Tuesday, April 04, 2006

Subscriber Types and Growth

April 4, 2006

Satellite Radio has been in the business of gaining subscribers for a
few years now. Because these companies have not yet been profitable,
the concentration has been on simply boosting the subscriber numbers
as much as possible while at the same time retaining as much revenue
as possible.

The business of getting a subscriber has associated costs that are
paid for up front. Sirius Satellite Radio and rival XM Satellite
Radio then hope to hold onto these subscribers long enough to "pay
back the up-front cost" and generate some profitability for the
company. The revenue from a subscriber comes over time even when a
subscriber pre-pays for a year of service. Generally Accepted
Accounting Principals (GAAP) dictate that these companies book revenue
over a time period that the service is delivered (see the financial
statements from the respective companies for more detail).

Now that both companies are closing in on Cash Flow Break even, it is
perhaps time to look at the subscribers more closely and understand
where the growth is coming from. Sirius and XM do differ in how they
count subscribers. Because of this SSG will identify which service is

Retail Subscriber (Sirius and XM)

A subscriber that comes from the retail channel, special markets,
sales direct by Sirius. These subscribers tend to be the most
"sticky"….meaning that they stay with the service the longest. Retail
subscribers typically made a conscious decision to go out and purchase
satellite radio.

OEM Subscriber (Sirius and XM)

These subscribers typically receive the service through a promotion
because the car they are buying or leasing comes with a satellite
radio installed. Because these subscribers have not necessarily asked
for the service, the deactivation rate is higher than the retail
channel. OEM promotions most often range between 3 months and 1 year.

Promotional Subscriber (XM only)

XM calls all subscribers in the OEM promotional period promotional
subscribers. This is a sub-category of the OEM Subscriber category.

Rental Car Subscribers (Sirius and XM)

These satellite radios tie to rental cars. For an addition fee, the
renting customer can get satellite radio. This segment of the
subscription base is not very large, but does fluctuate depending on
the size of the rental fleet.

Multi Subscription Subscribers / Family Plan Subscribers

These subscribers are additional radios that a current subscriber pays
for. The monthly fee for additional receivers is $6.99 rather than
the standard $12.95 price point. While these subscribers do bring in
less revenue, they tend to be very loyal to the service, and the costs
to gain them are minimal. XM also does some marketing promotions
where they will offer discounted hardware if the consumer agrees to
pre-pay for 6 months of service at the family plan rate. These
subscribers can be a sub-category of both the Retail Subscriber or the
OEM Subscriber category.

Data Services Subscriber (XM only)

XM breaks out this group who receive the on line feed only, or who get
other add on data services. At this point this segment is very small
in XM's subscriber base. These subscribers can be a subcategory of
the Retail Subscriber category or the OEM subscriber category.

As SSG has discussed in previous write ups, the satellite radio sector
is growing. The types of subscribers that represent this growth are
very important. At this point XM has been actively marketing to and
is gaining subscribers from the Multi Subscription and Family Plan
category. These types of subscribers (1.1 million) make up about 19% of the XM
subscriber base. This group of people represent people who already
have the service, like it, and want additional receivers either for
their own use, or for friends and family. Growth in this sector is
good, but is limited by nature. It is our understanding that XM would
like to get this category to about 25% to 30% of the subscriber base.

Sirius has been seeing growth primarily in two areas. The OEM channel and the
Retail Channel. With Ford ramping up installs, the OEM numbers for
Sirius have increased dramatically. Sirius has issued guidance that
they anticipate over 825,000 NET subscribers in the OEM category in 2006.
The substantial retail growth for Sirius is due to brand awareness, overall
content, and the addition of Howard Stern to the Sirius line-up.

Sirius has not separated out the family plan numbers lately, but did
mention the category at some point last year. At that time, the
Family Plan type subscriber made up less than 10% of Sirius'
subscriber base.

In the opinion of SSG, Sirius has more room to grow in the Family Plan
type subscriber than does XM. If you consider that Sirius added
nearly 2,000,000 subscriber in the past 6 months, and that most of
these subscribers were First time subscribers, you can see the
potential to grow that segment for Sirius. This does not even consider the
existing subscriber base.

This really boils down to these companies being at slightly different
points in their growth cycle, but with Sirius already grabbing between
90% and 95% of the new growth so far this year without having tapped
into the friends and family potential, the story could become very
interesting. Remember that before you can get a “Friends and Family” subscriber you need to get the “Primary” subscriber, and right now the primary subscriber category is being dominated by Sirius. Many have assumed that there has been a "Howard Stern
Effect" with Sirius, and this certainly can not be denied. The real
question is how long that effect lasts, and what happens to the market
share pie when the initial impact of Stern dies down. You can be sure
that there are many investors asking this very question.

The link for this write up is: http://tinyurl.com/qa5kf

Satellite Standard Group is not a financial advisor. SSG fully
encourages anyone to seek the advice of a Certified Financial Planner
prior to making any investment decisions.

4/04/2006 09:35:00 PM

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