It has been said that for every new car that sells there are between three and four used cars that sell. It has also been said that the subscriber bread and butter for Sirius XM Satellite Radio (NASDAQ:SIRI) is the promotional subscriptions that are derived from consumers buying new cars and experiencing satellite radio.
The new car experience has worked well for Sirius XM for a number of years. When a consumer buys a new car equipped with satellite radio they typically get a promotional subscription that ranges from three months to a year, and sometimes more. This promotional period, sometimes paid for by the car manufacturer, allows users to fall in love with the service and eventually become a self-paying subscriber. All things considered Sirius XM is able to convert about 45% of those that experience the service in a new car to self-paying status. That is a pretty decent conversion rate and is impressive. The problem is that in order to feed the subscriber machine and offset churning customers, the number of additions needs to increase.
That problem may seem to have a simple solution at first blush. Instead of installing satellite radios into only 65% of the new cars manufactured, install them into 75%, or 85%, or better yet 100%. This may come as a surprise to some, but installing satellite radios into all new cars is not the correct answer. Sirius XM has had YEARS to study its business. The company understands that over half of the consumers do not elect to keep the service. Why spend money at installing radios into every car when not every consumer keeps the service? Sirius XM has come to the conclusion that a 65% installation rate is the sweet spot.
With more new car installations off of the table the solution for adding more gross subscriber additions needed to come from somewhere else. The first and easiest path was to expand the deals that he company already had with the likes of Ford, GM, Chrysler, Toyota and Mercedes. That expansion came in the form of Certified Pre-Owned (CPO) cars. A Certified Pre-Owned car is one that gains a certain status with manufacturers by meeting certain criteria. With proper inspections and repair a used car can become a Certified Pre-Owned car and get the consumer warranty protections not typically available on a run of the mill used car. Sirius XM put CPO deals in place with almost all manufacturers and bundled a three month promotional subscription with them. The CPO channel helped, but the numbers were not very significant for Sirius XM. Every bit helps, but the satellite radio company still needed more.
The newest channel for Sirius XM to garner more subscribers started about a year ago with Sirius XM's used car program. At last report some 5,000 dealerships would offer up three month promotional subscriptions to Sirius XM for any satellite radio equipped used car sold on their lots regardless of brand. Simply stated, a GM dealer that takes a Ford in on trade will offer a three month subscription to a consumer buying that Ford even though the transaction happened on a GM lot.
Sirius XM has announced several partners including GM dealers, Honda dealers, Chrysler dealers, CarMax, Auto Nation and more. On Tuesday, May 29th, the satellite radio company announced that Ford and Lincoln dealers have now entered the fold as well. This brings the Sirius XM used car program toward 5,500 participating dealerships. There are about 20,000 new car dealerships in the United States, and Sirius XM seems to be announcing at least one new deal each month.
All of this news and fluff is the type of stuff investors love to hear. Adding more channels to gain subscribers is indeed great news and should be celebrated. However, digging deeper into the numbers is the real treasure investors want. Will these deals really help?
Before going any further it is of paramount importance to offer up a point of clarification. During the Q1 conference call Sirius XM management indicated that the Sirius XM Used Car Program would add 1,000,000 gross activations in 2012. That announcement excited many investors. So much so that I received many e-mails expressing that the company guidance of 1.5 million net subscriber additions was "in the bag" now. WHOAAAAAA! Hold your horses here. Look Below:
1. A gross activation of a Sirius XM used car does not translate directly to subscriber status. In other words, not one of those 1,000,000 gross activations is counted as a subscriber out of the gate.
2. The Sirius XM used car program provides promotional subscriptions only. It is a pool of "POTENTIAL" subscribers. The only promotional subscriptions that Sirius XM counts in its subscriber metrics are the ones that the company receives a payment for. Not a single one of these 5,000-plus dealerships is paying a nickel toward the promotional subscription. Thus, they are not counted.
3. These 1,000,000 gross activations will all experience satellite radio for three months. Upon the completion of the promotional subscription the consumer will be contacted by Sirius XM's marketing department to see if the consumer would like to continue the service. Only if the consumer elects to keep the service will they be counted as a subscriber.
4. Earlier this year Sirius XM management expressed that the program was seeing conversion to self-paying in "about the mid 30s." This means that about 35% of those used cars that get the three month promotion become subscribers. That translates to about 350,000 out of every 1,000,000 gross activations.
Getting an additional 350,000 is nothing to write off. That is an impressive number and will certainly help to offset churn as well as get some added value for chipsets installed years ago. In some cases, the second or even third owner of a satellite radio equipped car may be the first real subscriber. This is great news. Now consider these bullet points:
- My research indicates that about 35% of "quality used cars" are equipped with satellite radio. I define a "quality used car" as a car that is less than five-years old, is likely to be sold by a big dealership vs. getting shipped off to an auction, and is at a price point of above $17,500 or so.
- As of this writing the Sirius XM Used Car Program has captured about 28% of the desired market. That leaves plenty of room for growth.
- Each year the percentage of quality used cars equipped with satellite radio will increase. I anticipate that the 35% we are seeing in 2012 will be 37% in 2013 and approaching 40% by 2014.
- In my opinion Sirius XM's Used Car Program should encompass between 7,500 and 9,000 dealerships by the end of 2012 and as much as 15,000 by the end of 2013.
- If 5,000 dealerships can provide 1,000,000 gross activations in 2012, then we should anticipate that 2013 can deliver between 3,000,000 and 3,500,000 by the end of 2013.
- The approximately 350,000 conversions from the 2012 program are enough to offset the churn created by the law of large numbers. This should make matching the subscriber performance of 1.7 million NET additions in 2011 much easier.
- In 2013 it is expected that about 47 million cars will be equipped with satellite radio.
- By 2014 satellite radio equipped cars should number about 57 million.
- In 2015 satellite radio equipped cars will be an impressive 67 million.
- 2016 looks even more promising with 87 million.
- A massive 97 million cars are anticipated to be on the road in 2017.
- The new car channel is expected to grow about 500,000 units per year capping off at 16.6 million in 2016.
In review, the Sirius XM used car program is something to be excited about. The story with this program will be in the opening chapter in 2012 and will begin to bear meaningful fruits in addition to the new car channel in 2013. Going forward, the fleet of eligible cars will increase by about 10 million per year. This, combined with an increase in participants in the Sirius XM used car program equate to viable and meaningful growth prospects. With growth in both the new car channel and used car channel over the next five years, there are many promising attributes to what Sirius XM is doing.
Disclosure: I am long SIRI.