Sirius XM Wants to Break Free

We're just six months away from the third anniversary of the merger between Sirius and XM, and this is no ordinary milestone.

Under terms of the original Sirius XM Radio (Nasdaq: SIRI  ) deal, the Federal Communications Commission approved the combination under the stipulation that the satellite radio giant would freeze its basic subscription fee at $12.95 a month.

Like many out there, I figured that Sirius XM would be free to raise or lower its prices as the market deems fit starting this summer.

Not so fast.  

Bloomberg is reporting that Sirius XM recently put in a claim with the Securities and Exchange Commission to have the freeze lifted when the three-year anniversary comes up on July 28. FCC spokeswoman Janice Wise tells Bloomberg that the agency is reviewing the request.

Yikes! Reviewing the request? Regulators can keep meddling here by extending the freeze? It's bad enough that the FCC took a year and a half to approve the deal in the first place. Terrestrial-radio lobbyists and legitimate antitrust concerns bogged down the process. It's really too late for the FCC to begin flexing its muscles. The genie's out of the bottle.

Regardless of how this plays out, it's not as if Sirius XM has had its hands tied. It had no problem breaking in a $2 monthly music royalty fee on many of its accounts. It also jacked up prices for secondary accounts and began charging for Web-based streaming. If the FCC shakes its head, Sirius XM will just find creative ways to price its service accordingly.

It also may decide not raise its rates at all.

Despite a surge in new car sales, Sirius XM's subscriber base has only grown by 7% during the past four quarters ending in September. Now that Sirius XM is profitable, it will be that much harder to introduce new fees or bump rates higher by justifying them as necessary to offset programming or operating costs. Sirius XM would need to add more to its channel lineup, and that's something that may have to wait until Sirius XM 2.0 rolls out by year's end.

Rate hikes can get tricky. Netflix (Nasdaq: NFLX  ) is initiating its first plan increase in years this month. On the automotive front, General Motors' (NYSE: GM  ) OnStar Safe & Sound service has been locked for years at $18.95 a month.

Cable companies and your local grocer may get away with gradual hikes, but it remains to be seen just how flexible Sirius XM's 20 million drivers will be once the inevitable price adjustments kick in.

The FCC may be reviewing the issue, but I'm guessing that Sirius XM is well ahead of the regulators in either formulating a new pricing strategy or drumming up ways to charge more for incremental content and services.

How high can Sirius XM rates go without shedding subscribers? Share your thoughts in the comment box below.

General Motors is a Motley Fool Inside Value choice. Netflix is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz is a subscriber to both Sirius and XM. He does not own shares in any of the stocks in this article, except for Netflix. He is also a member of the Rule Breakers analytical team, seeking out the next great growth stock early in its defiance. The Fool has a disclosure policy.


Read/Post Comments (20) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 25, 2011, at 3:51 PM, doubting wrote:

    The request appears to be not with the SEC but rather with the FCC. SEC has nothing to do with this. I have no doubt that siri will execute a raise. They definitely deserve one for the value they are providing. I have been saying this for a long time. The service is still grossly undervalued. The three year freeze was voluntary when they were sugar coating the merger request with the FCC and DOJ. A reasonable increase should be about $2.00. A $3.00 increase should not be surprising either. They have not had a basic rate increase since the time I have been following them (2003). My gut feeling is that core subscribers, about 17M, will not budge at such small number and losses should be insignificant.

  • Report this Comment On January 25, 2011, at 4:21 PM, NotCensored wrote:

    Not for nothing -- I would, personally, like to see Mel do away with subscription fees & go with an all-free-sponsor-paid approach.

    Well - actually - I only want him to give the music away for *free*.

    Turn every radio on with limited commercials at the top of the hour & reduce the price for the Everything package to $5.99.

    There wouldn't be a vehicle on the road NOT listening to Sirius XM.

    What's more, Clear Channel would be left with Tradio as it's only sponsor ;-)

  • Report this Comment On January 25, 2011, at 4:44 PM, cantbefoolish wrote:

    @ NotCensored .... "Thank you for your call". Hehe

    Actually, I think having a combination of a paid service with no ads, along with the option of a free service with some ads, will be the future.

  • Report this Comment On January 25, 2011, at 4:55 PM, panimj wrote:

    Everything goes up every year, Sirus is due for a price hike they deserve it.

    The FFC should freeze there own wages for what they do

  • Report this Comment On January 25, 2011, at 4:58 PM, plange01 wrote:

    siri will break free and declare bankruptcy this year....

  • Report this Comment On January 25, 2011, at 5:08 PM, multi007 wrote:

    @ plange01 And pigs will begin to fly...

  • Report this Comment On January 25, 2011, at 5:31 PM, 702nitro wrote:

    Just how price sensitive are the Sirius subscribers?

    A $3 increase may not mean much for one person, while a $5 increase may not mean much to the guy next to him, while that extra $1 may mean a lot to the last guy.

    So will Sirius increase their prices knowing only the hard core users will continue paying?

    Or will Sirius keep the prices low for EVERYONE?

  • Report this Comment On January 25, 2011, at 5:49 PM, doubting wrote:

    Their business model is subscription fee based. It costs a lot of money to play music and to pay guys like HS. Let alone billions they have invested in the infrastructure. There should not be anything for "free" with the exception of promotion periods, be it one day or one year. People who know what business is UNDERSTAND this. We can dream of a situation with 100M activated radios when you have latitude from the business point of view to lower prices, say, to $8.99. Then it makes business sense to be more flexible. At this stage siri's flexibility in terms of blanket "free" is zero. Why should they be different from comcast or dish or dtv who charge through the nose and keep raising prices on anything they can. They do offer promotional stuff but it is time limited. There is nothing for free. Everything has costs, and siri is incurring them from music to auto manufacturers royalties to salaries to sports and talent contracts. Karmazin does not want to depend on ad model in his business, he does not believe in it and he is right. There is not enough money in advertisement in any economy for zillions of media outlets that want to live off it.

  • Report this Comment On January 25, 2011, at 5:49 PM, JPS007 wrote:

    Sirius XM should move forward with a $2 rate increase and at the same time roll in the online access. I don't think they lose many subscribers at all. $2 is just over a 15% increase. My health insurance goes up double that every year (and I'm health and don't even go to the Dr).

    I'd also like to see them offer premium content. For example. 14.95 gets your all the basics plus online access. for $1 more you get howard, for $1 more you get the NFL, for $1 more you get Keith Olberman (hint, hint...I think KO would bring on additional subs, as would Rush).

    Also I'd like to see them get their act together with regard to marketing. They are about to hit critical mass (like the iPhone, like Blu-Ray, etc). They just need to get the word out. There is not effective marketing going on. They need Howard and Opra beefing it out during the super bowl, with Laura S. trying to keep the piece!

  • Report this Comment On January 25, 2011, at 5:52 PM, Brent2223 wrote:

    Rick - can you please quantify the 'surge' in new car sales? Not disclosing this makes the 7% SIRI growth impossible to gauge, leaving you free to imply that SIRI's growth is lagging. In terms of pricing, SIRI bills itself as a premium service as opposed to Netflix which is sold more as a value service. Premium services typically have more success in raising prices. Seeing as SIRI has had success competing with terrestrial radio, which is free, I'd imagine most current subscribers will not bat an eye at an extra $1 or $2. And are you really drawing parallels between SIRI and GM OnStar? Really?

  • Report this Comment On January 25, 2011, at 6:15 PM, waterinfo wrote:

    OMG..........

    I never realized that On-Star was $18.95 per month. So, people are willing to pay $18.95 per month for something that they hope that they will never need to use, and not willing to pay even $14.95 per month for something that they use all the time.

    Come on.....where is the logic in that?

    Also, $18.95 per month is about 7 times more that an AAA membership. AAA membership and a cell phone will get you all the same help that OnStar will.

    We're talking subscription costs for SIRI that are absolutely negligible in the purchase/retention decision. A few gallons of gas per month...hardly noticible.

  • Report this Comment On January 25, 2011, at 6:35 PM, woolite1 wrote:

    Can you imagine the increase in subscribers if Sirius LOWERED the price? The infrastructure is already out there in so many cars. Lowering the price would exponentially gain millions of subscribers and I can only imagine the bottom line impact.

    Long Sirius.

  • Report this Comment On January 25, 2011, at 7:11 PM, DirtyTomRackham wrote:

    "Can you imagine the increase in subscribers if Sirius LOWERED the price? "

    Actually, no. Sirius is already pretty cheap - who's going to subscribe for $10, but not for $13? You would have to get (roughly) 30% more subscribers just to breakeven.

    The move to make is up. A 10% or so move up will cause a minimal loss of existing customers.

  • Report this Comment On January 25, 2011, at 7:17 PM, doubting wrote:

    woolite1,

    I cannot imagine ANY significant subscriber growth if siri ever decided to lower the price. If folks do not want to pay for radio, they WILL NOT. They will find so called free alternatives. If we find the price reasonable, which surely is in siri’s case, and we see value, we will pay. You buy an iphone or apple computer or something else of value to you, and do not haggle!!! Why? You know you cannot and you see the value at the same time. If you see NO value, you will not pay a penny. It makes me sick hearing that "if their service were free or cheap", there would be ten times more subscribers. BALONEY. You do not walk into a coffee shop or a bar and ask for a free drink or a drink half the existing price. They would think you are crazy. You can get a free drink if you have already spent quite a bit of money. Why do we think that we can ask for free service from siri that costs money to create and has value? We can expect some sort of promotion for a period of time, which they offer routinely. They are truly the best radio in the world, and their monthly fee equals as little as four cups of coffee at Starbucks. How much are we paying for coffee a month or some other truly discretionary stuff? It is very naive to think that siri should or must change its business model because we think they should. We can and should expect them to innovate. We can and should expect them to do better marketing, etc. These are legitimate expectations. They should and have a right to raise the price reasonable to return investments to their almost one million shareholders and to provide the best value possible at the same time. Siri's value is grossly undervalued, and it is not for the government to poke its nose in siri's business and dictate whether they can or cannot do what is absolutely legitimate under normal capitalism, good for the company, its investors, and in the long run for its customers. If you do not like it, do not buy it. This is still discretionary service in a very competitive market place.

  • Report this Comment On January 25, 2011, at 7:47 PM, 702nitro wrote:

    I don't think anyone is asking Sirius to offer their service for free, just saying that there is a balance between costs and how much continue with the service. If $$$ is not an issue, why won't Sirius just increase it by 3-$5 since people who will pay will pay anyways right?

    I think people are missing the picture here by comparing the service to Cable TV. There aren't many alternatives to Cable TV programming, if there are what are they? rabbit ears? That's the reason why your monthly bill is over $70/month.

    On the other hand we have sirius, excellent service and I like them, and as an investor i'm more concerned about the other %%%% that are deactivating or not turning into self pay; that is were the big money is at. Instead of keeping it a cat-and-mouse game, why not just retain them in the first place? If they didn't play the cat-and-mouse game so much, they wouldn't be so sensitive to fluctuations is SAARs.

  • Report this Comment On January 25, 2011, at 8:45 PM, Pearljamten wrote:

    So i bought an updated Sirus Radio and Home Docking Station, Couple Hundred for the set up.

    I call to transfer the account from a truck i sold. They want like $40 + to transfer the service, 2.5 times the monthly subscription!!!

    It ticked me off enough to make me want to return it all and flip them the bird! but i Love it too much.

    I am going to take my rage out on the phone company instead. !

    Long Siri.....

  • Report this Comment On January 25, 2011, at 9:54 PM, jm31563 wrote:

    Both sides will work it out. An extra buck or two shouldn't hurt.

  • Report this Comment On January 26, 2011, at 7:13 AM, BobMichigan wrote:

    HD Radio and a Ipod dock, I dropped my XM service last year.

    I don't need Stern. If I want to listen to an adolescent giggle over boobies I'll listen to my son and his buddies. If you take a road trip you find you can set your watch by the repeating songs on XM. I'd rather just set my Ipod on shuffle.

    Not to hijack the thread, but I want to see your cell phone dial 911 by it's self after the airbag goes off, or locate your car after it was stolen. Yeah, $12.95 is steep and of course I never want to use it, but I pay it

  • Report this Comment On January 26, 2011, at 5:01 PM, multi007 wrote:

    I dont listen to SIRI for Stern. I listen to SIRI for CNBC, FOXnews, 60's 70's 80's, Comedy, Dean Martin, Frank Sinatra, every once in a while, classic radio adventures from the 40's and 50's like "Your's truely, Johnny Dollar", and during the holidays, Christmas music. Great service. I love the service so much that I paid for the lifetime service. $625. and Im long SIRI with 5K shares.

  • Report this Comment On February 04, 2011, at 4:00 PM, hanks88 wrote:

    Siriusxm ,strong Mgt. Team...Key word "Team"They will move at light speed,this means, out smart the competition world wide! Buy!

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