As 2011 valuations come into play when pricing Sirius XM (NASDAQ:SIRI) shares, one notable question regarding next year's guidance stems from the possibility that Sirius XM may be able to increase its base subscription rate for the first time in the company's history.
The FCC accepted the voluntary concession by Sirius XM that it would not raise prices for three years. At the time of the initial offer of course, Sirius XM had no way of knowing that the FCC would continue to drag out the merger for many months following the offer. Still, Sirius XM stood by its promise as a concession of the merger, and agreed to a 36 month price freeze that will expire in early August of next year, allowing the company to potentially increase its base subscription rate in August of 2011.
As early as late February to early March of 2011 however, the Federal Communication Commission will begin the process of seeking public comment on whether the price cap should be modified, extended or removed:
The combined company shall not raise the retail prices for its basic $12.95 per month subscription package, the a la carte programming packages, and the new programming packages nor reduce the number of channels in either their current packages or new packages for at least 36 months. After the first anniversary of the consummation of the merger, the combined company may pass through cost increases incurred since the filing of the combined company’s FCC merger application as a result of statutorily or contractually required payments to the music, recording, and publishing industries for the performance of musical works and sound recordings or for device recording fees. Six months prior to the expiration of the commitment period, the Commission will seek public comment on whether the cap continues to be necessary in the public interest.
Although there will certainly be some opposition to any proposed increase, it is widely anticipated that the F.C.C. will allow for modest price increases to take effect. Sirius has never had a price increase to its basic plan since the service was introduced, in the early part of the last decade. Also worth noting, is that Sirius XM now offers a la carte plans at lower price points than its "Sirius Everything" package, meaning that there is no detriment to consumers. Sirius XM's multi-tiered plans mean no one that wants Satellite Radio will be excluded on the basis of price. That will be the focal point of the F.C.C. inquiry as it seeks to protect consumers.
One unknown, is what stance the Terrestrial Radio lobby may take. While a marketing campaign surrounding a price increase could be used to slow the exodus of am/fm listeners to Satellite Radio, price increases would further strengthen Sirius XM's ability to strengthen its content offerings and delivery system. Terrestrial Radio lobbied hard against the merger, and that move backfired as the consumer looked at their opposition as a form of censorship, creating a situation that resulted in negative publicity for the industry. In the end, opposition would simply prove to be another waste of Terrestrial Radio resources.
The F.C.C. has given itself a six month window to decide on whether Sirius XM should be allowed to increase prices. That should be more than enough time to have a plan in place well before the August expiration. Approval may be given at any time next year, but I would expect a decision to come no later than June, in order to allow for the company to begin the process of implementing any changes to its pricing structure, to take effect upon the expiration of its 36 month price freeze.
Last year, we witnessed tremendous quarterly growth with Sirius XM as it implemented a nominal royalty charge. Any potential price increase would be implemented in similar fashion over time, as most of Sirius XM subscribers choose longer term plans and increases would not be immediate to every subscriber. Improvements to the company's financial results will respond over time and well into 2012.
Disclosure: Long SIRI