For many it would seem that a subscription company either has subscribers or does not have subscribers. Of course, those that dig a bit deeper know that with virtually any subscription company there are actually various levels and/or types of subscribers. If you happen to be invested in a company that has a subscriber business model, then it behooves you to understand how that particular company addresses the subscriber picture.
With Sirius XM (SIRI) the subscriber picture can be a bit cumbersome because there are many different categories of subscribers. This article should serve as a bit of a reference piece for satellite radio investors.
SELF PAYING SUBSCRIBER
A self paying subscriber is one which the consumer, or end user, is paying for the Sirius XM Satellite or Internet radio subscription themselves. For Sirius XM 18,208,090 of the reported 22,297,420 subscribers are Self Paying. The importance of the differentiation between Self Paying subscribers and Promotional Subscribers is that some Sirius XM metrics rely on the Self Pay number only.
Churn is based on the Self Paying number only. Last quarter Sirius XM reported a churn rate of 1.9%. This means that 1.9% of the self paying subscriber base decided to cancel the service each month. The company does not disclose an actual gross number when reporting churn.
A promotional subscriber is not as simply defined as many people may think at first blush. There are actually a few types of subsets within this category. Promotional subscriptions are all subscriptions where the consumer, at no cost to themselves, receives satellite radio for a period of time. Promotional subscriptions can range from as brief as a week to as long as a few years.
It is the Promotional Subscription category where most of the confusion rests. In order to better understand how this category of subscribers works we need to break the Promotional category down into several subsets:
Paid Promotional is a subset that represents promotional subscriptions for which Sirius XM receives money. These promotional subscriptions are often paid for in whole or in part by an automaker. For example, Ford, GM, and Chrysler all pay money to Sirius XM toward a promotional subscription. Sirius XM tells investors exactly how many paid promotional subscribers there are because they are actually counted within the total subscriber metric. Last quarter Sirius XM stated that it had 22,297,420 subscribers with 4,089,330 being of the Paid Promotional type. Historically Sirius XNM is successful in converting about 45% of these paid promotional subscribers into self paying subscribers.
While Promotional subscribers are not counted in the churn number, Sirius XM does give a total deactivated subscriber metric. Paid promotional subscribers that do not convert to self paying subscribers are counted in the deactivated subscriber line item.
Within the Paid Promotional category are two distinct types of subscribers. I call them "LEADING" and "Point-Of -Sale." Leading Subscribers are titled as such because they become subscribers prior to a consumer ever buying a car. Sirius XM actually receives a subscription payment from some auto manufacturers at the time the car is produced. Because the company has received money, it begins counting the radio as a subscriber even though it could be months before the car is sold and the actual promotional subscription is listened to by a consumer. Sirius XM books these payments in Deferred Revenue, which actually acts like a liability on the balance sheet. When a consumer actually buys the car a promotional period will begin and as the months pass by money will be transferred from deferred revenue to revenue. Ford and Chrysler are examples of automakers that have this type of contract with Sirius XM. This type of contract can be a drain on the Average Revenue Per Unit (ARPU) metric, but provides a boost to the subscriber number and helps the deactivated subscriber metric by keeping a counted subscriber on longer than would normally be the case.
The Point-Of-Sale Subscriber category is a paid promotional subscription where the automaker pays for a promotional subscription when the consumer buys a car. This subscription is counted because money is received by Sirius XM. GM and Honda are automakers with this type of contract.
This leaves us with a final category of Promotional Subscribers. This last category is also unreported by Sirius XM, although every once in a while the company will give a taste of what this category looks like. The Unpaid Promotional Subscriber is just what it sounds like. It is a promotional subscription from which the company receives no money. Because no money is received the company cannot, and does not, count these as subscribers. This is a pool of perhaps millions of satellite radios that are actively being used and listened to that are not counted. At the end of an Unpaid Promotional subscription the consumer is approached about becoming a Self Paying Subscriber. If the consumer elects to keep the service they become counted in the numbers. If the consumer does not keep the service they simply vanish. This type of subscriber has no impact on churn, as well as no impact on the deactivated subscriber line. Those who convert do help the gross additions and self pay lines, which are used to calculate metrics such as Subscriber Acquisition Costs (SAC), ARPU and churn.
Within this category are subscribers that I term as "Trailing" subscribers. A Trailing Subscriber is an unpaid promotional subscriber that is derived from a contract with an automaker that does not pay for a promotional subscription. Toyota and Nissan are examples of companies that fit into this category. In addition, Sirius XM's used car deals that provide three month promotional subscriptions to buyers of satellite radio equipped used cars sold at participating dealerships, are trailing and unpaid by nature. Sirius XM typically converts about 45% of the new car buyers into self-paying subscribers and about 35% of the used car buyers.
A deactivated subscriber is made up of the combination of churned subscribers and subscribers from the paid promotional category that do not convert to self-paying when their promotional period ends. This is a very important metric to watch because it tells the story of the successes or failures in conversion as well as in churn.
This category represents people that have more than one subscription. After the first subscription, additional subscriptions are available at discounted prices. Sirius XM does not typically break out this metric, but in the past has indicated that between 20% and 25% of the subscriber number is made up from this category.
GROSS SUBSCRIBER ADDITION
This is the overall number of subscriber additions in a quarter. Gross subscriber additions come from the auto channel's Paid Promotional Subscriber Category, unpaid promotional subscribers that convert to self paying, and any radio that gets activated by a consumer during a quarter.
The Gross Subscriber line is used to calculate metrics such as Subscriber Acquisition Costs (SAC).
Some confusion about Gross subscriber additions developed at the annual meeting of shareholders when Sirius XM stated that the used car channel would deliver 1,000,000 gross activations in 2012. This should not be confused with gross additions. The promotional subscriptions in the used car channel are not counted as subscribers unless they convert to self paying status after the promotional period. Thus, with the conversion rate being about 35%, we can anticipate that during 2012 Sirius XM will realize about 350,000 self paying subscribers through the used car channel, or roughly 85,000 per quarter.
In essence, there is an importance to understanding how and through what means Sirius XM garners subscribers. This is the bread and butter of the company. Showing growth in subscribers is an important factor on valuation. If Sirius XM reports good subscriber numbers, but we do not see a metric like ARPU appreciating (especially considering the price increase), that would be an indication of an issue with consumers seeing satellite radio as a value. A small cheat sheet:
Subscribers Up But ARPU Isn't - The company is selling subscriptions at a discount
SAC Up - Look for rising auto installations, lower than normal gross additions, or a ramp-up prior to a typically big subscriber quarter
SAC Down - Second Life Subs (used car channel) are progressing
Churn Up - Self Pay Base not growing
Deactivated Subscribers Down - Could be a sign of heavy retention efforts and discounting
Deactivated Subscribers Up - Normal condition given the law of large numbers
ARPU Up - Shows traction in subscribers and their willingness to pay full prices
Promotional Subscribers Up - Indicates the auto sector is growing in sales and/or production. This is where understanding the auto sector and how it delivers subscribers comes into play.
Disclosure: I am long SIRI.