Sirius XM (NASDAQ:SIRI) sees a long runway left to keep adding to its 25.8 million subscribers. But with the company growing subscriptions at a rate of less than 5% per year, it's going to have to look elsewhere to keep its revenue on the rise. To keep the top line growing at a robust pace, Sirius is going to have to continue to bring in more from each subscriber it has.
The good news for Sirius on that front: A subscription price hike of $0.50 per month starting in January didn't cause mass cancellations. In fact, new subscriptions were up by 267,000 in the first quarter – more than the company had forecast. It is maintaining guidance for 1.25 million additions in 2014.
This is a significant development for Sirius, because it demonstrates that the company has pricing power amid ever-growing competition from music-streaming companies like Pandora (NYSE:P), Spotify, and the seemingly soon-to-happen Apple iRadio-Beats Music service.
The fine line
It's necessary for any subscription service to walk a tightrope, where it's not giving customers such a bargain that it's leaving cash on the table, but it's also not charging so much that they leave for cheaper alternatives.
Some 64% of Sirius subscribers also use Pandora, according to FBR Capital Markets. With the music-streaming service already having a foot in the door to swipe away unhappy satellite customers, that balance is even more important.
To date, Sirius XM has done a fine job walking the line.
Let's take a step back and look at where Sirius generates its cash. Subscriptions account for 85% of the company's revenue. Ads generate just 2%. But Sirius can't make up for slowing subscriber growth by airing more advertisements, because the lack of ads is one of things that sets Sirius apart from free and cheaper competitors.
Instead, Sirius has to look to generate more revenue from existing subscribers, which is why average revenue per user, or ARPU, is an important metric for investors to watch. Sirius has been able to increase that number 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.
Looking like 2012
This is only the second time Sirius XM has raised prices since the two satellite radio services merged in 2008.
So far, the latest price hike is looking a lot like the last hike, in 2012. Back then, Sirius raised the price of its basic package from $12.99 to $14.49. Investors were anxious.
It turned out that there was little reason to be. Although the company kept its subscription growth forecast conservative at 1.3 million net additions, it finished 2012 with 2 million more subscribers than it had at the end of 2011.
Sirius XM CEO Jim Meyer was confident in January 2014 that the latest price increase would not lead to mass cancellations:
While changing prices is a difficult decision, particularly in the competitive audio entertainment market, we are confident that our subscribers see significant value in our service and that this modest change will not significantly impact retention next year.
So far, that's been on the mark.
The bottom line
With growing competition from music-streaming services and new customer growth tied to new car sales, Sirius investors need to keep an eye on the average revenue it gets from each subscriber as a gauge of the company's pricing power. If subscribers are willing to accept a price increase, it's a good long-term sign for the satellite radio provider.
John-Erik Koslosky has no position in any stocks mentioned. The Motley Fool recommends Pandora Media. The Motley Fool owns shares of Pandora Media and 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.