Sunday, October 01, 2006

OEM Deals

October 1, 2006

A lot has been written about the OEM deals, and how they impact certain numbers for Sirius and/or XM.

We thought we would take a simple look at the bigger deals for Sirius and XM. Specifically, the DCX deal and the GM deal.

The DCX deal.

This deal carries a 1 year promotion for subscribers and the subscriber is counted as soon as Sirius receives a 1 year subscription payment from DCX. This means that the subscriber is counted prior to the vehicle being sold. Yes, the deal is friendly towards the subscriber numbers, but it is not friendly towards subscriber acquisition costs (SAC).

1. Sirius pays DCX in warrants for exclusivity. This is dilutive for the stock, but is cash flow friendly. These costs are not reflected in SAC.

2. Sirius pays DCX a healthy subsidy for installing radios. This cost is temporarily negative for cash flow, but later gets offset by the purchase of a subscription. This cost does count in SAC.

3. DCX pays Sirius for a 1 year subscription. The monies of this payment virtually offset the subsidy carried in item #2. This money is booked as deferred revenue by Sirius. These payments do not offset SAC.

4. Sirius pays GM a small revenue share of the subscriber. The revenue share is a percentage of the subscription fee each month after the promotional period ends. This does not impact SAC, but a lower revenue share is more cash-flow friendly, as it lets Sirius keep as much of the revenue as possible.

The GM Deal

This deal typically is a three month promotional subscription for the subscriber. GM pays for 2 months. The subscriber is counted when the vehicle is sold. The structure of the deal is not really subscriber friendly, but is very SAC friendly.

1. XM pays GM large cash payments for exclusivity. These payments do not get counted in SAC.

2. XM pays GM a very small subsidy for the radios and installation. This does get captured in SAC.

3. GM pays for two months of service in the promotion. These payments likely help offset the subsidy paid in item #2.

4. XM pays GM the richest revenue share deal. Many analysts have the revenue share at 50%. This means that after the promotion, ends, XM gives up half of the revenue to GM. This is not counted in SAC.

Basically, there is very little in the costs of the GM deal that are captured in SAC, but XM gets the benefit of using all of those subscribers to have a bigger divisor when calculating SAC cost. Fore this reason, the XM/GM deal is very friendly to XM when it comes to SAC.

Basically what we have is one deal that is friendly in terms of subscriber numbers, and another that is friendly in terms of SAC. What is an investor to do to try to make a comparison? Well, that is the answer many are seeking. The best thing you can do is to understand these deals as clearly as possible, and then understand that the structures of deals such as these make "head to head" comparisons difficult.

Perhaps the way to look at things is to ask yourself which deal you would strike if you were cutting a deal tomorrow.

10/01/2006 02:46:00 PM

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