Saturday, August 05, 2006

Is the Satellite Radio Subscription Model Dead?

In a word, no. Whether or not they will survive financially is another question, but subscriptions are still growing strong. There are no signs that gross subscriptions are slowing down. Sure, some may be disappointed after the quantum shift in gross subscribers in 4Q05, but that was an aberration. The Stern Effect disrupted the market. Gross subscribers are still signing up about the same clip as before Stern. Frankly, I am surprise it hasn't slowed down for now. Certainly, the Stern Effect did impact XM. The rate of growth has slowed for XM, but Sirius' rate of growth slowed even more in the recent quarter.

Sirius' churn is still small compared to XM. This is for two reasons: 1) their base is smaller; and 2) the way they count their subscriptions. Maybe 20% or more of their subscriptions are immune to churn. It makes their blended rate look comparable to XM's self-paying churn rate, but if 20% of the subscriptions are excluded from the churn calculation, that is exactly what one would expect. Unfortunately, there is no direct way to compare how the two companies are doing with regard to churn. Because the Sirius promo periods differ, one cannot make assumptions about when promo subs expire.

From the chart below, XM's net sub growth took a turn for the worse. Worse yet, the churn kept marching on. One would have expected the churn to level out a little as well. This apparently happened because of the screw up during the transition to a new customer service company. Let's hope they get it fixed. We already know that there was a screw up in this quarter with the OEMs.

It is amazing how low Sirius' churn remains. It is caused solely by how they count their subs. Their system is fundamentally flawed. Why? To answer that one must know why subs are counted. They serve two purposes: 1) sell advertisements; and 2) measuring how well the company is doing. Whether it is a lifetime subscription or a one year subscription or a three year subscription, it is import to know how many active listeners there are. Sirius counts parking lot subs and dead people. They also count people for a longer period of time who never tuned in. It distorts the actual number of listeners. By reporting self-paying subscriptions and promo subscriptions separately, XM gives a better picture of how many people are actually listening to satellite radio. On point number two, we have no idea how good or bad the drop out rate is for Sirius, no measure of how well its OEM business is doing. In fact, when talking about it, they use XM numbers. Hopefully, the SEC will step in some day and make both companies report the numbers the same way. That would be a tremendous help to investors.

Aside from the ranting, the rate of grow of the net subscribers declined last quarter. This is attributable to XM's churn problem and the waning of the Stern Effect and the economy in general.

XM has a great opportunity this quarter with the popularity of O&A growing and the upcoming Oprah and Friends show. Let's hope they don't blow this one.

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