Sirius XM's Long Road to 2012

So much for that summertime rate hike.

In a surprising move, Sirius XM Radio (Nasdaq: SIRI  ) is voluntarily agreeing to slap another five months on top of its three-year freeze on basic satellite radio subscription rates.

This is already stale news. A Securities and Exchange Commission filing explained the move on Monday. Fellow Fool Anders Bylund covered the move -- and related settlement -- yesterday.

However, the one question that I don't hear anyone asking is one that will have meaty implications for the satellite radio provider in the near term: Is Sirius XM 2.0 still on track for a fourth-quarter release?

Satellite radio's hardware reboot
A lot is riding on Sirius XM 2.0. We haven't been told much about the new receivers, but the little that CEO Mel Karmazin has revealed is encouraging.

  • Sirius XM 2.0 will have access to 25% more bandwidth for content.
  • A good chunk of those channels will be devoted to Latin American music to cash in on the fast-growing Hispanic market.
  • There will be more interactive features.
  • Sirius XM is targeting a retail receiver release during the fourth quarter with incorporation into new cars shortly after that.

Increased functionality is the wildcard here.

A lot has happened in the realm of dashboard entertainment -- outside of satellite radio -- in recent years.

Toyota Motors (NYSE: TM  ) teamed up with Microsoft (Nasdaq: MSFT  ) to introduce a new platform earlier this year. Entune incorporates Microsoft's Bing for mapping, OpenTable (Nasdaq: OPEN  ) for restaurant reservations, and MovieTickets.com for multiplex admissions. This would seem to be a bigger threat to GPS behemoth Garmin (Nasdaq: GRMN  ) or telematics pioneer General Motors (NYSE: GM  ) through OnStar, but I've left out two of the Entune's six touch-screen buttons: Pandora and Clear Channel's (OTC BB: CCMO.PK) iHeartRadio.

Don't let the Clear Channel bias set you at ease. The iHeartRadio app offers access to the terrestrial leader's 750 radio stations from 150 different cities. There has to be something in there for everybody.

All it takes is a single smartphone to open up all of Entune's possibilities, including a lot of ear candy.

Sirius XM knows what it's up against. If it wants to sell its premium product against free ad-supported streams it's going to have to elevate its game during the hardware upgrade.

Perfect timing
Why do I fear that we won't see Sirius XM 2.0 until next year? Well, the upgraded platform seems like the perfect opportunity to bump its rates higher. More content and snazzier features would certainly justify a higher monthly tab. If it's not going to raise its rates until January at the earliest, why not wait until then to push both the new rates and gear at the same time? It just wouldn't make sense if Sirius XM 2.0 is out on the market for a few weeks and then Sirius XM introduces new rates that will likely be $2 to $3 a month higher.

There's a science to any increase, and surely Sirius XM has mapped things out accordingly. There's already some pricing brilliance at play. For example, subscribers will have the opportunity to pay for longer terms at the current rate before year's end. This is a move that will create a cash flow windfall at the expense of softer earnings as the lower monthly rates are factored into the income statement. Perhaps more importantly, this move will also keep churn in check shortly after the hike since so many drivers will have prepaid for longer terms.

We'll see how the next few months play out, though Sirius XM did crash its own party by hosing down the prospects for a 2011 rate hike. There are still catalysts that can help push the stock higher this year. Possible content deals, more Sirius XM 2.0 details, and a few more quarters of robust growth can work wonders until we get greater clarity on the rate hike itself.

Sirius XM doesn't have to cool down this summer as a hot investment, but it will have to try a bit harder now.

What would you like to see in Sirius XM 2.0? Share your thoughts in the comment box below.

Motley Fool newsletter services have recommended General Motors, Microsoft, and OpenTable. Motley Fool newsletter services have recommended creating a diagonal call position in Microsoft and a short position in Microsoft. 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 Sirius since 2004. He does not own shares in any of the stocks in this article. 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.


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