Assessing Sirius XM's Used Car Market Opportunity

| About: Sirius XM (SIRI)
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In addition to the factory install opportunity in which nearly half of all vehicles installed with a satellite radio convert into a paying customer, Sirius XM (NASDAQ:SIRI) plans to tap the used car market to further drive subscriber growth at a low incremental cost. Given that Sirius XM has already incurred the cost to install the radio in those vehicles, the SAC is insignificant, and growth from this channel should improve overall subscriber economics. The company would still have to incur some cost to market this service to used car owners.

Currently SIRI has entered into agreements with several OEM partners including Volvo, Porsche, Chrysler, GM, Ford, Nissan, and BMW to offer free trail services to the certified used cars. At the moment, we are unsure how the economics work, meaning does the dealership pay for a few months of the service as is typical with the factory install deals, or does SIRI offer the service completely free. We assume the latter.

So how big is this opportunity?

The Department of Transportation (DOT) lists the used car market at 40 million units and the National Association of Used Car Dealers states that about 11 million used cars are sold annually with about 4 million of that number being certified used cars. The average life span of a car is 13 years, according to the DOT.

To date, over 35 million cars have been built with a satellite radio. When factoring the cars that have been disabled or reached their end of life, which we estimate about 3 million, about 32 million cars on the road today have a satellite radio installed.

Now SIRI ended 2010 with 13 million OEM subs, so that means the used car opportunity is 19 million today. This is an enormous opportunity that should only grow over time as 60% and growing of all new cars are installed with a satellite radio.

Over the next five years, our math shows that over 80 million cars would have been built with a satellite radio. With about 10 million of those cars having been disabled or trashed, about 70 million cars on the road should have a satellite radio installed. If we further assume that SIRI will have 25 million OEM subs in five years, the used car opportunity will be 45 million. That 45 million number continues to grow as the percent of car installed increase and as the years go by. We think you get the idea that the used car opportunity is enormous.

Now that we know the opportunity, how many of those 45 million subs can SIRI really get?

On the certified used car sales, we believe that conversion rates are likely less than half of that for a new car sale. Let’s says the car market improves meaningfully and 5 million certified used cars are sold each year, up from 4 million, we can say 60% of those have a satellite radio or 3 million. If let’s say 25% convert to a paying sub, then we are looking at 750,000 gross additions per year. If we assume the standard SIRI churn of about 2%, even though we should assume higher churn, the net additions would be approximately 570,000 annually from the certified pre-owned channel. Extrapolating further we see SIRI ending 2015 with a bit over 2 million subscribers from the pre-owned channel or about 4% of the potential used car universe in that year. Not exactly the huge number we were thinking.

What about the cars outside the certified pre-owned channel? That one is a bit difficult to calculate with any assumptions that makes sense. SIRI would have to attempt to get at those car owners, we presume through the dealerships. We assume SIRI would have to reward those dealerships for providing that information to them. Nonetheless, there is still a massive opportunity there waiting to be exploited which can be lucrative economically if SIRI finds the right strategy to get to those customers and then get them to sign up for the service.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.