By the most recent quarter, Sirius XM (SIRI) has 22.3 million subscribers. As I wrote in an earlier article, the number of subscribers by the end of this year could hit 24 million if new car sales stay strong.
Sirius could grow with its subscriber count, but unlikely forever. The growth would stop or slow down at some point. In this article, I analyze the likely upper bound of Sirius' subscribers.
In doing this, I'm going start with examining the subscription of similar businesses. Many businesses rely on subscribers to pay a fixed monthly fee as the revenue source. Understanding the magnitude of subscribers across various business helps us get a rough idea about the upside potential of almost any subscription business.
Company | Business | Subscribers | Market Cap ($) |
Comcast (CMCSA) | Cable TV | 22.3 million | 82 billion * |
DirectTV (DTV) | Satellite TV | 20 million | 30 billion |
Dish Network (DISH) | Satellite TV | 14 million | 12 billion |
Netflix (NFLX) | Video Streaming and DVD Rental | 23 million | 3.7 billion |
Sirius XM | Satellite Radio | 22.3 million | 6.94 billion |
* including Internet and voice service
As we can see in the United States, subscription based services rarely gets more than 25 million subscribers. Even if we use the sum of DirectTV and Dish's subscribers for satellite TV, we get have 34 million. That is perhaps the highest possible number a monopolistic company can have in the U.S.
From that perspective, things don't look that bad for Sirius, as it is very far from the 34 million.
Next, let me calculate how Sirius may be able to reach 34 million subscribers. The first nagging issue Sirius has to deal with is its monthly churn rate of 1.9%, which means Sirius loses 1.9% of its subscribers every month. This is no small number! It converts to the subscriber retaining rate of about 79% annually. This also means, for the 21,892,824 subscribers Sirius has by the end of 2011, only 2,623,890 will be left in 10 years (see the table below).
| Year Sequence | Year | Subscribers in 2011 | Lost Subscribers |
| 1 | 2011 | 21,892,824 | |
| 2 | 2012 | 17,295,331 | (4,597,493) |
| 3 | 2013 | 13,663,311 | (3,632,020) |
| 4 | 2014 | 10,794,016 | (2,869,295) |
| 5 | 2015 | 8,527,273 | (2,266,743) |
| 6 | 2016 | 6,736,545 | (1,790,727) |
| 7 | 2017 | 5,321,871 | (1,414,675) |
| 8 | 2018 | 4,204,278 | (1,117,593) |
| 9 | 2019 | 3,321,380 | (882,898) |
| 10 | 2020 | 2,623,890 | (697,490) |
Sirius has to grow at least 4-5 million new subscribers just to keep the total number of subscribers constant.
That is no easy task. Based on Sirius' 45% conversion rate from promotional to paid subscribers, 9-11 million new cars have to be installed with satellite radio each year just to keep Sirius' customer base from shrinking.
Let me present the most optimistic scenario for Sirius' growth projection in the next 10 years.
1. New car sales = 16 million a year from 2012-2020
2. Churn rate stays constant at 1.9% per month
3. Conversion rate from promotional to paid subscribers stays constant at 45%
Each year, Sirius will lose some existing customers and acquire some new ones. The following table gives the total number of subscribers each year from 2012-2020 under these assumptions.
| Year | Total | Subscribers in 2011 | Subscribers in 2012 | Subscribers in 2013 | Subscribers in 2014 | Subscribers in 2015 | Subscribers in 2016 | Subscribers in 2017 | Subscribers in 2018 | Subscribers in 2019 | Subscribers in 2020 |
| 2011 | 21,892,824 | 21,892,824 | |||||||||
| 2012 | 24,495,331 | 17,295,331 | 7,200,000 | ||||||||
| 2013 | 26,551,311 | 13,663,311 | 5,688,000 | 7,200,000 | |||||||
| 2014 | 28,175,536 | 10,794,016 | 4,493,520 | 5,688,000 | 7,200,000 | ||||||
| 2015 | 29,458,673 | 8,527,273 | 3,549,881 | 4,493,520 | 5,688,000 | 7,200,000 | |||||
| 2016 | 30,472,352 | 6,736,545 | 2,804,406 | 3,549,881 | 4,493,520 | 5,688,000 | 7,200,000 | ||||
| 2017 | 31,273,158 | 5,321,871 | 2,215,481 | 2,804,406 | 3,549,881 | 4,493,520 | 5,688,000 | 7,200,000 | |||
| 2018 | 31,905,795 | 4,204,278 | 1,750,230 | 2,215,481 | 2,804,406 | 3,549,881 | 4,493,520 | 5,688,000 | 7,200,000 | ||
| 2019 | 32,405,578 | 3,321,380 | 1,382,681 | 1,750,230 | 2,215,481 | 2,804,406 | 3,549,881 | 4,493,520 | 5,688,000 | 7,200,000 | |
| 2020 | 32,800,407 | 2,623,890 | 1,092,318 | 1,382,681 | 1,750,230 | 2,215,481 | 2,804,406 | 3,549,881 | 4,493,520 | 5,688,000 | 7,200,000 |
Obviously, under this extremely optimistic assumption, Sirius' subscriber base can ultimately reach 33 million in 2020. That is about 50% higher than the current subscriber base.
Using the calculation method from my previous article (each 8% customer base growth converts to approximately $220 million extra cash flow), 50% more subscribers would mean a total projected cash flow of $2 billion in 2020. Since Sirius' subscriber growth will be much slower by 2020 (at 1-2% annually), we have to use a relatively conservative price/cash flow ratio of 8.6 (S&P 500's). This gives Sirius a projected market cap of $17.2 billion.
That about 9.5% annual return, on the conditions that (1) there is no share dilution and (2) a booming ten years in car sales between 2011-2020.
This long term return may not appear too shabby, but it is based on such an optimistic assumption. The inevitable conclusion: Sirius is not a worthy long term investment target.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
