In a recent interview with Jim Cramer on "Mad Money," SiriusXM (SIRI) CEO Mel Karmazin was asked about the impact of the Sirius subscription price increase that went into effect on January 1, 2012. Karmazin replied:
On the price increase and I'll give you the answer on that one, is our consumers have been really loyal and they really love our product, and the reaction has been very modest. Very modest. So you know, we feel very good about, you know, the subscriber growth in light of the fact that we put in a price increase.
The price increase was just under 12%. As long as the cancellations result in less lost revenue than would be gained by the increase in subscription revenue from the remaining subscribers, the company should come out ahead and feel "very good about" the subscriber growth. But what does "very modest" really mean?
In 1729 Jonathan Swift wrote a scathing satirical piece titled "A Modest Proposal." The full title of the essay is "A Modest Proposal For Preventing The Children of Poor People in Ireland From Being a Burden to Their Parents or Country, and For Making Them Beneficial to The Public." For those unfamiliar with the piece, the proposal is anything but "modest." It nonchalantly promotes cannibalism, provides a financial "analysis" of the cost of raising children in Ireland, and lays out the economic benefit for the poor to raise children to be used as food for the well-to-do.
I am not suggesting that when Karmazin used the word "modest" that he had in mind any definition that was remotely similar to Swift's use of the term. But what did Karmazin really mean? In an interview late last year, Karmazin said "I'm not really good at working for somebody, I just could not be a No. 2." These aren't the type of statements that I consider to be made by a modest person.
Karmazin was granted options to purchase 120 million shares of SiriusXM stock at the price of $0.43 per share. The vesting schedule was for four equal installments on December 31, 2010, December 31, 2011, June 30, 2012 and December 31, 2012. At current prices, these options have a value in excess of $200 million. It would be hard to define Karmazin as a man of "modest" means.
Often when leaders are to be interviewed, they go through extensive preparation. They review lists of possible questions and go over possible answers. They learn to talk in sound bites. Was Karmazin prepped for this question about the price increase and subscriber losses? I don't know, but he certainly should have been expecting it.
As investors, we don't get enough chances to see the CEOs of the companies we own. On those occasions when they speak, some of us tend to focus on small details. I focus on details a lot, especially details that are quantifiable. I think Karmazin's choice of words is important. He had so many ways to answer the question. He could have said:
- Our subscriber losses our less than expected, or
- More than expected, or
- In line with expectations, or, even,
- It's too soon to tell.
He could have given a quantifiable answer. Instead he chose to dodge the issue with the comment "the reaction has been very modest. Very modest."
While I do not think that the Sirius price increase is cannibalizing its subscribers to the same extent Swift's "Modest Proposal" sought to reduce the population in Ireland, Mel Karmazin had a chance to say something positive about the impact of the price increase. Instead, he chose to speak about the loyalty of "our consumers." He also chose not to say something positive. And it makes our decisions about investing in Sirius modestly more difficult. Very modestly more difficult.
Additional disclosure: I am long SIRI. I have $3 January 2013 covered calls against most of my Sirius position, as well as some $2 and $2.50 January 2013 covered calls. I may initiate (or close) a buy stock/sell option position in Sirius, discussed in another article, at any time.