Subscription growth for Sirius XM (NASDAQ:SIRI) satellite radio service may look destined for a slowdown. There are 25.8 million subscribers already paying increasing monthly fees. Streaming competitors like Pandora, Apple's iTunes Radio, and Amazon's new Prime Music are becoming available to an increasing number of customers in connected cars.
But there's one factor that may keep Sirius sales robust in the years to come: used cars.
An increasing number of used cars on the lot have Sirius technology installed. With the used car market in the U.S. almost three times the size of the new car market, in terms of volume, that leaves plenty of opportunity. Sirius is looking to position itself to capitalize on this.
A second wave of sales
There was a lull in new vehicle sales during the recession, but sales ramped up as we moved through 2009, 2010, and 2011. A lot of those cars had satellite technology installed, and that helped drive subscription sales higher. Last quarter, vehicle penetration stood at 70%, up 3% over last year, the company reported.
What Sirius is seeing now is that a lot of the cars that were purchased new in those years are turning over and are up for sale on the used lots. As they are sold, it expects to see another wave in free trials and subsequent conversions, and each one of those used cars represents a second shot at adding a subscriber.
Here's CEO David Frear:
We have 60 million cars on the road today. It'll be 150 million in 10 years. It'll be 120 million in roughly five years. And so the prospects for long-term growth are quite strong.
Frear sees used car trials not only eclipsing new car trials, but doubling them within the next 10 years.
Trials are key
Sirius generated 2.4 million new car trials for the quarter and 1 million trials from used-car purchases. That was the best the company has done, to date, in used cars. It expects that only to increase in coming years.
"The big trick there is getting them on trials," Frear said. "So this year we've talked about the used car business growing to about 2 million gross additions from little over 1.5 million last year, so 30%-ish type growth. It's a category we expect to grow for years to come."
Letting prospective customers know they have a trial available is important in a market when so many people are already using streaming services at home and via mobile devices. Even the number of existing Sirius subscribers who stream music is high. According to an FBR Capital Markets survey, 64% of Sirius subscribers also use Pandora. Sirius' original content and commercial-free music sell its service. But people have to hear it first.
Sirius is working with about 12,000 U.S. auto dealers in its efforts to reach used car buyers with trial offers. But with 36,000 dealers out there and many of them independent, Sirius sees a bigger opportunity in trying to reach prospective used car buyers as they research their possible purchases online, Frear said. That way, they'll go into the purchase knowing there's a free 90-day trial available to them, and all they have to do is activate it.
The company has also seen significantly better conversion rates on used car trials than it had anticipated several years ago, Frear said. Conversions were expected to come in at around 20%, but what they've seen recently are rates above 30%.
The Foolish bottom line
Used car sales present Sirius a significant opportunity to reach prospective subscribers over the next several years, as more people buy autos that have Sirius equipment already installed. The key to growth lies in reaching those buyers with trial offers. The coming quarters should provide investors some insight on the company's progress on this front. With a 30%-plus rate of conversion, the opportunity is significant.
Note: A previous version of this article inaccurately referenced Sirius XM's new and used car trials for the quarter as dollar amounts. The Fool regrets the error.
John-Erik Koslosky has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, and Pandora Media. The Motley Fool owns shares of Amazon.com, Apple, 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.