XM Satellite Radio (Nasdaq: XMSR ) shares charged up 14.7% on Monday after the company announced a price increase and a change in its basic service package. Investors are evidently confident that consumers are willing to pay up for the company's broadcasts and excited about the firm's capacity to raise prices. While XM's price hike makes some sense, future price increases may not be so easy.
The firm, based in Washington, D.C., said that the monthly subscription price for its basic service will increase from $9.99 to $12.95, which rival Sirius Satellite Radio (Nasdaq: SIRI ) now charges for its service. At the same time, XM expanded its basic package to include features that had been add-ons that cost extra, including its XM Radio Online Internet radio service and its High Voltage channel, which features "shock jocks" Opie and Anthony.
In the near term, the move seems sure to benefit the company's performance. After all, because the higher price doesn't go into effect until April 2, folks who may have been on the fence about buying the service could be enticed to purchase a new subscription. In addition, XM is letting existing subscribers lock in the current $9.99-a-month price with a one-year prepaid plan and offering discounts on the $9.99 price for those who agree to subscribe for several years. Going forward, the higher price certainly will add to the company's improving margins.
Still, XM's power to boost prices is not unlimited. The company's decision to set its price in line with its rival suggests that XM believes people are willing to pay no more for its service than for Sirius'. And that pricing parity seems likely to remain in place until one company offers a unique service or until consumers decide one firm's content is worth the extra dough. To date, the two firms have gone toe-to-toe with respect to services, although Sirius appears to be a little ahead on a video offering. So that leaves content. While Howard Stern has plenty of detractors, he also has an extremely large and loyal audience. Until XM can come up with an answer to Stern (and I don't think it's Opie and Anthony), $12.95 a month may be the upper limit in its pricing.
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Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.