With Higher Prices, Will Sirius XM Customers Stick Around?

Sirius XM (NASDAQ: SIRI  ) sees a long runway left to keep adding to its 25.8 million subscribers. But with the company growing subscriptions at a rate of less than 5% per year, it's going to have to look elsewhere to keep its revenue on the rise. To keep the top line growing at a robust pace, Sirius is going to have to continue to bring in more from each subscriber it has.

The good news for Sirius on that front: A subscription price hike of $0.50 per month starting in January didn't cause mass cancellations. In fact, new subscriptions were up by 267,000 in the first quarter – more than the company had forecast. It is maintaining guidance for 1.25 million additions in 2014.

This is a significant development for Sirius, because it demonstrates that the company has pricing power amid ever-growing competition from music-streaming companies like Pandora (NYSE: P  ) , Spotify, and the seemingly soon-to-happen Apple iRadio-Beats Music service.

The fine line
It's necessary for any subscription service to walk a tightrope, where it's not giving customers such a bargain that it's leaving cash on the table, but it's also not charging so much that they leave for cheaper alternatives.

Some 64% of Sirius subscribers also use Pandora, according to FBR Capital Markets. With the music-streaming service already having a foot in the door to swipe away unhappy satellite customers, that balance is even more important.

To date, Sirius XM has done a fine job walking the line.

Let's take a step back and look at where Sirius generates its cash. Subscriptions account for 85% of the company's revenue. Ads generate just 2%. But Sirius can't make up for slowing subscriber growth by airing more advertisements, because the lack of ads is one of things that sets Sirius apart from free and cheaper competitors.

Instead, Sirius has to look to generate more revenue from existing subscribers, which is why average revenue per user, or ARPU, is an important metric for investors to watch. Sirius has been able to increase that number on a pretty consistent basis. For the first quarter, it stood at $12.18 a month, up from $12.05 in the first quarter of 2013. Going back to 2009, ARPU stood at just $10.95.

Looking like 2012
This is only the second time Sirius XM has raised prices since the two satellite radio services merged in 2008.

So far, the latest price hike is looking a lot like the last hike, in 2012. Back then, Sirius raised the price of its basic package from $12.99 to $14.49. Investors were anxious.

It turned out that there was little reason to be. Although the company kept its subscription growth forecast conservative at 1.3 million net additions, it finished 2012 with 2 million more subscribers than it had at the end of 2011.

Sirius XM CEO Jim Meyer was confident in January 2014 that the latest price increase would not lead to mass cancellations:

While changing prices is a difficult decision, particularly in the competitive audio entertainment market, we are confident that our subscribers see significant value in our service and that this modest change will not significantly impact retention next year.

So far, that's been on the mark.

The bottom line
With growing competition from music-streaming services and new customer growth tied to new car sales, Sirius investors need to keep an eye on the average revenue it gets from each subscriber as a gauge of the company's pricing power. If subscribers are willing to accept a price increase, it's a good long-term sign for the satellite radio provider.

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Read/Post Comments (10) | Recommend This Article (2)

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 May 23, 2014, at 11:34 AM, goodguy36 wrote:

    The answer to your captioned question is "Yes".

    I have a question for you. Why do you write about a stock that you don't own? Why should you even comment on the future of SIRI? Don't bore us with your opinion. No one cares.

  • Report this Comment On May 23, 2014, at 12:11 PM, Protocola wrote:

    Of course they'll stick around....where else can they get the best CONTENT w/out ANY interruptions for pennies a day? Huh J-E K???

  • Report this Comment On May 23, 2014, at 2:08 PM, Austin77478 wrote:

    If one wants to get clicks, one writes about Sirius. Another perfect example is Cameron Kaine/WSP/Richard Saintvilus.

  • Report this Comment On May 23, 2014, at 4:40 PM, dannysboy wrote:

    Once again the dark (but rainless) clouds of subscription price and competition are over head.

    I have heard this almost irrelevant nonsense so much I now regard it as someone trying to start another short run.

    The sub price:

    This morning I paid 2.10 for a medium black coffee that lasted about 15 minutes----- $2.10 is a full 4 days of SiriusXM!

    Compeitition:

    Put this in a brick and mortar visualization. Pandora, Spotify, et al, are music boutiques.

    SiriusXM is a huge Mall of everything broadcast.

    Technology:

    Here's a factor never discussed. There are still many people uncomfortable with tech and many (like me) with tech burnout.

    Satellite radio is terrestrial radio multiplied by at least 10. Your signal doesn't come from a limited range tower, but a limitless satellite.

    Yet, for the user, the process is the same-----turn on the radio and select the station you want. That gives everybody the convenience, speed, and efficiency of familiarity-----no passwords or user names, or any other techo hurdles.

  • Report this Comment On May 23, 2014, at 9:07 PM, jekoslosky wrote:

    @goodguy36 -- I fail to see a problem with a writer writing about a stock he does not own.

    @dannysboy -- Exactly how does an article that closes "If subscribers are willing to accept a price increase, it's a good long-term sign for the satellite radio provider." look like "someone trying to start another short run?"

    That said, I do agree, at least somewhat, with your 3 points. MY question on the technology point is will that be a lasting advantage, with the advance of in-car technology?

  • Report this Comment On May 26, 2014, at 12:09 PM, 1thebopper wrote:

    The biggest problem is the format changes and trivial talk on the music channels, I first got into the satellite radio for the only reason that made sense to pay for something that was free. Music without the interruptions--period without of the inevitable commercials and DJ BS on free radio. When XM and Sirius combined the DJ BS started and commercials (and that's what DJ's talking about where a group is going to be or what they are doing) really is and has literally doubled in the last few months. I have 3 radios in 3 vehicles and starting this month I'm dropping them as they go out of contract. Pandora and Spotify for me and XM can go in the dust bin of time.

  • Report this Comment On May 27, 2014, at 9:06 AM, dannysboy wrote:

    jerlosky, I have been a subscriber and shareholder for 11 years.

    The pattern for short selling has been the same. Everytime the stock makes a good run up, the negative articles, often about "how expensive" SiriusXM is, come out and the short selling begins. I don't know if it's still true, but siri was the market's most shorted stock for a long time.

    Once I recognized this, I used the occasions to accumulate stock. For the future, I think that continues, until the shorts get burnt really good.

  • Report this Comment On May 27, 2014, at 11:54 AM, sirifair6 wrote:

    Sirus XM customers may not stick around...with high prices!!! The real question that author so conveniently passes up is what is HIGH PRICES? Is $15 a month a high price? Having in mind that on the average siri customers pay much less than $15 a month, sirius xm has a margin for price rise between $5 and $10 that may bring it to the threshold of "hight prices".

    I would like the auhtor to look at any other service that an average household pays for and find prices lower than what sirius charges. Netflix, who else? Nobody!!! The rest is free that comes with cheap quality and ad nuissance.

    The beauty of siri's business model is that the company can be very profitable even at the price range they charge now. However, the company has over 50% margin for the pirce growth before it is considered "high".

    Sirius service is not for everybody but for those who are willing to pay for the value the company provides. Chances that the core of siri subs would flip becuase the company increases its price by up to $10 in the next five to seven years are close to zero. Today, sirius xm is one of the best value propositions on the entertainment market and the market in general. This is why I can say with 100% confidence that siri customers will stick with the company at this ridiculously low range of prices under any circumstances that the author may come up with as long as siri's programming quality remains the same or better.

  • Report this Comment On May 27, 2014, at 11:49 PM, jekoslosky wrote:

    @sirifair6 -- The article notes "higher prices," not "high prices." There's a big difference between those two terms. To answer the question about what constitutes a "high" price. That's not up to me to decide. I think Sirius is in the process of figuring that out. The first price hike was well-tolerated. So, far, it appears this one may be as well. As an investor, I think it's dangerous to assume that "Chances that the core of siri subs would flip becuase the company increases its price by up to $10 in the next five to seven years are close to zero." As a subscriber, I can tell you that I get more value out of my Siri service than I do my satellite TV, at about one-sixth the cost.

  • Report this Comment On May 29, 2014, at 9:00 AM, AdWhois wrote:

    I've been a Sirius stock holder for 7 or so years, and have had the free trial in many of my vehicles.

    Personally, I don't subscribe to sirius because I dislike the music channels. I've never experienced a good block of music that didn't have me changing the channel... Not to mention the audio quality of sirius radio for music is not superb I've found, not sure why but their broadcasts always sound hollow and tinny.

    Traditional radio may be better at picking songs everyone likes, but the commercials (what seems like 40 minutes of each hour) are just too prevalent to bother listening.

    I don't stream through Pandora or other because I'd rather not waste both battery life and my data plan for no reason, I put music I like on an SD card and play it directly in my car.

    My newest car has Sirius Travel-Link, which takes care of traffic, gas prices, movie times, weather, etc. Once my free trial of travel-link expires in 10 months I WILL be renewing that service. In my opinion this is what Sirius should focusing on. No music licensing fees involved, no disc jockey costs, just an automated service built in to cars with GPS systems.

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