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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