Sirius XM Pre-Announces Plans For More Tiered Pricing

| About: Sirius XM (SIRI)

Summary

CEO Jim Meyer pre-announced plans for more tiered pricing.

Balance between growing subs and cannibalizing full price subscriber base.

Still trying to get Hispanic offer correct.

At yesterday's Bank of America Merrill Lynch 2014 Media, Communications and Entertainment Conference, Sirius XM Holdings (NASDAQ:SIRI) CEO Jim Meyer once again discussed market segmentation and introduced a new tiered pricing concept. This is not the first time that Meyer has discussed addressing market segments with lower priced and/or targeted offers. On recent earnings conference calls Meyer has noted that the company's subscriber base was underrepresented with both women and Hispanic subscribers.

It has also been a difficult market to penetrate. A year ago the company tried tiered pricing to go after the Hispanic market, centered around Piolin radio, with a $5.99 package. The offer was a suite of Spanish language stations including news, talk, sports and music programming, all geared towards the sector. That $5.99 Hispanic package offering has not been successful, and it's not known whether it was pricing or lack of compelling content that was the reason for failure.

Piolin is gone, but Meyer is not about to give up on addressing the Hispanic market. Admitting the difficulty of trying to address a fragmented Hispanic market, Meyer stated:

...we're trying lots of things, we're learning lots of things. I will tell you, it's not easy. You know, what's successful in Miami doesn't necessarily work in San Antonio and doesn't necessarily work in L.A. And we're going to keep working at it and keep trying. When we find stuff that doesn't work, we move away from it.

And we're going to continue, you know, for instance, we just signed an agreement this week with Pitbull who plays extremely well in Hispanic community. He's going to do one whole channel for us and a lot of appearances for us. So we're excited about that.

But more important than the update on the company's efforts to go after Hispanics were comments made about other potential offerings. When asked about the segmentation efforts in the Hispanic market, Meyer made a surprising revelation about the Sirius plans for the recently announced Joel Osteen Radio, Meyer said:

You know, we're introducing paid political message here, but we're introducing Joel Osteen Radio here in about two weeks. And Joel Osteen Radio again will be targeted at a segment, with special packages and special marketing, that we think complements, you know, our existing subscriber base will get out of it.

Question by Jessica Reif Cohen (Bank of America Merrill Lynch) - Right. And then the Joel Osteen, so that's just a channel, it's also going to be a separate tier, is that what you're saying?

Meyer - Yes

Cohen - It's Catholic music, like Christian music?

Meyer - It will have a few little things combined with it, so that it gives you some other products to go -- some other channels to go with it. But -- and of course, we would prefer you pay for the whole service, right? But we don't want anybody that wants to get Joel Osteen Radio that -- where price is a blocker from getting it. And frankly, Jessica, I want to see. I mean, you know, I think this is -- this world's not static, right, this market. And so I want to try a few of these and see how they go, and see if we can balance both growth, but not growth at just any cost, okay?

It's not totally clear how this package will be offered, but based on the highlighted sentence, it certainly appears that it will be quite similar to the Hispanic offer centered around Piolin. Building an offer around Joel Osteen Radio will have at least one major difference. Osteen has far more regular listeners than Piolin had. From Osteen's web site:

According to Nielsen Media Research, Joel is the most watched inspirational figure in America. His weekly sermon is broadcast into every U.S. television market where it is viewed by seven million Americans each week and more than 20 million each month.

So, clearly if price is not to be a "blocker", the expectation would be a low priced suite of stations. That still leaves another option open - a premium add-on offering similar to the way cable companies offer premium channels - for current subscribers. Either, or both, methods would appear to be an opportunity to grow revenue without "cannibalizing" the installed base. However, considering the timing of the launch and the company's history of offering free trials, investors will probably not find out much about the success of these efforts before 2015, and whether Osteen's television viewers or church attendees will migrate to, and pay for, the Sirius offer.

But it's not just about special pricing targeted at ethnic or religious groups, Meyer also discussed the idea of market segmentation as it relates to lower income households. These households are becoming more important as the company continues to ramp up its efforts in the used car market.

...as we go deeper and deeper into the economic base of the country and we get, you know, more and more exposed to how folks with incomes less than $75,000. Our guess is that we're going to have to offer packages and pricing there to keep our growth going, that may not be a full tier. And we're going to have to manage that to make sure we don't deteriorate the top.

Very solvable problem. Very, you know, I wouldn't say it's an easy problem, but it's certainly a problem that we're really focused on, and I don't see any problem implementing correctly.

Implementing different pricing tiers and segmented offerings will not be easy, and Meyer recognized this, "The issue for us will be managing what they pay and what they get so that we don't cannibalize this great base that we already have."

Beyond Osteen, Hispanics and lower income segments, Meyer also briefly addressed two other areas where programming needs to be improved. One had to do with the issue of being an East coast centric company. As an example, he noted that the company needs to do a better job with offering content for the 4PM to 7PM afternoon commute on the West coast. The other was tailoring more programming for women:

...we need to do a better job. And we're going to continue to invest there to find unique programming that we think works better for that target demographic, right? We -- I think we've been a little too, you know, male-oriented, sports-oriented, and I think we could expand more in some other areas.

Summary

The idea of offering lower priced, or even "free", ad-supported tiers is not new. Former CEO Mel Karmazin first addressed this at a Liberty Media (LMCA) investor day conference in 2011. At that he floated the idea of monetizing the idle radios by providing 10-15 ad-supported stations as the number of those radios increased. And, the idea of offering premium content is not new either. (After the merger, subscribers with XM radios were required to pay a premium to listen to Howard Stern.)

Meyer is quite correct about the cannibalization issue. Clearly, that did not occur with the Hispanic offer, and I seriously doubt that it will occur with Joel Osteen Radio.

However, if the company begins to tier pricing to achieve greater market penetration into lower income households, the dynamics will be much different. Meyer claims that it is a "Very solvable problem." I have my doubts. The question investors may need to consider is:

If this is a very solvable problem, why hasn't the company already found the answer?

Disclosure: The author is long SIRI, BAC.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: In addition to my long positions, I have January 2015 $4 covered calls written against portions of my long positions in Sirius XM. I also trade blocks of Sirius XM on a regular basis.

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