Satellite radio service Sirius XM Holdings (NASDAQ:SIRI) continues to grow its subscriber base and its revenue, the latter at around 11% over the prior year. And the company believes it has just started to tap into the used-car market, which it expects to drive continued growth for several years to come.
But questions linger about the service's growth over the longer term. It will eventually reach a saturation point in American autos. Where will it look for growth as it nears that juncture?
With operations currently limited to the U.S. and our neighbor to the north -- where the company owns a 70% stake in Sirius XM Canada -- the idea of overseas expansion continues to surface. A company executive fielded questions from analysts just last month about possible international efforts.
Investors shouldn't get their hopes up. Any serious effort at an international business is unlikely to happen -- at least anytime soon.
There would be big expenses involved
Sirius likes its business model. Its big expenses are behind it. It continues to grow at a healthy clip. It's profitable, and it's continuing to grow its cash flow. That gives the company flexibility moving forward.
It can expand through acquisition, like it did with the connected-car business it bought from Agero. It can start returning cash to its shareholders via a dividend, or it can keep repurchasing shares. In short, Sirius sees itself in a strong position financially, but it's been a long road getting there.
It costs a lot of money to get a satellite radio service off the ground -- mostly because it requires launching a whole new set of satellites into space. CFO David Frear noted that the company might have to spend $4 billion launching satellites to expand into Europe.
That would erase profits and send Sirius back into negative cash flow, something executives do not want to do at this stage. And it could be seven more years before Sirius would return to positive cash flow, Frear told analysts.
So, while the prospect of a European expansion might at first blush seem to make sense over the long-term, it would essentially be resetting the clock for Sirius.
Other markets would provide different challenges
There are also considerations beyond the initial investment in satellites. One of those is auto ownership. Sirius XM's business is driven primarily by in-car listening. And Europeans don't drive quite as much as Americans do.
Only three European countries -- Lichtenstein, Luxembourg, and Iceland -- maintain car ownership rates that rival those in the U.S. And those three countries have a combined population that's less than a third the size of Brooklyn. Many of the more populous European countries maintain considerably lower rates of auto ownership. In the U.K., for example, only about half of the population considers themselves car owners, compared to eight in 10 Americans.
Then there's a question of programming costs. Sirius XM's programming is built with a U.S audience in mind, from Howard Stern to live sports and sports talk to politics. As it expands in the U.S., the company generates increasing benefits of scale for every dime it pumps into programming.
But to expand overseas would require a much different lineup, which again would mean starting over from scratch to build up the scale it's already achieved here in the U.S. -- and with no guarantee it would achieve the same economics as it did here.
Offering internet listening may land some subscribers but not many
At the same time, the company believes it is far from done growing in the U.S. As Frear pointed out, its technology is in 85 million cars today, and it believes it will be in 185 million over the next decade.
With that in mind, international expansion, at least at this time, seems "really difficult to justify", Frear said.
The internet provides a way for Sirius to offer its U.S. services to listeners overseas. And it's likely that the company will continue to look for ways to tap into some international revenue that way. But a real expansion into Europe or elsewhere would require substantial investment at a time when Sirius is just starting to reap the benefits from the investments it made in the U.S. in its formative years.
It's important for the company to look for ways to keep growing long-term. However, launching a satellite service outside the U.S. doesn't look like an approach the company wants to take at the moment.