Why I am Loyal to Sirius XM Radio

Although Sirius XM Holdings (NASDAQ: SIRI  ) has over 25 million subscribers, my sister and I are the only people I personally know who have retained our satellite radio subscriptions for longer than the free trial period bundled with the purchase of a new car. They may be strangers, but I know there are tons of people like us who know this company's original slogan to be the truth: "the best radio on radio." The majority of its subscribers result from auto manufacturer partnerships, but the superb service is building a brand that stands in a class of its own.

Paying for music?
Yes, I grew up during the Napster days, but I do pay for my music. Today, if you're not too particular, you have free options such as Pandora  (NYSE: P  ) and iTunes Radio from Apple (NASDAQ: AAPL  ) . If you want higher audio quality and an ad-free experience, Pandora asks for just $36 a year for its extensive music library built from the company's Music Genome Project. Other music services are priced at around $10 per month, a third less than Sirius XM's monthly rate of about $15 per month.

With many free and more affordable services available, why would anyone remain loyal to the pricey Sirius XM? Simply put, the entire consumer goods sector follows the same model, with certain brands commanding higher prices than others. Canister coffee costs far less than a cup of just about anything at Starbucks, yet there is almost always a line in every Starbucks location I've ever visited. Sirius XM increased its monthly subscription rate by 12% in 2012 and more recently increased it by 3.5%, but these moves were met with little backlash and thus prove that quality dictates price, even if something similar is available for free. 

Selling a brand
Not everyone gets instantly hooked on Sirius XM stations such as Eminem's Shade 45 and the booming electronic music channel BPM. Beyond stations based on algorithms and genres alone, Sirius XM's stations are actively managed by music professionals, producers, and personalities. This allows users to discover new music, learn about their favorite artists, and make connections via a shared passion for music. On many stations, users can call in to request songs and discuss topics, and this interaction has become even more accessible through heavy activity on Twitter.

If you haven't had the pleasure of hearing these brilliant music channels and premium talk shows, the company will find a way to get them to your ears. Sirius XM comes standard in many rental cars, a two-month trial is included with pre-owned cars equipped for the service, and anyone can get a thirty-day trial online. After a few commutes and Internet browsing sessions, many listeners are ready to sign on.

The company's little known "A La Carte" package, which is only compatible with certain radio units, allows the subscriber to select 50 channels for just eight bucks a month. For the majority of radios that are built into vehicles, the "Mostly Music" package sells for about ten dollars a month and offers over 80 channels.  Although the company will throw premiere packages with bells and whistles at unwary consumers, the service is more affordable after a little research.

What about everyone else?
Over the last year, Pandora has exploded with a stock appreciation of over 200%. That's great for short-term investors, but Pandora and other music services do not have the unique business model that makes Sirius XM so special. 

Pandora relies on ads for most of its income. This requires increasing listener activity, but activity has recently declined and the subscription base sat at just over 70 million active users as of October 2013.  The declines most likely stem from users leaving for iTunes radio as well as Spotify and iHeartRadio from Clear Channel, to name just two alternatives. As superior as Pandora playlists appear to be, the service is too similar to others to command the market. Listener time eclipsed 1.5 billion hours in December, but it's only a matter of time before more names enter the fray and begin to hurt Pandora's earnings. 

Estimates place Sirius XM's annual revenue per user at about $155. Compared to Pandora's annual revenue per user, which sits at just $9.40, it should be clear to investors that Sirius XM has a more sustainable financial position. As long as the company continues to add subscribers at anything near the 1.66 million rate it achieved in 2013, revenue per user will rise because of the previously mentioned price increase in sync with a rise in free cash flow, already at $709 million at the close of 2012.

Winners either way
Some analysts believe that people have become less inclined to pay for music. Between Sirius XM's subscriber growth of over 6% from 2012 to 2013 and Apple's 1.26 billion units moved in iTunes for 2013, many people are still paying for music. Consumer habit changes will always cause ups and downs, but people are inclined to subscribe to services they hold dear; just ask Netflix. Sirius XM indirectly assists iTunes in that if one discovers something new on satellite, they may be inclined to make one more click and spend a dollar. Most readers will argue that Apple is a rival to everyone, but the company has a seemingly ubiquitous influence on consumer behavior.

Sticking to one brand is not my style, but Sirius XM and Apple command the consumer goods market with premium services and reap huge profits from their expertise. Investors can scrutinize quarterly earnings reports for hours, but it won't change the fact that premium companies have loyal followers who are willing to spend.

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  • Report this Comment On February 01, 2014, at 11:05 AM, millewk wrote:

    Today, if you're not too particular, you have free options such as Pandora (NYSE: P ) and iTunes Radio from Apple (NASDAQ: AAPL ) . Pardon me but nothing in life is free. Yes Pandora is technically "free" with the exception of usage fees. When I ask anyone about usage fees, whether it be their PC, I-Phone or radio I just get a blank stare. Costs escalate about $20 per 5G of usage and I you get an unlimited usage plan you are paying about $100 per month.

  • Report this Comment On February 01, 2014, at 1:33 PM, TreeKing wrote:

    There is one very important aspect of Sirius that is never mentioned or calculated in any report written about Sirius. That is Availability. For a lot of people it is the only radio available. In a lot of USA & Canada satellite is the only one that works all the time anywhere.Sirius should push this fact more. In my case, I had [since retired] over 20 subscriptions, one in every piece of equipment i owned. Sirius's variety contributes to a very happy crew on long 12 hour shifts. No more tapes and cd's, they did not live well in our harsh work environment, way to go Sirius. Should not say this but there are a lot of people that would pay a lot more.In my case I think it more than payed me back .

  • Report this Comment On February 01, 2014, at 3:14 PM, sirifair6 wrote:

    I agree with the author and the two make sense commenters. I have had five life time subscriptions of sirius xm in my family since 2004 and 2005.

    It appears the author belongs to the younger generation that is not averse to what I call tinkering and finding what they think is the best deal in spite of the time it takes to operate whatever juke box (not radio because neither Pandora nor Spotify are a radio but rather juke boxes) they choose. The point I am trying to make is that for people that belong to two generations preceding the author the convenience and choice of programming at sirius xm are invaluable. Plus I hate commercials and will never get back to any so called free option even if a commercial is run once an hour.

    In terms of price, it is hard to find a service in principle that is so inexpensive vs. the value it offers. Even though Netflix is cheaper the quality of programming is not appealing to me plus direct comparison of the two services would be inappropriate.

    Many whine that sirius xm is expensive. Name me a service that is cheaper that $15-$20 a month and provides this much value translated into amazing programming choices, ubiquity of the service and its convenience comparable only to terrestrial radio. It is true the utility of sirius xm is not as broad as of a cell phone or paid tv. However, the price is five times less, the utility in the auto is perfect. This is why sirius xm has had and will always have its customer who does not want to limit his/her experience to music only and deal with commercials or tinker while looking for what he/she wants. With Sirius, I spin a knob and find what I like in a split second without wasting my time on so called options.

    Once siri adds security services on a standalone basis or bundled with radio in the next couple of years the service will become even more appealing in every aspect from price to its utility and will turn into a household name similar to pepsi or cable/sat tv.

  • Report this Comment On February 02, 2014, at 7:43 PM, zukerman wrote:

    sirifair, waiting for the planned take down for more shares. Last purchase was $3.39 but never thought it would get that low again.

  • Report this Comment On February 03, 2014, at 9:47 AM, sirifair6 wrote:

    zukerman,

    Tomorrow's Q4 and 2014 overall announcement is not going to be stellar for the ignorant. The stock may very well lose more. But this is expected because Q4 2014 was hugely cash intensive plus the deal with GM changed for the worse the sub count for a period of three to six months. However, starting Q3 they will start catching up on subs and cash build will be stronger due to up to 40% reduction in revenue sharing with GM.

    Starting Q3, all metrics will be getting consistently better with the year finale AMAZING. The company has done everything possible and impossible to thrive for years to come. Sometimes you need to take a blow short-term for the long-term. I have zero worries here.

    My major worry is liberty and its schemings with Meyer and the co. I am very concerned that Meyer will bend over backwards to please his benefactors by making dubiuos announcements about 2014 guidance. This is the real danger. Such moves may scare the herd out of its wits and it will start running and SELLING. This is all liberty and their servers need to get siri for a song. I will be first to acknowledge that I was wrong if Meyer does behave ethically.

  • Report this Comment On February 03, 2014, at 11:37 AM, BillFromNY wrote:

    Just to clarify again, Liberty is NOT purchasing Sirius for a song or any other amount. Liberty already owns a controlling interest in Sirius.

    Liberty wants to buy out the remaining interest in Sirius with a stock swap. Current Sirius shareholders will still own Sirius, but their ownership will be diluted by their gaining ownership in the other assets held by Liberty while current Liberty shareholders will share in ownership of Sirius.

    So post-merger shareholders will still share in any great future increase in valuation of Sirius, plus any value increase in the assets now held by Liberty. The deal could turn out to be a positive or a negative.

  • Report this Comment On February 03, 2014, at 1:23 PM, dannysboy wrote:

    Why do I love SiriusXM,a 2step tech. (turn on and push a button) and never consider dropping it?

    Simplicity!

    I'm a Senior citizen who started working with data systems in the 60s, who did not know using electronic systems was going to be a perpetual game of leap frog! I got sick of that game a long time ago.

    SiriusXM conducts their evolution without me having to be involved with it.

    I turn on the radio, and every once in a while it upgrades.

    Finally, SiriusXM is the general store of broadcast products. All of the internet music companies are just music boutiiques.

  • Report this Comment On February 03, 2014, at 6:00 PM, sirifair6 wrote:

    BillFromNY,

    You do not need to clarify that, this is obvious. However, what is not obvious is the actual stock swap. At 0.076 and $3.68 at the moment of the offer liberty will be buying the company for a song. This is going to be a lousy stock swap for a siri investor with our holding devalued substantially, potentially by 20% for a start.

    If you project siri as a standalone business in the next five years, you would see fcf double and the number of shares reduced by 40% to under 4B. The stock will be valued at a minimum at $8+, or much more in an average scenario. The company is a monopoly and Malone knows that. I can assure you that starting Q3, 2014 siri will be producing very strong results in every metric. I do not want this to be under liberty because these results will be diluted by liberty's mediocre portfolio and grandiose plans that may or may not work.

    Today siri is a strong and easily predictable business with huge money making potential unlike it was before the merger five years ago. I have had my share of trouble with the company in the past, survived, got to a point of prosperity, and now you are telling me that liberty should own siri. Why in the world I would accept this nonsense!!! They own 52%+ and the rest they may buy if they want siri’s cash so much. Why should I agree to this cr@ppy deal that makes no sense to me??? Because you think so! Funny, isn’t it???

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