Monday, March 12, 2007

A Deeper Look At SAC

March 12, 2007

Subscriber Acquisition Costs, better known as SAC, is a measure of how much money it costs to garner a subscriber. SAC is not a GAAP (Generally Accepted Accounting Principal)metric, and thus the method for determining SAC is up to the individual firms.

There is often discussion relative to SAC when people compare Sirius and XM. It is also a metric used by some to estimate a timeframe of how long the companies current cash will last.

Perhaps more important than the SAC figure itself is the ROI, or return on investment that SAC brings. By example, investing $200 into someone who subscribers and prepays for 5 years ($777) is a nice return, and likely worth the investment. While the SAC may seem high, the company is quickly able to get back the invested dollars.

Now look to the OEM channel for Sirius. Sirius pays an OEM subsidy of about $155 for each Chrysler install (this number will decrease as chipset improvements are made, and DCX is now using a newer chipset, so it has likely already decreased). Seems like a high SAC. Now consider that Chrysler buys a one year subscription for each install to the tune of about $150. Sirius' investment into the radio (SAC) now becomes much more reasonable. They are already recouping most of their initial subscriber investment. Even a take rate of 50% will bear fruit for Sirius. Sirius needs to average about 1 month of self pay status to be "whole" in their investment after the "promotional period" of 1 year ends.

For XM, the big OEM player is GM. The subsidy for GM is not well known, but lets assume a $50 subsidy happens. GM pays for two months of service at $10 per month. This means that XM gets back $20 on their $50 SAC investment. A take rate of 50% also bears fruit for XM. The needs to average about 3 months of self pay status after the "promotional period" of 3 months ends.

Now, these examples do not use exact numbers, but do give an indication of how these deals differ, and how to look at the ROI side of SAC. Cash flow friendly deal structures help a company remain liquid. All to often people only look at one side of the equation. For SAC, people always look only at the cost, and tend to ignore how fast that cost is recouped. The speed of recovery is an all important aspect of SAC that investors need to make themselves familiar with.

With Sirius and XM, the strategies differed with respect to these deals. This is not about one being right, and one being wrong. Both methods have their positives and negatives.

In the future, when looking into various metrics, look deeper and see the whole picture. Knowing how fast a SAC investment is recovered is perhaps more important than knowing the SAC number.


3/12/2007 09:25:00 AM

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