Sirius XM: Service Lane? Yeah, It's A Big Deal

| About: Sirius XM (SIRI)
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In a slow market week of August 19th leading into the release of the Fed minutes, Sirius XM (NASDAQ:SIRI) plowed along in similar fashion. Hitting a low of $3.60, the stock ended the week nearly 3% higher at $3.70. Unremarkable, really, except that attention placed elsewhere could have caused investors to overlook potentially important developments in the company.

With eyes on the fed, investors may have glanced over two key releases that I feel are going to be a big deal for Sirius XM moving forward. First was the announcement of the pending purchase of Agero's connected vehicles unit which I discussed at length. Second, and what I feel to be as important, is the announcement of the initiation of Sirius XM's Service Lane program.

Service Lane builds on the success of the Sirius XM Pre-Owned Vehicle program, which has surpassed 10,000 participating dealers across the country and includes most of the nation's top franchise dealer groups. Now Sirius XM and participating dealerships are able to reach many more satellite equipped vehicle owners, who otherwise may not have had the opportunity to fully experience a Sirius XM trial subscription.

So what's going on here? And more importantly, why is this a big deal for the company?

First and foremost, it should be understood that Sirius XM derives the vast majority of new subscribers from new car sales. Buy a new car, and if Sirius XM is installed you are treated to a free trial after which many convert to become paying subscribers. This has been working great for Sirius XM in an era of increasing new car sales, and not a quarter has gone by recently in which the company has not added a net number of subscribers.

The problem here is eventually those people that are cycling through the new cars and selling that old car, and moving into a new trial subscription. The net effect here is 0, as the old car gets deactivated and the new car gets activated.

A second stream of subscribers is necessary to grow the base of customers.

Enter the used car purchaser. As mentioned in the Service Lane press release above, Sirius XM currently has signed up over 10,000 participating dealers in this program. Now used car buyers who purchase from a participating dealership are treated to a free trial of the Sirius XM service and thus become a potential paying subscriber on conversion at the end.

But now we come across another problem. What of those private party sales? What of the cars sold at dealerships not participating in the Pre-Owned program?

Enter Service Lane. This program has the potential to effectively tap this previously untouched segment of used cars with dormant installed satellite radios. Cost to the dealers? Nothing at all to sign up. Dealers get what amounts to a $43.98 end user value carrot on a stick to pull customers in for routine maintenance :

Sirius XM Service Lane Program currently offers a complimentary 2-Month Trial (a $14.49 monthly value) plus complimentary activation ($15 value) of the Sirius or XM Select programming package to qualifying customers with factory-installed satellite radio.

The benefit here to Sirius XM and the dealership both could be exceptional. First, it could bring additional business to the dealership as the dealership now has an over $40 value incentive to offer the customer, at no cost to the dealer. Sirius XM, on the other hand, gains a trial subscription that likely wouldn't have existed before. It's a potential activation and future paying subscriber on what was previously a dead radio.

Cost to Sirius XM? Minimal. Even if only 20% of these users convert, the program is a success since that is 20% more than would have been received previously.

Churn, or deactivations on a monthly basis on radios, now enter a secondary and even tertiary pool for reactivation. The radio is bought and paid for by the time the new car buyer trades it in or sells it. The new conversions then come with an extremely low SAC (subscriber acquisition cost) and are more quickly profitable.

Service Lane is a big deal, and I have a hard time finding negatives surrounding it. Time will tell how it plays out, but those who can see the light at the end of the tunnel here are in a stronger position to invest in Sirius XM today. Don't let the market noise distract you from your quality investments. With the recent announcements by Sirius XM, the company is providing proof that it is a keeper, and should continue to be so for the foreseeable future.

Disclosure: I am long SIRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long SIRI January 2014 calls from strikes $2 to $3.5.