hard as it is for me to say, I have to admit that frankly, I am disappointed. Why did Sirius feel it needed to essentially leave 50 cents on the table? What did Mel think was the associated risk with not rounding the rate up to an even $2?

In another article, I mentioned how Sirius could learn a thing to two from Netflix (NFLX). The premise of the article surrounded the question of “value.” Or more specifically, how can Sirius present the price increase in a manner that it does not disrupt the business and/or alienate its loyal customers? In comparison to Netflix, we highlighted how its subscriber growth continued its uptrend in the face of two announced increases in less than 10 months. To make the point, we discussed how the company sold its service to its subscribers in a manner where they were convinced that the value was there.

Now, I was anticipating a $2 increase while there were some analysts that mentioned $3. So for Sirius to only raise rates by $1.50, makes me question its strategy. Does that indicate its own perceived lack of value or its ability to sell the increase to its subscribers? I think these are fair questions; particularly when the company was more than justified to raise rates after having a freeze for three years. Karmazin did say “for the first time since the merger, we will be able to price our service as we see fit.”

I would have loved to have been in on the discussions to fully appreciate how it arrived at $1.50. You may be thinking why I am harping on a measly 50 cents, but the reality is, at 21 million subscribers, that is potentially 10.5 million per month that Sirius has just forfeited; or just under 130 million on an annual basis. Do you suppose that would have helped free cash flow a little bit? So I keep coming back to the question, what were they thinking? This is something that I am sure analysts are salivating to find out at the company's Q3 conference call in November. Hopefully some details will be revealed much sooner than that.

During the announcement on Tuesday, Sirius, which has satellite radios in the dashboards of 65 percent of new cars, said it expects 2012 revenue of about $3.3 billion which is up 10 percent from 2011 - a figure that arrives slightly below analysts' estimates of $3.37 billion. However, on the news, the stock surged almost 7%, with volume of 190 million.

Management also reaffirmed its prior 2011 guidance for the addition of 1.6 million new subscribers, revenue of about $3 billion, adjusted EBITDA of $715 million and free cash flow approaching $400 million.

  • SiriusXM's guidance for 2012 includes:
  • Revenue growth of 10% to approximately $3.3 billion,
  • Adjusted EBITDA growth of 20% to approximately $860 million, and
  • Free cash flow growth of 75% to approximately $700 million.

Mel Karmazin was quoted as saying:

Our new guidance for 2012 demonstrates our expectation of robust growth next year. Sirius XM's outstanding financial performance in the midst of considerable economic uncertainty will continue in 2012 as we grow our subscriber base and free cash flow and anticipate that our revenue and adjusted EBITDA growth will accelerate.

  • The company also affirmed its existing 2011 guidance, including:
  • Net subscriber additions of approximately 1.6 million,
  • Revenue of approximately $3 billion,
  • Adjusted EBITDA of about $715 million, and
  • Free cash flow approaching $400 million.

As a great CEO often does, Karmazin took this opportunity to give investors a continued reason to believe in the idea of satellite radio. By re-affirming guidance and projecting growth in areas where the macro-environment was said to be a reason for Sirius concerns, he basically has told the bears and pundits to find other day jobs and Sirius was here to stay. But this news continues to be somewhat “bitter sweet.” It’s great that the company has raised rates, but I can’t help but think that it has also blown an opportunity. I have faith in Karmazin and want to think that he has adequately assessed the risk-reward, but at the onset it’s a disappointment nonetheless.


The fact of the matter is Sirius offers a tremendous array of diverse audio content at a modest cost; this fact can’t be disputed. What else is available to the American consumer that provides a comparable level of daily satisfaction at a cost of less than $0.50 a day? As evident by the growing number of subscribers over the past two years, there is clearly a demand for Sirius' service.

While pundits may choose to scoff at various known improving metrics in an effort to poke holes at the business model, what they are unable to dispute is that the model is working. This has left many analysts and pundits scratching their heads and forced to admit that Sirius XM is in fact a growth company; however, one that appears could use a lesson in pricing leverage.

Disclosure: I am long SIRI.