Sirius XM Hears You


Sirius XM Radio (NAS: SIRI) is tired of being a digital castoff.

It was three summers ago that the satellite-radio giant made waves when it rolled out a streaming application for Apple (NAS: AAPL) iPhone and iPod touch owners. It was a hit, racing to the top of the music category on Apple's magnetic App Store.

Two weeks after its debut, Sirius XM proudly announced that the program had received a million downloads. Investors got giddy, and Sirius XM would go on to roll out its streaming application for Android and BlackBerry users.

However, a million downloads didn't translate into a million subscribers willing to pay nearly $13 a month for the mobile service or even a million existing receiver-based accounts paying $16 a month for both streaming and receiver access.

Why pay for mobile streaming? Folks were already paying plenty for their unlimited data plans, and Pandora Media (NYS: P) is more than happy to provide free accounts with customized radio accompanied by minimal advertising.

Well, Sirius XM is ready to step up its game on the streaming front.

Streaming 2.0
In Sirius XM's conference call on Thursday, discussing its improving quarterly results, CEO Mel Karmazin spelled out the company's goals to beef up its streaming initiatives later this year.

In its current form, Sirius XM as a streaming product simply offers what's playing on traditional receivers with a few extra stations that are exclusive to the platform. Things will get better later this year, when many of satellite radio's more popular shows are available on demand.

One of the shortcomings of the original streaming offering introduced in 2009 is that it lacked some of the star attractions of satellite radio. Several sporting events and both of Howard Stern's Sirius channels were not contractually available. Sirius XM made sure to get Stern on when his new five-year deal kicked in last year, but subscribers are currently limited to the same real-time programming that receiver-based accounts are accessing.

Why? If Stern's on the cloud, shouldn't streaming customers be able to dive right into the show from the beginning, not to mention celebrity interviews or Robin Quivers' news? Well, that will change with the on-demand feature.

Another serious upgrade to the streaming product will be commercial-free personalized music. Pandora's "music genome project" has been around since 2000, and the service is up to 125 million registered users, largely music fans on the ad-supported free plan. Pandora One -- the premium offering that strips ads away -- sets Pandora customers back $36 a year. That's clearly a bargain compared with the $14.49 a month that Sirius XM now charges standalone Internet customers after last month's rate increase. However, the vast majority of Sirius XM customers -- paying the same $14.49 a month for their receiver-based plans -- can pay just $2.99 a month to add streaming.

In other words, for drivers who already have activated receivers, the improved streaming product will be competitively priced relative to Pandora One.

Dreaming 2.0
Despite the initial 2009 fanfare, Sirius XM has never divulged its actual number of streaming subscribers. There's probably a reason for that.

The average revenue per subscriber has gone up -- from $10.65 a month three years ago to $11.61 a month today -- but the improvement stems largely from the music royalty fee that was instituted in 2009 of $1.42 a month for primary receivers and $0.98 a month for secondary receivers. Streaming as a standalone service or the more likely $3-a-month upgrade for receiver-based accounts hasn't been as popular as it could be.

Well, that should change as the streaming product gets dramatically better this year. It will be easier to convince smartphone owners and PC users to pay $3 more a month for incremental on-demand access and personalized music. Average revenue per subscriber will inch higher anyway. Sirius XM instituted a 12% rate increase last month, and it will take 18 months to roll out to most of its prepaid accounts. Now there will be another top-line boost for a scalable model where most of the costs are fixed.

Stronger streaming features will also help keep churn in check. An unfortunate byproduct of last month's rate increase is that Sirius XM expects the move alone to bump monthly churn from 1.9% to 2.1% this year. This translates into roughly 40,000 users a month -- or 720,000 over the 18 months of implementation -- who are leaving because the price went up.

Here is where streaming can help. If someone is getting better value out of Sirius XM by paying an additional $3 a month for the enhanced streaming product, that listener is more likely to stick around. It may not be enough to talk keep the price-sensitive accounts from leaving, but it's a smart way to both pump up average revenue per user while tugging monthly churn back down to the kinder end of 2%.

Running of the bulls
I remain bullish on Sirius XM's future. It should come as no surprise that I'm promoting the CAPScall initiative for accountability by reiterating my bullish call on Sirius XM for Motley Fool CAPS.

XM Satellite Radio was a Rule Breakers recommendation before the Sirius XM merger. It's now gone from the scorecard, but if you want to discover the newsletter service's next Rule-Breaking multibagger, a free report reveals all.

At the time thisarticle was published The Motley Fool owns shares of Apple.Motley Fool newsletter serviceshave recommended buying shares of and creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.Longtime Fool contributorRick Munarrizcalls them as he sees them. He owns no shares in any of the stocks in this story and is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.