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Below are key drivers of Sirius XM's value that present opportunities for upside or downside to the current Trefis price estimate:
Sirius and XM merged in July 2008 to form Sirius XM Radio. The satellite radio service provider offers numerous channels comprising of commercial free music, sports, talk shows, news stations, and other channels in the U.S. Sirius XM radio channels are mainly available through receivers in automobiles but can also be accessed over the internet or through home stereos by using various accessories.
The firm's satellite radios are primarily distributed through automakers ("OEMs"), retail locations, and through their website. Sirius XM has ties with major automobile manufacturers such as Ford, GM, and Toyota. This helps drive its presence in the US automobile space. Additionally, satellite radio services are also offered to customers of certain rental car companies.
The firm's primary source of revenue is the subscription fee it charges customers for annual, semiannual, quarterly, or monthly subscriptions. Additionally, the company derives revenue from activation fees, the sale of advertising on select non-music channels, the direct sale of satellite radios and accessories, and other ancillary services such as weather, traffic, data, and backseat TV services.
In February 2020, Sirius XM acquired a minority stake in the open audio platform SoundCloud. Sirius also acquired Simplecast, in June, a leading podcast management platform that allows creators to publish and analyze their content. This business synergizes well with Sirius' ad tech subsidiary, AdsWizz, which is an end-to-end monetization solution for audio content. Then, in July, Sirius XM made an acquisition of podcasting behemoth Stitcher, which will add established podcasts like Freakonomics Radio, Oprah Winfrey's SuperSoul Sunday, to name a few, to its platform. In total, Sirius's 2020 acquisitions cost the company $428 million. The expectation is that the new podcasting trend will boost the company's current revenue streams and possibly add new ones.
Sirius XM completed the acquisition of Pandora for $3.5 billion in an all-stock deal in early 2019. The deal made the combined entity the world's largest audio entertainment company. Further, it gave the satellite radio company entry into the well-established media streaming market. The merger helped the company unlock music streaming services for cars. This deal holds great potential for both companies as it could bolster their positions in segments where they are currently lacking. Pandora's technological competence should help Sirius XM expand beyond vehicles and streamline its features like personalized recommendations. Concurrently, Sirius XM alliance with several automakers should accelerate Pandora's distribution to vehicles and unlock music streaming services for automobiles.
Sirius XM earns the majority of its revenues from the subscription fee it charges its subscribers. It offers various monthly, semi-annual, and annual plans to customers. The company also offers discounts on long-term subscriptions and on multiple subscriptions. As of now, the Sirius XM All Access package is available for $20.99 per month and the other basic packages are available at $15.99 and $10.99 per month.
Sirius XM has contracts with nearly all major automobile manufacturers. Every year the firm pays out a large amount to its OEM (original equipment manufacturers) partners to keep their radios flowing into the new car market, at around a 75% penetration rate. Of this 75% who buy a car with satellite radio, 39%-40% choose to keep it after the promotion trial runs out.
Sirius XM mentioned at the end of 2017 that its penetration rate in the used car domain is around 35%, which increased to 40% by the end of 2018. The used car market is becoming attractive for Sirius XM and penetration could grow from current levels. This would present a strong opportunity for Sirius XM to exploit in the used car market. CFO David Frear expects used car trials to surpass new car trials in the foreseeable future and double in the next decade. These numbers suggest that the company is extremely confident about potential growth in the used car market.
On-demand music streaming services are currently dominating the market, with Spotify being one of the leading players. Spotify had about 207 million Monthly Active Users (2018) globally, far ahead of its nearest rival Apple Music and continues to add more subscribers - driven by expansion into new markets. Further, connected cars that allow smartphone apps to stream seamlessly through Bluetooth should dampen the subscriber growth in premium-priced satellite-beamed platforms. However, Sirius XM has seen steady growth in recent times. This coupled with the acquisition of Pandora should allow Sirius to counter this competition.
Sirius XM's business model is based on a subscription fee, and therefore the company is able to afford unique and exclusive content that separates it from other radio services. The company will continue to sustain this ability and therefore, grow its user base. An example of this front is its recently renewed contract with Howard Stern, that would probably keep him associated with Sirius XM through to his retirement.
In addition to offering listening content through satellite radio sets factory-installed in cars, Sirius XM offers connected services to car manufactures through its subsidiary – Sirius XM Connected Vehicle Services Inc. The company provides an array of features to enhance safety, security, and convenience. These include remote and assist services, automatic crash notifications, easy access to maps, weather, restaurants and points of interests, scheduling service appointments, repairs etc. The satellite radio company has been in this domain for a while and it recently signed a deal with American Honda to provide next-gen connected services to Acura and Honda vehicles. Currently, Sirius XM provides connected services to Acura, BMW, Hyundai, Honda, Infiniti, Jaguar, Land Rover, Lexus, Nissan, Subaru, and Toyota. With new car sales increasing steadily, connected services should provide buyers an incentive to subscribe to Sirius XM services, which should keep its growth running. Coupled with the huge opportunity in the used car domain, this paints a pleasing picture for Sirius XM’s future.