Is Sirius XM About to Abandon This Important Metric?

Two of the most important metrics in measuring the performance of satellite radio provider Sirius XM (NASDAQ: SIRI  ) could soon go out the window, and it may not be a bad thing if they do.

Subscriber growth and average revenue per user, or ARPU, have been two significant markers in Sirius XM's progress. The two go hand-in-hand. But one avenue the company is considering could force investors to rethink how they view the numbers – and how they assess the company's health. More on that in a minute.

First, let's take a quick look at why these two metrics matter. Subscriptions account for 85% of the company's revenue. Ads, which generate the lion's share of revenue for terrestrial radio operators and streaming competitors like Pandora Radio (NYSE: P  ) and Spotify, generate just 2% of revenue at Sirius. That's likely a healthy balance for the company, since the absence of ads is one of the things that sets Sirius apart from free and cheaper competitors.

Squeezing more from each subscriber
But with Sirius approaching 26 million subscribers, new subscriptions face inevitable slowing growth. Subscriptions last year grew at 5%. That makes average revenue per user, or ARPU, an important statistic to watch in tandem with the growth of new subscribers.

If growth in subscribers tails off, growth in ARPU must pick up. Sirius has been able to increase ARPU 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.

So, things have been good on that front.

But Sirius executives say they will welcome a shrinking ARPU number -- if the circumstances are right. Executives see an untapped market that the company could soon begin to target – the husbands, wives, live-in boyfriends and girlfriends, and driving-age children of loyal subscribers.

The "great opportunity" ahead
As it stands, only one in five of Sirius' subscribers have multi-radio households.

"And therein, I think, lies the great opportunity," CFO David Frear told analysts at the Bank of America Merrill Lynch Global Telecom and Media Conference.

Some 80% of Sirius subscribers have two or more cars – and most likely have two or more drivers.

"So, I think we have a great opportunity to take that 20% number on multi-radio households toward the 80% over time," Frear said.

To get there, however, Sirius would likely offer discounts on the subscriptions each household adds. This is a trade-off. To convert these now-and-again listeners to paying customers, it will be willing to take them on at a discount rate, which will drive down ARPU. And with a potential market of 20 million or more new radios, it could do so significantly.

At the same time, it has an audience already familiar with the service, with at least one household member already seeing enough value to pay a full subscription price. That makes these potential customers easier to reach, which should keep the cost of acquiring those subscriptions at a minimum.

"So, we would love to end up with lower ARPU, but a lot more subscriptions in the long run," Frear said.

The Foolish bottom line
Sirius has a number of avenues of growth moving forward – from new deals with car makers to a glut of used cars with factory-installed radios starting to turn over on the market. But it still expects subscriptions growth of just 1.3 million – another 5% – on the year. A satellite-radio subscription is only one-fourth or less the cost of the average cable-TV subscription. But Sirius is well-aware that it could overprice its service, with so many free music competitors on the scene and an increasing number of cars on the road now Internet-connected.

Tapping into existing customers' households with multi-car discounts could be a significant revenue driver in the years to come. But it would also force investors to reset how they track the company's progress.

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  • Report this Comment On July 08, 2014, at 12:24 PM, sirifair6 wrote:


    I would agree with your assumption that siri may not be as focused on ARPU as it used to be. There are many reasons for that.

    Today, Sirius has several sources of revenue today from OEMs, used car market and telematics and some retail. Before there were only two meaningful sources of revenue - OEMs and retail.

    Sirius crossed a point a few years ago where each and every new customer became profitable by default. Siri's margins are so big that they allow somewhat smaller ARPU at the "expense" of more customers.

    Let us not forget that siri, being a virtual radio monopoly in the dashboard, still has strong pricing power. Price increases alone may bring the ARPU to $15 in three or four years.

    I do not believe the company is slowing down. Period. I would like to see three or four quarters with subdued sub growth before I would agree. Projected 1.25M new subs in 2014 that will be definitely beaten by a few hundred thousand is not a sign of slowing down. Let us see what Q2 will show before we jump to premature conclusions.

  • Report this Comment On July 08, 2014, at 2:41 PM, dannysboy wrote:

    This is making a mountain out of mole hill. The factors in determining ARPU have increased, such as the increasing number of subs coming from 2nd owner cars.

    Should ARPU continue to be calculated? Yes! But clearly redefine how the calculation has changed.

    Will SiriusXM continue to grow? Yes! Why? Because siri is an excellent practitioner of the KISS system------keep it simple stupid.

    As one who sold data systems for a long time, I burnt out on new systems, upgrades, downloads, and security scans a long time ago.

    Eighty years ago, you turned on your radio and dialed up the station you desired. In 2014, you turn on your sat. radio and dial up, or punch in, the desired station.

    Like the song lyrics, "what's new?"-------nuttin Honey!

  • Report this Comment On July 08, 2014, at 10:21 PM, jekoslosky wrote:


    Keep in mind that I'm trying to keep a long-term view on this, so when I mention sub growth slowing down, I'm not thinking the next few quarters. More along the lines of how we may have to adjust our view of the company over the coming years.

    The key point here is that the more successful Sirius is in turning single-subscription households into double-sub household, the more ARPU numbers would seem to suffer. Of course, the company -- and its shareholders -- would benefit from those lower ARPU figures if that's the case.

  • Report this Comment On July 09, 2014, at 8:24 AM, sirifair6 wrote:


    Thank you for the clarification that is absolutely reasonable. It would be great to define what "slowing down" actually means and where the point of "slowing down" is. Id o not think this will happen any time soon. There is also significant pricing power of the company because the product is still under valued.

    It is obvious that everything eventually slows down. There are no exceptions here. However, I believe that the used car market, where, per siri management, the company is just the surface. Also, Jim Meyer's statement, "... we see nothing in the next "few" years that should prevent us from continuing to grow our paid subscriber base toward 30 million", is very encouraging.

    Also, the "slowdown" may be boosted by another type of a subscriber - telematics sub with on star like services for auto safety/security. This would be a completely new source of revenue. Siri would be offering appealing packages of radio and on star type services that would be difficult to resist.

    To conclude, I believe the company has a vision and a clear direction in continuing to exploit the OEMs, used car and telematics markets. There are clearly relatively new and brand new (siri's own on star service) opportunities that the company will take advantage of. This is why I believe in a very bright future of the company.

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John-Erik Koslosky

John-Erik Koslosky is a writer, journalism instructor, investor, and all-around Fool. He follows the media and social media industries, and writes about some of their publicly traded companies.

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