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There has been some discussion lately among Sirius XM (NASDAQ:SIRI) investors about the potential impact of hurricane Sandy on the subscriber base. Many see and expect some positive impact because current vehicles which may have been rendered unusable due to the storm would need to be replaced. New vehicles typically mean increased satellite radio penetration and eventually new subscribers after conversion.

While that line of thinking may be correct, the overall effect may be small compared to the "big picture" of the entire subscriber base. I'd like to touch on a comment made by Spencer Osborne on this within his article here.

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While I think only one number needs correction there, and that is that out of 100,000 satellite equipped cars potentially affected, that likely 40,000 are subscribers (currently around 2/5 of satellite radio equipped vehicles are subscribers), I fully agree with what Spencer states here. I do think that expectations of an immediate hurricane Sandy "bonus" to Sirius XM's subscriber numbers may be leading oneself down the wrong track. There are far too many factors at play here to guess at speed of replacement of those vehicles, how many of those subscribers will keep satellite radio, how many will even purchase a new vehicle soon, etc. etc.

But let's assume all 40,000 current subscribers lost their vehicle and cancel and buy a new vehicle. That's the portion I am most concerned about. Why? Because it will hit the churn figure in Q4, and it will most certainly impact that churn figure in a negative fashion due to the lead / lag effect of how churn is calculated. If you missed my article on this recently, you can read it here. In that article I explain how churn is impacted when a subscriber sells a current vehicle and moves to a new one. Because the subscriber is then "churned" by moving from a paying subscriber to a promotional subscriber, the more people that buy new vehicles, the higher this churn number will be.

It is absolutely critical at this point to have an understanding that the churn number includes individuals moving from vehicle to vehicle. Churn is not a measure of customers dissatisfied with the service. Churn is made up of many components including customers moving vehicles, customers dissatisfied with the service, customers canceling for financial reasons, and customers owning less radios and subscriptions but still remaining a subscriber. Statements about churn are often coupled with comments about customers dissatisfied with the service or mentioned with bearish overtones such as saying that investors should ask themselves why 23% of the subscriber base cancels every year. Investors would do well to understand what makes up the churn number so they are not knocked off track by such comments.

How large is the impact of vehicle to vehicle moves on churn? It depends on what you feel is the best estimate for how long people keep their cars on average, but it's reasonable to assume that a good portion of the churn number is affected by owners selling and replacing an old vehicle for one which is new to them.

So how does a potential 40,000 subscribers affected by hurricane Sandy affect churn for Q4? It should be fairly simple to calculate. Since churn is the number of self pay deactivations divided by the number of self pay subscribers, if we assume an additional 40,000 deactivations across Q4 or 13,333 per month, and 19,000,000 self pay subscribers, that is an addition of .07% to the monthly churn number. Q3's average churn was 1.954% and assuming it remains stable, the addition of .07% may bring churn to 2.024% for the quarter. This still falls in the 1.8% to 2.0% acceptable range as given by the company, but it may come as a shock to some who are not expecting it if it hits.

Will hurricane Sandy's effects be felt in this fashion? Will Sirius XM struggle to keep that churn number within acceptable limits? It's hard to tell, and these are just some very rough estimations. Even so, it's important for investors to understand that this could be a potential leading impact which may hit that churn number in Q4 and if it does it is absolutely not a huge cause for alarm. It is almost certain that those who do not understand this number will attempt to paint a bearish picture if there is an increase. Arming yourself with the correct perspective ahead of time will allow you to roll your eyes at such comments.

The potential benefits many are talking about such as increased new vehicle sales and increased penetration of satellite radio equipped vehicles as a result, will take 3 to 12 months to hit the self pay line due to promotional periods. Even then, I expect such benefits to be small in the face of larger potential benefits such as impending share buybacks by Liberty Media (NASDAQ:LMCA) once it moves to controlling interest in Sirius XM.

Source: Hurricane Sandy Could Hit Sirius XM's Churn Hard In Q4