Wednesday, January 31, 2007

Toyota - Push vs. Pull

January 31, 2007

While this article speaks to SDARS in relation to Toyota, it is also applicable to other OEM's, as well as retail.

There are two methods in satellite radio installs as far as Toyota is concerned. There is the "PUSH" model and there is the "PULL" model. Simply stated, a factory install program is a "PUSH" and Port Installs are a "PULL"

PUSH

Push is where an OEM such as Toyota makes a decision to integrate satellite radio into their cars at the factory level. Installations happen, and the cars are shipped with ready to operate satellite radio receivers complete with three months of service. The concept of satellite radio, and XM specifically, is "PUSHED" out into the market place. The upside of this practice is that XM Satellite Radio gains an opportunity to get their service in front of the ears of many consumers. The downside is that there is a percentage of those consumers who will not have an interest in the product, yet the subsidy expense for XM has already happened. The key to a “PUSH” system is that the benefit obtained by those that keep the service outweighs the expense of the program. Typically OEM take rates seem to hover between 50% and 55%. For the purposes of this article, and simplicity we are assuming 50% as a take rate.

So, if we assume a factory install level of 350,000 units by Toyota in 2008, then realistically speaking, the takers will number 175,000, and those that do not keep the service will number 175,000.

If we assume costs of $75 per radio (marketing, subsidy, etc.), those 350,000 installations will cost $26,250,000. At the end of 3 months 175,000 will keep the service. Using an ARPU (Average Revenue Per User) of $11 per month, it would take 13.64 months of continued service to break even on the investment.

Factory installation also offers some synergies with other vehicle options and capabilities. Pull installations will typically lag behind before those synergies can be incorporated.

PULL

Pull is where the consumer asks for a service to be installed on their vehicle. Regarding Toyota, there is actually a combination of PUSH and PULL. From the standpoint of PUSH, dealers such as Penske have deals with Sirius, and they install Sirius in their vehicles. This type of installation is PUSH, because it still is not the end user that makes the decision as to whether or not the installation happens. Likely, the take rate on these Sirius installs is similar in nature to the XM factory installs. The difference between a port install and a factory install is transparent to the consumer.

The Pull aspect of the port install deal Sirius has is that consumers can request that Sirius be installed in their vehicle. If consumers request it enough, dealer always have the option of ordering cars with the radio already installed so as to have an inventory of Sirius equipped cars on their lots.

The disadvantage of PULL is that it relies on the consumer to be aware that Sirius is an option, and the likelihood of some consumers to “give it a try” may not be as strong. In other words, Sirius loses the ability to make an attempt to market their service unless the consumer is a willing participant. By nature, PULL radios begin to represent what the demand for satellite radio is. The advantage of the PULL method is that you are better able to control expenditures, and the take rate should be substantially higher than 50% (because the consumer is making the request). Thus, each radio you install pays for itself faster. If 100,000 radios were requested by consumers, and Sirius the cost to Sirius was $75 each, then the investment into these consumers would be $7,500,000. If we can assume an 85% take rate (remember, these are consumers that made the request to have Sirius), then there would be 85,000 radios at a cost of $7,500,000. At an ARPU of $11, it would take Sirius 8 months to recoup their investment.

A big factor in PULL is that Sirius needs to ensure that consumers are aware of the option. If Sirius can create a large enough PULL, then the PUSH factor of the dealer ordering equipped cars can increase.

The point of this article is not to say that one method is better than the other. It is to highlight out the advantages and disadvantages of each type of install. Where PUSH generates volume, PULL generates cost efficiencies, etc.

From an investors standpoint, the PUSH strategy at least gives people a reasonable understanding of what kind of numbers to expect. The PULL numbers seem to be shrouded in mystery, and thus it is hard to contemplate how “valuable” the port install deal between Sirius and Toyota is.

In a perfect world, the subsidy would be inexpensive, and a consumer could simply get either or both services to try. SDARS is not there yet.

Labels: OEM, pull, push, sirius, toyota, xm