SiriusXM And Slowing Subscriber Growth

Feb.14.12 | About: Sirius XM (SIRI)

In a previous article I noted that the SiriusXM (NASDAQ:SIRI) 2012 subscriber guidance failed to meet Wall Street's consensus estimates and that the low number was just one of several disappointing subscriber metrics. The conversion rate - the percentage of OEM trial subscribers that become self pay subscribers - is expected to show no improvement in 2012 and the self-pay monthly churn (the cancellation rate for subscribers that had previously chosen to pay for the service) is projected at 2.1%. These are most likely two of the primary drivers behind the company's relatively low forecast of 1.3 million net additional new subscribers in 2012.

Impact of trials
A third driver is the mix of sales by OEMS. Unpaid trials, unlike the paid promotional trials, are not included in the Sirius subscriber total of 21.9 million. On the conference call James E. Meyer, Sirius President of Sales and Operations, had this to say about the trials:

So in 2011, we have supply disruptions in Asia. What we have is shift in mix towards U.S. and European manufacturers who tend to be paid trial partners. And I think the industry view is that there will be a shift in mix back towards Asian manufacturers in the course of 2012, which will be a shift back towards unpaid trial partners. So part of what you're seeing in the sub-outlook is just shifting mix in paid versus unpaid trial subscriptions,...

The issue here is that the unpaid trials were also up very significantly in 2011. Paid trials went from 3.5 million at year end 2010 to 4.0 million at year end 2011, an increase of 0.5 million. During that period, total trials went from 4.3 million to 5.4 million, indicating that unpaid trials climbed at an even faster rate, an increase of 0.6 million. It's a bit difficult to understand what the "shift back" will be that Meyers mentioned when it does not appear that there was a negative shift with trial partners in 2011.

Impact of Churn
How bad is the 2.1% self-pay monthly churn figure? It is the worst since the merger took place in 2008 and worse than the deepest part of the recession. These churn figures are in an environment where a major source of competition disappeared when Sirius and XM were permitted to merge.

Self Pay Monthly Churn 2008-2012













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Source: 2010 Annual Report, Q4 Press Release and Conference Call

2011 ended with 17.9 million self-pay subscribers. This is where the churn comes from. Assuming that 80% of the 1.3 million net adds become self pay subscribers, Sirius would have an average of about 18.4 million self pay subs for 2012. A 2.1% monthly churn rate would result in 4.6 million cancellations. That's a lot of subscribers that need to be replaced.

The 2.1% churn rate was attributed to the unknown impact of the price increase that began taking effect the first of the year. On the call, CEO Mel Karmazin said:

Because of the price increase and our conservative outlook, we expect churn to be up modestly this year, probably in the 2.1% range. Without the price increase, we would be providing self-pay churn guidance consistent with past years of 1.9%.

Later, Sirius CFO David Frear added:

Our call center agents are equipped with a variety of tools to save every customer who is at risk of canceling. While we are encouraged by the early response to the price increase, we are anticipating a modest increase in self-pay churn in 2012 to approximately 2.1%.

The price increase of $1.54 per month is smaller than the original Music Royalty Fee (MRF) add-on a few years ago. The MRF was an incremental $1.98 per month for most subscribers. In fact, on the Q3 conference call Karmazin said:

Again, we think that $1.50 a month or, as I said earlier, $0.05 a day is something that would not really materially change any DX for us. You really don't know. We're going to work very closely with our "save desk" and make sure that we're monitoring carefully. So far, based on the noise that's in the market, or I should say the lack of noise that's in the market, we monitor social networking and basically go through the feedback that we've gotten from our subscribers. And we've seen them say they understand. I mean, the price increase is not in any way, shape or form egregious. It's not something that we're doing regularly, and we don't think that it should impact our growth next year.

And, Frear added:

We looked at the Music Recovery fee, we implemented that. ... One of the things to bear in mind with the price increase is that the -- for the net cost to consumers, we should probably look through the change we made in the Music Recovery fee last December. If you go to what were prices a year ago now to what they will be in January, the effective increase is about $1 overall, it's just that we've got it into 2 steps, $0.58 down on the MRF and then about $0.50 up 12 months later on the primary. So -- and maybe that sort of being around $1 is helping sort of mute the reaction that we've seen so far, because we certainly haven't seen much.

With these comments about how there were no negative reactions around the announcement and how there was little noticeable change in churn when the MRF was implemented, why is Sirius now forecasting a record high level of churn? It's not even based on the early results so far this year. That was specifically denied in response to a question when Karmazin said, "We're not seeing anything impacting our January churn that is alarming to us at all."

Impact of Conversion
The conversion rates are deteriorating as well with 2011 conversions also at their worst level since before the merger.

Conversion Rates 2008-2012







Conversion Rate






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The Q4/Full Year Report rounded to the nearest whole number, although during the conference call, Frear said:

Since the merger in mid-2008, the new car trial conversion rate has generally ranged between 44% and 46%. In 2011, we remained in this range, but were down slightly from 2010 at 44.6%. Sales mix and delays in getting trial conversion communications to some new car buyers contributed to the decline.

Here are the quarterly numbers for 2011:

2011 Quarterly Conversion Rates







Conversion Rate





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The decline in conversion rates should have been expected as the company increased its penetration rates in OEM vehicles, placing radios in more car models that were less likely to convert. During the Q&A on the conference call Frear also discussed how a bias towards American OEMs in 2011 reduced the conversion rates. It is possible that the OEM mix had some impact, but the first quarter also showed low conversion rates and that was long before the impact of the Tsunami related disasters in Japan would have shown up in those rates.

The paid promotional subscribers are the other major source of lost subscribers. As the conversion percentage declines, the number of deactivated subscribers rises. In 2011, total deactivations came in at 7 million compared to a previous high of 6.4 million in 2009. With a higher starting installed base of both self-pay and paid promotional subscribers, a higher churn rate than 2011 and a lower conversion rate, look for the 7 million figure to approach 7.5 million. That is a significant number.

I was expecting to see improvement in subscriber metrics for 2012 based on announcements of the expanding used car program and the introduction of 2.0. The used car program, if it is succeeding, isn't impacting the guidance in a meaningful way. And as far as 2.0, an expanded suite of stations targeting the Hispanic market and new features should have made the service more desirable. There is, however, one problem. 2.0 isn't in the dashboard of new vehicles yet. Last August on the Q2 conference call, Meyers said:

A primary goal of what we have called Sirius 2.0 has always been to secure the commitment of our OEM partners to the next generation of satellite radio technology. We have been sharing that vision with our car partners, and I'm happy to report they are very excited about the new technology and how it will add to the driving experience. In fact, we expect to be able to announce, by year end, launch plans for at least one of our OEM partners to begin factory implementation of 2.0 features as early as next year.

"[B]y year end" has passed. On this month's call there was no mention of an OEM partner beginning factory implementation of 2.0 features.

Sirius management is sending the investment community a very mixed message on subscriber activity in 2012. On the one hand, management has issued guidance that subscriber growth will be slowing down significantly in 2012. Management claims they are being conservative because a price increase was implemented on January 1st. On the other hand, management states there was no increase in churn during January, there was no impact when the MRF was implemented and the social media boards are quiet on the topic.

2012 subscriber guidance that is not only less than 2011 actual results, but is also less than the original 1.4 million guidance issued for 2011, is more than a little bit unsettling.

Disclosure: I am long SIRI.

Additional disclosure: I also have covered calls against some of my Sirius position. I may open new covered calls or initiate (or close) a buy stock/sell option position in Sirius, discussed in a prior article, at any time.