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Sirius XM's Strongest Competition May Surprise You

By John-Erik Koslosky - Sep 12, 2015 at 10:00AM

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Streaming services and connected cars draw all the headlines, but the biggest threat to Sirius XM's continued growth is free AM/FM radio.

Source: SiriusXM.com

Despite all the hoopla about streaming services and the connected car, Sirius XM (SIRI -0.16%) executives say they haven't seen the newer technologies put a dent in their customer base. In fact, the satellite radio service is adding subscribers faster than expected, up 8% over last year. And it's seeing more customers stick around after trying its service for free.

But that doesn't mean Sirius XM is without a major threat to its business model. It has one, and it's the same old nemesis it's been fighting since its inception: AM/FM radio.

That's right, good old terrestrial radio is proving resilient, especially in the car. More than 80% of those polled by Edison Research early this year said they listen to AM/FM radio in their vehicle. That towers over online radio, which 21% of respondents said they use, and satellite radio, at 17%.

Perhaps even more impressive, some 35% of respondents said they listen to AM/FM radio almost exclusively. Only 7% of respondents said the same about Sirius XM, and an even smaller number -- 5% -- said they listen to streaming radio "almost all of the time."

This probably shouldn't come as a shock. AM/FM radio may not have the sex appeal of satellite radio or streaming music, but it does have two things going for it: It's easy, and it's free.

Better radio, but at a cost
The first half of that is what Sirius XM tries to deliver with its service. It packages a broad variety of content -- music, talk, news, sports, comedy -- in an easy-to-use application, banking on a growing number of listeners being willing to pay to have that variety of programming at their fingertips. Where it can't compete, of course, is price. And that's why AM/FM will continue to pose a threat to the satellite service.

"When a listener doesn't convert to a self-paying subscription or cancels our service, it's almost always because they don't want to pay," CEO James Meyer told analysts in July. "Today, most of these listeners migrate back to the default, free option, which is terrestrial radio... [the] challenge is convincing more and more people to switch from free to pay."

In more cars
The company has been convincing more manufacturers to install its equipment on the assembly line. More than seven of every 10 cars and trucks produced today have Sirius XM radio by the time they roll into dealership lots.

About 76 million vehicles -- roughly one in every three on the road -- is now equipped with Sirius satellite technology. The company expects that number to double over the long term. "We'll probably top out with it in enabled vehicle fleet of something approaching 160 million," CFO David Frear said in June. 

Still, Sirius needs to do more than gets its technology into vehicles. It needs to get buyers to activate their free trials. The company typically sees between 11 million and 12 million trials in a given year, executives say. Then, it needs to convince them to pay -- and keep paying. Sirius said total paid subscribers reached 28.4 million in the most recent quarter. 

The metric we have to gauge for whether subscribers are sticking around is churn rate. Sirius XM's churn rate stood at 1.6% last quarter, one of the lowest numbers in the company's history. It was about 20 basis points higher than a year prior, which equates to about 140,000 more subscribers who stuck with the service. With annual average revenue per user in the area of $150 per year, that's about $21 million in subscription revenue.

"Put quite simply, fewer people called us to cancel," CEO James Meyer told analysts. Executives were clear, though, that they don't expect churn to stay that low going forward. The company has had a long-term expectation of churn around 1.8% to 2%.

It's the economy... at least in part
Part of the latest quarter's low churn is undoubtedly due to the content and ease of use the service provides. But executives also acknowledge that the low rate of cancellations are in part a product of a better economy for consumers.

"Having a strong economy helps a lot, OK," Meyer said in July, noting that the company had the "wind at our back" and cautioning that the low churn isn't likely to stay around indefinitely.

Any economic weakness could send that rate in the opposite direction, as car sales could slow, and owners could look to trim unnecessary costs. A reversal in prices at the pump could have a similar effect, just as it may have helped fuel growing subscription sales as average gas prices dropped from $3.43 a year ago to $2.49 on Aug. 24.

Those leaving Sirius XM would be leaving not for subscription streaming services, but probably to return to good, old, free AM/FM stations.

That's why Frear in June summed up the competition as "overwhelmingly AM and FM radio ... everybody else is so far down the list that it doesn't matter ... AM and FM radio totally dominates the competitive landscape."

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