What does a slowdown in auto sales mean for Sirius XM (Nasdaq: SIRI)? Which automakers hold the keys to satellite radio's success? In this first part of a four part series, I ask Sirius Buzz writer Spencer Osborne. Sirius Buzz covers satellite radio news but is not affiliated with Sirius XM. Spencer owns shares of Sirius XM.
Mac Greer: OK, Spencer, let's start out with retail sales. The Commerce Department reported this week that retail sales in June fell for the second straight month. A big drag on that number was motor vehicle sales, which fell 2.3%. What does a slowdown in auto sales mean for Sirius XM?
Spencer Osborne: It is predominantly where Sirius XM garners the most exposure for consumers for satellite radio. It is predominantly not a retail-driven model, but a promotional-subscriber model. So when car sales are down or car sales are up, Sirius XM is going to have their promotional pool of subscribers either go up or down. Typically what the company has been dealing with is anywhere between 44% and 48% take rate. In other words, after the promotional period expires, somewhere between 44% and 48% of those consumers will opt to become a self-paying subscriber of the service. The satellite radio business model is predominantly driven through someone's experience when they buy a new car.
Greer: And Spencer, if I am looking at the big auto makers, which company or companies are the best proxy for Sirius XM? Is it Ford (NYSE: F), or who are the companies that you are looking at?
Osborne: Well, that is an interesting question. There are three categories of OEM (original equipment manufacturers) subscriber in terms of Sirius XM and satellite radio that I look at. You have your leading companies, and by "leading" I mean when the company manufactures the car or produces the car, that is when the subscriber is counted -- that's your Fords, your Chryslers, your Mercedes, and BMWs. So, while it is still on the assembly line and a satellite radio gets installed, those OEMS are paying for a subscription to Sirius XM radio and are being counted as subscribers at that point.
The second category is what I would call point-of-sale contributors. That is your General Motors, your Honda (NYSE: HMC), and companies along those lines. That becomes a promotional subscriber at the point of sale, when a consumer actually buys the car, the promotional subscription starts.
Then the last category is what I would call our trailing subscriber. That encompasses Toyota (NYSE: TM), Nissan, Hyundai, Kia, and those brands. In essence, what happens when a person goes and buys a Toyota, it comes with satellite radio. They get a three-month subscription, promotional subscription, and they are not counted as a subscriber at that point. They are only counted as a subscriber if they elect to become a self-paying subscriber at the end of the promotional period.
And all of those OEMs, all those deals, are structured a little bit differently. Some of them are cash-flow friendly, like the Ford and Chrysler deals with longer promotions and the subscription getting paid for, some are more churn friendly, like the Toyota, the trailing subscribers, because it was never counted as a promotional subscriber. If the person elects not to keep the service, they are not counted in the churn number. Then some just fall right in the middle like your General Motors and your Honda.
So I would say that the preferred partners right now for Sirius XM are the ones with the highest penetration of installation, that would be General Motors, Honda, Ford, Chrysler and you have Hyundai and Kia doing 100% installations. So those are probably the preferred partners right now. It is just a matter of which way things shape up and work for the mix. Usually we are about a 33% mix there. Lately with Toyota taking it on the chin with recalls, and Ford kind of picking up that slack, you have got the leading subscribers taking up about 37% of the category, the point of sale taking up about 33%, and the trailing taking up about 27%. The healthiest thing for satellite radio is to have that in balance.
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