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Sunday, February 04, 2007

Counting Subscribers

February 4, 2007

Some analysts and even XM themselves point out that subscriber growth in the first half of 2007 will not be particularly strong. Those statements left alone without further understanding can be a bit dangerous. This is particularly true given a change in the methodology XM will be using counting some subscribers.

With a change in methodology come an unbalance, and until the current methodology can absorb that change, the balance is disturbed. That is exactly what will be happening for XM in the first half of 2007.

The "weaker" first half numbers are not at all indicative of "nothing happening", or a "weakness in the sector". Quite to the contrary, XM will be building a "backlog" of subscribers during that time with Hyundai, Nissan and Toyota. This happens because, going forward, subscribers from Hyundai, Nissan, and Toyota are not counted in subscriber rolls when the consumers promotional period starts. Instead the installations will be counted after the promotional period ends and when a consumer decides to keep the service. The method is derived from the structure of the deal. Absent any revenue from Hyundai, Nissan, and Toyota, these installs are a pure "promotional period", and because there is no revenue, they are not counted as subscribers at the inception of the promotional period.

Thus, during the first half of the year, this new method will be taking shape for XM. After a three month trial, those that keep the service will become a part of the subscriber count. This is where a "backlog" of subscribers is created.

For example, if we were to assume 50,000 installs from these automakers in January of 2007, and a 50% take rate were also assumed, XM would have a sudden swell of 25,000 subscribers in April. The February crop would hit in May, the March crop in June and so on. As the year progresses, and installation rates increase, the crop will get bigger. With a deeper penetration rate anticipated for model year 2008 cars, we should expect bigger monthly numbers beginning in July or August of 2007.

It stands to reason that this type of change in the counting methodology will take 6 months or so to become absorbed into the overall system. Given these changes, and the investment XM is making into these installations, we hope to see some sort of breakdown or statement from XM on how things are progressing.

These changes require that investors shift from what they have been conditioned to accept. With all of the other OEM deals, the subscriber crop has been counted as soon as the "seeds" were planted. With Hyundai, Nissan and Toyota, it is the "harvest" that determines the subscriber count.

Investors should think of OEM installations as "seeds" and "harvest" of a crop. The "seeds" are planted and take three months to come to fruition. With GM and Honda, the "seeds" are added to the subscriber number. With Hyundai, Nissan and Toyota the "harvest" determines what is added to the subscriber number.

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2/04/2007 10:46:00 AM


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7 Comments:

  • Okay, so lack of revenue is a reason for XM not counting these subscribers during the 3 month promotional period.

    Why, then, does Sirius count DCX vehicles as subscribers during the [average] 2-3 months between manufacture and sale when no revenue is being generated?

    Isn't this, too, an anomaly that must be considered?

    By Anonymous Anonymous, at February 04, 2007 1:11 PM  


  • The article was specific to XM, but to answer your question.

    Sirius does receive revenue from DCX at the time of manufacture. The money is accepted and booked as deferred revenue. Therfore, the DCX radio has a financial commitment tied to it, and Sirius books reflect that commitment for 1 year of service.

    We here at SSG have covered the DCX subject in other articles.

    There was also an "adjustment period" for Sirius as the OEM impacts began to come into play. Fully loaded churn went from 1.6% to as high as 2.0% in Q3 of 2006.

    The methodology used by Sirius has now been absorbed into the overall system. Each month, manufactured cars are added, and each month their are deactivations from the OEM channel. In my opinion, the bulk of the absorbsion has already happened.

    Should invcestors consider this? Sure, but that is another article. This article was specific to XM, and the intent was to shed light on what is happening. With headlines about a "weak" first half for XM, we felt it would be beneficial for investors in the equity to understand one of the reasons behind the issue. hopefully you found this article enlightening and useful

    By Blogger SSG, at February 04, 2007 6:14 PM  


  • Thanks for all your hard work.

    The article was very entertaining as is the rest of this blog.

    By Anonymous Anonymous, at February 04, 2007 10:23 PM  


  • What happens if a Sirius car is on the lot for a longer period of time (than your 2-3 month mentioned)? Let say it sits on a lot for 6-9 months.. Is the buyers promotional period less because the promotional period started at the time of manufacture or does Sirius extend the promotional period. And if they extend the promotional period who pays for it and is it counted?

    By Anonymous DudeManCentral, at February 05, 2007 9:57 AM  


  • The buyer of a Chrysler car gets a 1 year promotion from Sirius. The length of time between the manufacture of the vehicle and the sale of the vehicle has no bearing on the length of the promotional period.

    During the timeframe prior to the vehicle being sold, there is a negative impact on ARPU for Sirius, because deferred revenue is not considered when calculating ARPU.

    By Blogger SSG, at February 05, 2007 10:22 AM  


  • So, they count it as a subscriber but don't show any revenue for it until its sold?

    By Anonymous DudeManCentral, at February 05, 2007 10:46 AM  


  • When they receive payment from DCX, the payment is booked as "DEFERRED REVENUE". When these funds are received, Sirius counts the subscription. One year of service to that particular radio has been paid for.

    Deferred revenue is a "liability". In theory, Sirius either has to deliver their service or refund the money.

    The funds remain in deferred revenue until a consumer buys a vehicle, and begins receiving service for 1 year. Each month, as the service is delivered, money is removed from deferred revenue and booked as revenue.

    By Blogger SSG, at February 05, 2007 11:03 AM  


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