Can Sirius XM Get Away With $14.99 a Month?

Shares of Sirius XM Radio (NASDAQ: SIRI  ) opened 4% lower this morning after the company posted disappointing quarterly results and lackluster guidance, but not everything is heading lower at the satellite radio provider. Sirius XM is revealing that it will boost its core monthly rate by $0.50 to $14.99 starting in January. Is that too much? Is the move coming too soon? Is Sirius XM overestimating its stranglehold on the premium radio market?  

Sirius XM tested its pricing elasticity last year, pushing its basic monthly rate higher for the first time since the 2008 merger between Sirius and XM. That was a nearly 12% increase -- far more noticeable than next year's 3.5% uptick -- and the media giant didn't have a problem growing subscribers and keeping churn in check in 2012. Consumers are used to seeing their cable and satellite television bills creep higher every year, so why should premium audio entertainment be any different than premium video? It's hard to complain about an increase after two years that seems to be merely keeping up with inflation.

Well, there is a big difference between the two models. Pay TV companies are merely passing on the costs of the more expensive carriage rights they have to pay to offer the top channels. Sirius XM is in a far more lucrative situation. It doesn't need to carry any particular channel. It can afford to pass up on key talent if it's just too expensive. Programming and content costs have risen just 3.4% over the past year, even though its subscriber count has grown by 9.5% to nearly 25.6 million subscribers. In other words, Sirius XM is increasing its core subscription rate in three months even though its programming and content costs per subscriber are actually shrinking.

That's important. We're seeing a similar situation at Netflix (NASDAQ: NFLX  ) . The leading video service posted quarterly results on Monday and if we key in on its flagship domestic streaming business, we see an 18% spike in revenue costs, but its subscriber count has actually risen 24% over the past year. In other words, costs per subscriber are also sliding there. However, Netflix isn't increasing its monthly rate. CEO Reed Hastings has consistently argued that $7.99 is an important price point. Pay-TV providers will keep creeping their monthly ransoms higher, but Netflix -- like Sirius XM -- can control its programming costs. It can let properties walk if they don't offer a reasonable return.

Is Sirius XM right? Is Netflix right? Obviously, if Sirius XM can get away with it, that's the way to go. Most subscribers naturally don't know that they're being hit with an increase at a time when content costs per account are on the way down. They don't care. They're more than happy with the content, and $14.49 or $14.99 a month for unlimited premium audio entertainment as they drive around is a sweet deal.

However, a lot has happened since Sirius XM's price increase. More cars allow smartphone owners to seamlessly stream content via Bluetooth. All of the major tech giants have introduced free or cheap streaming music services, including last month's rollout of iTunes Radio. Sirius XM has argued in the past that the connected car has helped -- not hurt -- it, and the growth and low churn definitely bear that out.

However, it may be troublesome to see Sirius XM offer initial guidance for 2014 that calls for revenue to grow at a mere 6% clip. Wall Street was holding out for more than that, even before it knew about the monthly increase. Sirius XM has been historically conservative with its guidance, but pushing through an increase at a time of decelerating growth could prove to be a bit of a gamble.

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9/29/2016 11:06 AM
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