Sirius XM Radio (SIRI -0.16%) sees the future of used cars, and there will be more lemonade than lemons.
The satellite radio giant's CFO spoke at Piper Jaffray Technology, Media and Telecommunications Conference yesterday, and David Frear is encouraged by the potential of secondhand cars.
It remains an untapped market for the company, especially as more and more used cars hit the market with preinstalled Sirius or XM receivers.
There are 50 million cars with satellite radios at the moment, and more than half of those receivers are dormant. In 10 years, Frear sees 150 million vehicles out there with receivers. There's a big opportunity here for Sirius XM to grow its reach, especially as cars get passed along.
Data suggests that just 30% of automobile transactions are for new cars. Sirius XM has a strong presence in the new-car market, but that's just 15 million of the 50 million cars that are being exchanged every year. Sirius XM has teamed up with its auto partners to offer free trials to buyers of certified pre-owned cars, but that's just a 5% sliver of the market.
Sirius XM is starting to get aggressive.
Back in November, Sirius XM announced a deal with Automatic Data Processing (ADP 0.47%) subsidiary Digital Motorworks to reach out to more used-car showrooms. The partnership allows the more than 7,000 dealerships doing business with Digital Motorworks to offer car buyers three free months of Sirius XM service.
Sirius XM has a lot to gain through this deal with ADP's data intermediary. Unlike new cars where Sirius XM has to subsidize the receiver, acquisition costs for subscribers buying used cars with receivers already installed is substantially less.
One might imagine that used-car buyers are less reluctant to pay for satellite radio, but Frear argues that those who convert do stick around. There is no difference in the churn rate between subscribers in new cars and old cars. There is naturally a higher churn rate for those paying month by month instead of annually -- and one can argue that used-car buyers are more likely to be living month by month -- but generally the churn levels are the same for new and used cars.
Data can be surprising that way.
Frear was asked toward the end of the presentation if the buyers of new cars that seamlessly allow smartphone owners to stream Pandora (P) through their dashboards convert at a lower rate than buyers of more conventional cars. Critics have argued that Sirius XM is a transitory technology and Pandora -- with its growing user base -- will begin to eat into Sirius XM as it becomes more accessible on the road.
Well, Frear surprised the audience by pointing out that conversion rates have clocked in higher for high-tech cars. He was puzzled by the data at first, but his theory is that the kind of early adopter that wants that kind of dashboard technology is already consuming across multiple channels. They may stream Pandora, but they still value Sirius XM's premium content offerings.
Then again, let's take this migration cycle one step at a time. Let's let the first wave of early Sirius XM cars begin working their way through the used-car market.
Sirius XM is just scratching the surface.
