Readers following Sirius (SIRI) know I am not afraid to give my honest opinion of the company. Despite the platoons of Sirius fans swarming down on me to explain how wrong I am about the company (I haven’t been so far) with comments galore, I do not bend. I don’t normally follow Sirius or Netflix (NFLX) day to day, but recently both have my attention. Both stocks recently have been under price pressure. No surprise for me as I have written as much for both for months now (click HERE and HERE). Both companies have also decided to raise prices. Netflix, for reasons I do not understand, decided an almost immediate price doubling for the same plan (or providing half the previous service for the same price, depending on if your glass is half full or half empty).
For Sirius this will be the first price increase in years. To understand why the price is the same, you have to go back about three years ago. In order for Sirius and XM to merge, several concessions were made to federal regulators who believed the government should expend resources and money to regulate the costs of entertainment radio (I hate to think about how many millions of dollars of taxpayer money was wasted for that activity). Sirius agreed to a three-year freeze on prices, which has now passed, allowing Sirius and customers to decide what the value of the service should be. Sirius is now able to announce no price change, a 10% increase, a 500% increase, or any price that Sirius believes is in the best interest of the company. Unsurprisingly, Sirius did announce an increase in the subscription price of $1.50. With a current base subscription price of $12.95, the price increase is just slightly above a 10% increase.
I believe in this current market environment, Sirius is demonstrating a better long-term pricing strategy compared with Netflix. Of course Sirius will lose some subscribers over the price increase, but more importantly, customers who continue to subscribe to Sirius, will not feel like they have been kicked in the head by the company they support. No one likes to pay more for something, and few subscribers can say either price increase will have a noticeable financial impact to family budgets. At the same time, Netflix created uproar and tragically, turned the price increase into an event. Sirius I believe will get relatively much less backlash. In fact not everyone believes Sirius should have raised the rates as little as they did. For example Cameron Kaine argues the price increase should have been $2.00. I view this debate as a good sign for Sirius, and the price increase will be well received. Investors can take comfort in knowing a large amount of the increase should find its way to the bottom line.
In six months from now it is likely that most Sirius subscribers will not be giving any thought to the greater amount they pay each month for the service. Netflix on the other hand, may still be dedicating considerable resources to customer goodwill at a time when others are gaining momentum, like Amazon's streaming service. Amazon (AMZN) has not taken very many wrong moves and if there is money to be made from offering unlimited movies, it’s not hard to imagine Amazon entering in the space. HULU.com appears to be up for sale and depending on the buyer may dramatically change the landscape Netflix currently finds itself in.
It would be unfair to not include the increasing content costs Netflix faces. With greater competition for online content as a result of Amazon, Hulu, Apple (AAPL), Dish Network, cable companies and others, studios are able to demand a greater price for providing content. Also, the monthly charge for subscribing to Netflix is relatively low compared with what a consumer pays for premium cable. Be that as it may, if a company wants to avoid a backlash of ill will from subscribers, a company should offer some honey with the medicine.
The market knows all, and based on market reaction it is fair to say that Sirius understands how to raise rates better than Netflix. Given the large drop in price and media backlash from the price increase, it may have come as a surprise that Netflix also reaffirmed guidance. Even with the snafu in customer relations that Netflix displayed, my excel spreadsheet is displaying an increase in revenue, and depending on the cost of content increase I enter, a likely increase in the bottom line. Add in the large decrease in share price, and I believe the lost goodwill is largely priced in. I explained why I may short Netflix puts in the next few days (see HERE ). Longer term I am not excited about Netflix due to the very possible change in the competitive landscape. I no longer have a short bias with Sirius with a price below $2.00, absent a material change.