Sirius XM (NASDAQ:SIRI) and Nissan (NASDAQOTH:NSANY) announced this morning that they are extending their relationship through the end of 2018. Nissan North America will move to increase the penetration of its cars that roll into showrooms with factory-installed satellite receivers.
The news itself isn't a surprise. What's an automaker going to do? It's not as if car manufacturers have had any real leverage here since regulators allowed Sirius and XM to hook up in 2008. Do they install satellite receivers for which Sirius XM pays them a royalty for every active subscriber or do they shut down that incremental revenue stream altogether? The days of having Sirius battling XM to land a deal with a particular manufacturer are long over. The answer for carmakers today is obvious, and it all works to Sirius XM's advantage.
Terms of the extension with Nissan weren't divulged, but it's likely pretty beneficial for Sirius XM. It's not a coincidence that Sirius XM didn't turn a profit until after the two companies merged. Since then we've seen improvement in key metrics including free cash flow and outright profitability. A lot of the fundamental gains can be attributed to the economies of scale. Satellite radio is a highly scalable model with low variable costs that amplify the benefits of subscriber and revenue growth. However, the merger itself also helps in ways that aren't clear at first.
Since the merger we've seen automakers improve Sirius XM's penetration rate in new cars. We've seen deals with these same companies to push subscriptions on used cars with existing receivers. Beyond the vehicles, we've also seen programming and content costs decline per subscriber, even as Sirius XM kicks in small price increases along the way.
Sirius XM can't help that music labels will command a growing percentage of its revenue. Pro sports deals also come with escalating rates. However, when it comes to renewing deals for on-air talent or syndicated content, it's Sirius XM that is calling the shots. Yes, having 25.6 million subscribers on its rolls is going to command that respect, but the combination of Sirius and XM several years ago -- as messy as it may have seemed at the time -- continues to pay off with every handshake that the merged company initiates.
Nissan and Sirius XM are both winners in the expanded deal, but with every passing negotiation it's Sirius XM that is gaining leverage.
Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of Sirius XM Radio. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.