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Ever since Sirius XM (NASDAQ:SIRI) got serious about the used car segment last year, the company has been adding more and more dealerships into the fold. The used car initiative started with GM and about 1,000 about a year ago and has grown 6 fold since with Volkswagen of America being the most recent addition.

The latest deal with Volkswagen makes the potential pool total a potential 6,600 dealers since VW of America has about 600 active dealerships. Close relationships between Volkswagen, Porsche, and Audi could increase that even more.

Early in the year I had indicated that I anticipated Sirius XM announcing about one of these deals per month throughout 2012. So far the company has not let me down. With about 20,000 new car dealerships in the U.S., Sirius XM has essentially captured about 33% of that potential market!

The Sirius XM used car program gives the company a second (or perhaps third) shot at extracting revenue from a factory installed satellite radio. The beauty in this is that the costs of the radio have previously been accounted for, making any money realized have an easier trip to the bottom line. This is good for the company and good for investors.

While there is a ton of focus on new cars sales as they relate to Sirius XM, the used car market will be an integral part of the growth story in the years to come. For every new car that sells there are an estimated 4 used cars sold. As each year passes the number of satellite radio equipped used cars increases, and this is exactly what the company is now tapping into.

Only about a year ago we were seeing the satellite radio equipped used car inventory at Car Max at about 33%. Today that percentage is 47%. That is impressive penetration! In the new car channel Sirius XM enjoys about 66% penetration. Used cars will not get to that level, but at 47%, it is a market worth chasing!

One key element to understand is how the used car program works. In essence the company gives a three month unpaid promotional subscription to any used car equipped with satellite radio regardless of brand. By example, a participating Volkswagen dealer selling a used Ford will be able to offer the consumer 3 months of satellite radio for free. The dealer wins by having a carrot to give consumers. The consumer wins because they get satellite radio free. Sirius XM wins because it gets the contact information of the consumer and can try to keep that consumer on board by converting them to a self paying subscriber.

Digging deeper we want to know what this means for investors. The first thing to understand is that none of these promotional subscribers are counted in the subscriber number given by the company. This is because they are unpaid promotions. The only way these consumers get counted is if they elect to become self paying subscribers. Think of it a "trailing pool". A used car is sold this quarter, and has potential to become a counted subscriber next quarter.

For Sirius XM the impacts could be substantial over time. Imagine how this can impact the self paying subscriber line item. Imagine how it will help decrease the Subscriber Acquisition Costs (SAC) which calculate the cost per gross addition. With these used cars being essentially "free", it becomes easy to make improvements in the SAC line item. This will also give ARPU and assist, as well as churn.

Sirius XM has indicated that it anticipates having 1,000,000 cars in 2012 participate in this program. The company is successful in converting about 40% of these used car buyers into subscribers. The numbers will be more impressive as A) the Sirius XM Used Car Program grows, and B) the number of satellite radio equipped used cars grow.

While new car sales will level off at some point in the next couple of years, the used car channel still has much more time to develop and mature. Look for these types of deals to have a more and more meaningful impact as each quarter passes!

Source: Sirius XM Bolsters Used Car Segment With Volkswagen Deal