Tuesday, February 13, 2007

THE Canadian Factor

February 14, 2007

With the news from Sirius Canada being announced today, investors in Sirius Satellite Radio should begin to look more closely at the business north of the border. The reason is simple. There will come a day when Sirius Canada contributes to the bottom line of Sirius Satellite Radio, and given the fast start up north, that day may come sooner than many people realize. It wont be this quarter, and maybe not next quarter, but the day is coming. If 300,000 subscribers have an ARPU of $10 each, then Sirius Canada is bringing in $3,000,000 per month. As the base grows, the revenue will as well.

Consider that Sirius Canada did not have about 1 billion dollars worth of satellites to launch. Consider that the repeater network in Canada is quite small. Consider that the bulk of content is already paid for. Consider that the marketing efforts up north benefit greatly from what happens here in the U.S.

Simply stated, the operations costs of Sirius Canada are a stark difference from Sirius Satellite Radio stateside. Now think about the fact that Sirius Satellite Radio gets about half of the Sirius Canada pie.

Many analyst models do not even consider Sirius Canada in their projections. The costs are not big, and at this point neither is the revenue, but people should begin to think a couple of years down the road, and what the business north of the border will be contributing to the bottom line of this equity. Perhaps some early projections are now warranted.

The same would seem to hold true for XM satellite Radio, but their road to riches seems to be a bit further off at this point, and XM's ownership in the Canadian counterpart is not as substantial as Sirius’.

Some pretty interesting data was announced today, and it is compelling enough that it ought not be ignored. Since January 2006 Sirius Canada has garnered a 75% retail share according to NPD, and more impressively, brought in almost 80% in December of 2006. These statistics are quite telling. There seems to be an obvious choice being made by Canadian consumers. Even more note worthy is the fact that Sirius Canada has been the more expensively priced service during this time period (the services now have identical pricing for the first subscription).

There are several reasons that investors stateside should begin to watch the Canadian counterparts closely:

The services launched at virtually the same time, thus the subscriber comparison metric is not skewed.

The retail channel, according to NPD, is seeming to show a clear preference. How will advertisers react to this news? OEM's? potential on air talent?

The Canadian companies will be contributing to the bottom line of Sirius as well as XM at some point. The faster that happens, the faster a surprise in the revenue line will hit these stocks. XM Canada is publicly traded, and various reporting is required. In the case of Sirius Canada, it is private. The financials are not disclosed. This means that the Canadian factor will come as more of a surprise to the street when it happens.

For their part, XM Canada has announced several OEM deals in Canada, and similar to stateside claims a big advantage in that area. However, we have covered the perception vs. reality of the OEM world in the past, and that channel boils down to the number of installs, the cost of those installs, the take rate, and what kind of revenue these companies get to keep (revenue share). It comes down to whether retail fuels OEM, or whether OEM will be the dominating force. The answer to this type of question may well be already available. How many "Factory Installed I-Pods" have you seen? how many I-Pods come from retail?