How Price Increase Of Sirius Select Or XM Select Impacts Sirius XM’s Value

Sirius XM (NASDAQ:SIRI) doesn’t have a long history of price rises. Following the merger of Sirius and XM in 2008, the new entity increased its prices for the first time in 2011. It implemented another revision in 2014, and starting January, began rolling out a new pricing that will require its Sirius Select or XM Select subscribers to pay additional 50 cents a month. Priced at $14.99 per month, Sirius Select / XM Select is a mid level subscription plan which is most popular among Sirius XM subscribers. Going forward, we believe that the incremental subscriber additions will slow down and price increase will become a periodic phenomenon driving Sirius XM’s topline growth. It is therefore important to understand the composition of the company’s subscribers and how selective price rise can affect the overall ARPU (average revenue per user).

Our current price estimate for the company stands at $3.45, implying a premium of about 10% to the market.

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$1 Increase In Sirius Select/XM Select Service Can Increase The Overall ARPU By $0.65

Given that 2014 price increase of 50 cents per month was applied to only mid-level package (Sirius Select/XM Select), the prices (per month) for three subscription levels that Sirius XM was offering were $9.99, $14.49 and $18.99 at the end of 2013. However, choosing annual payment instead of monthly payment results in savings of $8.99 and $28.89 for mid and premium level packages. Assuming 50-50 split between annual and monthly customers, we arrive at an average monthly pricing of $13.87 and $17.79 respectively for these subscription plans.

We further know that mid-level subscription plan is the most popular one, as Sirius XM has mentioned so on several occasions. We believe that over 50% of the subscribers are using this service. Assuming a rough bell curve for distribution, we conclude that one possible subscriber distribution could be: 20.5% of them using base plan, 65.5% using mid-level plan and remaining 14% using premium plan. Besides roughly satisfying the criteria of bell distribution curve, this combination also results in ARPU (average revenue per user) that closely matches reported ARPU.

The average number of self-pay subscribers stood at 20.876 million for Q4 2013 (average of quarter-beginning and quarter-end count). Additionally, the subscription revenue totaled $853 million for the same period. This gives us monthly ARPU of $13.61, which is close to $13.62 ARPU we get from our calculated subscriber split. Therefore, for every $1 price rise in mid-level plan (Sirius Select / XM Select), the overall ARPU will increase by roughly $0.65 as 65.5% of the subscribers choose this plan according to our estimates. This will result in incremental annualized revenues of more than $160 based on Q4 2013 subscriber count. Extending this assumption to outer years, we get positive impact of roughly 10% to the price estimate.

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