Note: Sirius XM's FY'23 ended on December 31, 2023.
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 channels comprising 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.
As of Dec. 31, 2023, the business had a total of 39.9 million subscribers. This includes paid and promotional customers for both Sirius XM and Pandora. The issue, though, is that the subscriber count has remained flat. The Sirius XM service had 33.9 million customers at the end of 2023, slightly less than it did five years ago. And it's a similar situation for Pandora, which counts about the same number of self-pay subscribers now as it did at the end of 2018. For what it's worth, the customers who do pay for Sirius XM are sticky, as the service boasts a monthly churn rate of just 1.6%. Management is focused on improving the value proposition of the app with more differentiated content and better pricing.
Sirius XM completed the acquisition of Pandora for $3.5 billion in an all-stock deal in early 2019. Pandora was supposed to give Sirius XM a foothold in streaming and a way to consolidate two ad-supported platforms, but Pandora's audience has contracted in back-to-back years. As of Dec 31, 2023, Pandora and off platforms saw a 3% y-o-y dip in subscribers to approx $6 million.
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 $23.99 per month and the other basic packages are available at $18.99 and $13.99 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.
In FY 2023, Sirius XM's penetration rate in the used car domain was around 53%. 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 the used car market. The company 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 602 million Monthly Active Users (FY 2023) globally, far ahead of its nearest rival Apple Music, and continues to add more subscribers - driven by expansion into new markets. And they can satisfy all of the content needs that a person might have, whether it's music, news, sports, or podcasts. Further, connected cars that allow smartphone apps to stream seamlessly through Bluetooth should dampen the subscriber growth in premium-priced satellite-beamed platforms.
Sirius XM's business model is based on a subscription fee, and therefore the company can 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, which 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 manufacturers 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 interest, scheduling service appointments, repairs, etc. 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.
