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Case 11 Teaching Note Sirius XM Satellie Radio Inc. in 2014
429
radios; device royalties for certain radios and chip sets; commissions paid to automakers as incentives
to purchase, install and activate satellite radios; payments for handling product warranty obligations;
Sirius XM’s Market Opportunities
nOpportunities to expand the percentage of owners of new and used vehicles equipped with a satellite
nOpportunities to develop a connected vehicle platform and begin delivering connected vehicle services
to a host of major automotive manufacturers—providing connected car services to vehicle owners is
nFuture expansion into geographic areas outside of the United States and Canada (but this is unlikely to
The External Threats to Sirius XM’s Future Well-Being
nSirius XM might lose out to competitors in providing connected car technology/services to motor
nGrowing numbers of vehicle owners may shift their preferences for in-vehicle entertainment away from
Conclusions regarding the attractiveness of Sirius XM’s overall situation: On balance, Sirius
XM’s overall situation is currently attractive. Sirius XM has a potent set of resource strengths for gaining
6. What are the key elements of Sirius XM’s current strategy? Which of the five generic
competitive strategies discussed in Chapter 5 is Sirius XM currently pursuing? Is Sirius
XM’s strategy working well? Based on what evidence?
XM’s overriding strategic objective was in 2014 to acquire as many new subscribers as possible as quickly as
nRefreshing and expanding the company’s programming lineup. Sirius XM monitored the popularity
of the content on each channel and the size of the audience listening to each channels. Channels with
Several times each month, the company sent e-mails to subscribers calling attention to upcoming
programs, shows, and events of interest scheduled for broadcast across its entire channel lineup.
The e-mails also announced the launch of new shows on particular channels, temporary switches to
seasonal music on particular channels, and any other noteworthy items (contests to win tickets to live
performances and major sporting events, the appearance of special guests and/or the discussion of
Case 11 Teaching Note Sirius XM Satellie Radio Inc. in 2014
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nCurbing the costs of duplicate programming for XM channels and Sirius channels.
nLaunching SiriusXM On Demand in 2012 to give Internet subscribers listening on the company’s
online media player and on smartphones the ability to choose their favorite episodes from a library of
more than 300 shows and over 3,000 hours of content that included regularly updated feature content,
nExpanding its online offering to further enhance the appeal of subscribing to SiriusXM Internet
Radio. Sirius had introduced MySXM that permitted listeners to personalize the company’s existing
SiriusXM On Demand and MySXM were offered to Internet subscribers at no extra charge
nSince the merger in 2008, Sirius XM had continued to employ the strategy of gaining access to new
subscribers by distributing its satellite radios through three channels: automakers, assorted retail
locations nationwide (including rental car companies), and the company’s website. As had been the case
nSirius relied heavily on using free trial subscriptions to induce the owners of new vehicles equipped
nMore recently, Sirius XM had accelerated its sales and marketing efforts to help induce people who
bought or leased previously owned vehicles with factory-installed or dealer-installed satellite radios
to subscribe to Sirius XM service (free trials were used as an inducement). The company had recently
developed systems and methods to identify these people and had established marketing programs to
promote its programming to these potential subscribers. The company worked directly with franchised
and independent vehicle dealers to promote and sell Sirius XM subscriptions for both certified and
nIn 2013, Sirius XM began enrolling dealers in its Service Lane Program to provide a complimentary
2-month Sirius XM subscription to qualifying customers who brought their vehicles with a factory-
equipped satellite radio in for service; there were over 2,500 dealers participating in the Service
Case 11 Teaching Note Sirius XM Satellie Radio Inc. in 2014
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The strategic target was to convert some of the 30 million vehicles on the road with inactive satellite
nSirius had created a variety of subscription plans for customers to choose from—case Exhibit 4 shows
the three most popular plans. Most customers, especially newer subscribers, opted for annual, semi-
annual, quarterly, or sometimes monthly subscription plans. To entice customers whose subscriptions
were expiring to sign up for a longer term, Sirius offered discounts for prepaid subscriptions and for
nOne of Sirius XM’s top strategic priorities was to help boost subscriber retention rates through
improvements in customer service and overall customer satisfaction. To improve customer retention
and customer satisfaction metrics by making it easier and more satisfying to be a Sirius XM subscriber,
the company had:
• Made significant investments in customer care and assembled a team of experienced customer
• Increased its capabilities to “chat” with online customers—a function that online customers liked
• Integrated its subscriber management systems to enable Sirius radios and XM radios to exist on a
• Launched a mobile service app to allow transactions and account management from a subscriber’s
nSirius did not manufacture satellite radios. Rather, it designed the radios, established their specifications,
either sourced or specified the needed parts and components, and managed various aspects of the
logistics and production of its satellite and Internet radios. It had authorized manufacturers and
distributors to produce and distribute radios, and it had licensed the company’s technology to various
nIn 2013, Sirius introduced the SiriusXM Internet Radio app for smartphones and other connected
nIn 2013–2014, Sirius accelerated efforts to develop and deliver in-vehicle technology and systems
with greater capabilities and connectivity. It was participating in an initiative with Nissan to provide a
Case 11 Teaching Note Sirius XM Satellie Radio Inc. in 2014
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nIn November 2013, Sirius completed the acquisition of the connected vehicle services business of
Agero, Inc., giving it significantly greater capability to develop a connected vehicle platform and begin
delivering connected vehicle services to a host of major automotive manufacturers. Agreements had
already been negotiated with Acura, BMW, Honda, Hyundai, Infiniti, Lexus, Nissan, and Toyota, with
Which of the five generic competitive strategies discussed in Chapter 5 is Sirius XM currently
pursuing? If you have covered the material in Chapter 5 on the five generic competitive strategies, then
How Well Is Sirius XM’s Strategy Working? We believe there’s strong evidence that the strategy is
working well. Because no other single provider of in-vehicle entertainment services can currently match
the breadth and diversity of Sirius XM’s programming, it is fair to say that Sirius XM has achieved a
7. What is your evaluation of Sirius XM’s financial performance during the 2010–2013
period (as shown in case Exhibit 2)? Table 4.1 in Chapter 4 provides guidance on doing
financial statement analysis; you should become accustomed to using the financial
ratios in Table 4.1 as guides for evaluating a company’s financial performance.
We are strong believers in making sure that students understand they are absolutely expected to crunch
the numbers in the financial exhibits to arrive at analysis-based conclusions about a company’s financial
nSubscriber revenue has climbed from $2.41 billion in 2010 to $3.28 billion in 2013—equal to a
nTotal revenue has grown from $2.82 billion in 2010 to $3.80 billion in 2013—a CAGR of 10.5%.
nIncome from operations has jumped from $465.4 million in 2010 to $1.04 billion in 2013, equal to a
nNet cash provided from company operations has climbed significantly every year since 2010—jumping
from $512.9 million in 2010 to $1.1 billion in 2013.
Case 11 Teaching Note Sirius XM Satellie Radio Inc. in 2014
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nSirius XM’s expense ratios, profitability ratios, and assorted other financial performance measures
2010 2011 2012 2013
Royalty and revenue-sharing payments as a % of total revenues) 15.5% 15.6% 16.2% 17.8%
Programming and content expenses as a % of total revenues 10.9% 9.3% 8.2% 7.6%
Customer service and billing expenses as a % of total revenues 10.4% 8.6% 8.7% 8.4%
Satellite and transmission expenses as a % of total revenues 2.9% 2.5% 2.1% 2.1%
Cost of equipment as a % of total revenues 1.3% 1.1% 0.9% 0.7%
Subscriber acquisition costs as a % of total revenues 14.7% 14.4% 14.0% 13.0%
*This is due to an outsized income tax benefit (from losses in prior periods). Without this tax benefit, the net profit
margin would have been 13.9%.
Several pertinent conclusions can be drawn from the above calculations:
• Royalty and revenue-sharing costs are rising as a % of total revenues (not surprising, given the
• Programming and content expenses are declining as a % of total revenues (which is good and which
• Subscriber acquisition costs as a % of total revenues are declining—which is good and which
• General and admin expenses as a % of total revenues are declining—good!
• The other expense ratios are either declining slightly or stable.
• The bouncing around of the company’s returns on stockholders’ equity are also due in large part
• The bouncing around of the company’s return on assets is due in large part to big swings in income
Case 11 Teaching Note Sirius XM Satellie Radio Inc. in 2014
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Conclusions: All things considered, Sirius XM’s financial performance since 2010 has been good. The
company has come through the hard times since 2008–2009 in good financial shape. And its future prospects
seem bright—it definitely has the financial strength to continue to grow its subscriber base and build a strong
competitive position in connected car technology/services.
If Time Permits. Ask the class what is to be learned about Sirius XM’s strategic performance from the data
in case Exhibit 3.
Our thoughts:
8. Is Sirius XM’s decline in the number of subscribers from the third quarter to the fourth
quarter of 2013 alarming (see case Exhibit 5)? Why or why not?
According to the information in the case, several factors contributed to the 22,756 reduction in net subscribers
in the 4th quarter of 2013:
nSirius XM began paying automakers lower subsidy rates per satellite-radio-equipped vehicle. Indeed,
the lower subsidy payments resulted in subscriber acquisition costs of only $124 million in the fourth
nA major automaker shifted to unpaid trial subscriptions in Q4 of 2013, accounting for most of the
nThe new vehicle conversion rate from trial to self-pay was only 42% in Q4, as compared to 45–46%
The reason for the 434,240 decline in paid promotional (trial) subscriptions from Q3 to Q4 was attributed
Was the automaker’s shift very likely done to “punish” Sirius XM for its actions to cut the subsidy it paid
to automakers for each vehicle equipped with a satellite radio? We suspect that Sirius was motivated to
cut subscriber acquisition costs and pursued the subsidy-cutting action because it believed (1) the subsidy
was too large and (2) automakers would continue to equip new vehicles with satellite radios, despite a lower
Case 11 Teaching Note Sirius XM Satellie Radio Inc. in 2014
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9. What recommendations would you make to the senior management of Sirius XM to
improve the company’s competitive position and financial performance over the next
five years?
There are several actions that class members might deem appropriate or propose:
nStick with the same basic strategy—no major overhaul seems called for.
Class members should recognize that it is especially important for Sirius XM to
•Continue aggressive efforts to become a major provider of connected car services/technology to
You might ask the class two questions:
Can you think of anything specific that Sirius can do to help ensure that it becomes a (the?)
Should Sirius institute a series of subsidies, incentives, revenue-sharing payments to
automakers in return for them promoting Sirius as a preferred/highly recommended provider
•Continue aggressive efforts to secure more new subscribers—ongoing increases in the number of
nRevisit the issue of whether management cut the subsidy paid to automakers for installing satellite radios
in new vehicles by too much. While only one automaker was apparently upset enough to respond by
dropping its participation in Sirius XM’s prepaid trial subscription program, if any other manufacturers
nBe cautious about instituting further increases in subscription prices.
Epilogue
In October 2014, Sirius XM announced that:
nRevenues for the first nine months of 2014 totaled $3.1 billion, versus $2.8 billion for the first nine months
of 2013.
nNet income for the first nine months of 2014 equaled $350.1 million, an increase of 12.3% over the $311.7
million in net income reported for the first 9 months of 2013.
nAdjusted EBITDA as a percentage of revenue climbed approximately 530 basis points, from 30.7% in the
third quarter of 2013 to 36.0% in the third quarter of 2014, which is the highest in the company’s history.
nThe company had added nearly 1.2 million new subscribers in the first 9 months of 2014, bringing the
ending number of subscribers on September 30, 2014 to 26,734,398 and the daily weighted average number
of subscribers in Q3 2014 to 26,487,969.
Case 11 Teaching Note Sirius XM Satellie Radio Inc. in 2014
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nSubscriber acquisition costs fell 22% from $45 per new subscriber in the third quarter of 2013 to $35 per
new subscriber in the third quarter of 2014.
nTotal trials underway at the end of the third quarter of 2014 were approximately 7.4 million, the largest in
Sirius XM’s history, up from approximately 6.9 million at the end of the third quarter of 2013.
nThe new vehicle conversion rate was 41% in Q3 of 2014, compared to an average of 42% for the first 9
months of 2014, and 44% for the first 9 months of 2013.
nThe company had spent $2.1 billion so far in 2014 to repurchase shares of the company’s stock. The weighted
average number of shares outstanding (on a diluted basis) at the end of Q3 2014 was 6.21 billion, compared
to 6.45 billion at the end of Q3 2013.
Management provided the following guidance for full-year 2014:
nNet self-pay subscriber additions of approximately 1.25 million,
nTotal net subscriber additions of approximately 1.5 million,
nRevenue of approximately $4.150 billion,
nAdjusted EBITDA of approximately $1.425 billion, and
nFree cash flow of approximately $1.120 billion.
Sirius XM CEO Jim Meyer said the following in discussing the 2014 third quarter’s results:
SiriusXM turned in an excellent third quarter that puts us another step closer to achieving all of our financial
and operating goals for the year. We are entering the fourth quarter with strong momentum, and we are once
again raising our guidance for subscribers, revenue and free cash flow, each for the second time in 3 months.
We now expect net additions of approximately 1.5 million, approximately $4.15 billion of revenue and
approximately $1.12 billion of free cash flow this year.
We finished the third quarter with a record high 26.7 million paid subscribers, which includes an all-time
high 22 million self-pay subscribers. Total net additions for the quarter were 433,000, of which 380,000
were self-pay net additions and 53,000 were paid promotional net adds.
Our paid trial additions benefited in the quarter from strong auto sales and helped us raise our subscriber
guidance twice in the past 2 months. New car SAAR was up 7% to 16.75 million in the quarter. Note that full
year auto sales are expected to be approximately 16.4 million, up a more modest 5% from last year.
Our new car penetration rate in the third quarter was 71.5%, up about 2.8 points from last year’s third
quarter. We finished the third quarter with approximately 68 million factory-enabled vehicles in operation,
which equates to about 28% of the vehicles on the road. An important point is, as the fleet continues to turn
over, our vehicles in operation will eventually match our new car penetration rate of approximately 70%,
meaning we will have many years of growth ahead of us in our primary distribution channel, the vehicle.
Each year, a growing portion of preowned vehicles sold will include a satellite radio, and we have made
great progress this year in executing our preowned business. Every major automaker offers a SiriusXM trial
with its certified preowned vehicle sales at every franchise dealer location. And in addition, we now have
more than 14,000 auto dealers providing SiriusXM trailers—trials to their noncertified customers. This is up
from 11,000 at the end of last year.
Our auto remarketing team is also focused on new business initiatives to target subsequent owners who
purchase their vehicles from either independent dealers or from other individuals in private sales. Our efforts
are paying off, and we now expect to exceed our original full year target of 2 million self-pay additions from
the second-owner market this year.
We had our best quarter ever for both new and used car conversions. More car owners elected to become
subscribers than ever before. Our conversion performance has been strong, but conversion rate is also
Case 11 Teaching Note Sirius XM Satellie Radio Inc. in 2014
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impacted by the increasing mix of subprime buyers and leases, both of which are at all-time highs as a
portion of new vehicle sales.
Self-pay churn for our overall business remained very solid at 1.9%. I am very satisfied with this level of
performance.
The business produced total revenue of close to $1.1 billion in the third quarter, up 10% from $962 million
in the third quarter of last year. By tightly managing our cash operating expenses to just 1.5% growth versus
last year’s third quarter, adjusted EBITDA came in at $381 million, up 29% from $296 million a year ago.
This represented a margin of about 36%, up a truly astounding 530 basis points from 30.7% in last year’s
third quarter.
Free cash flow for the quarter was $267 million, the highest amount we’ve ever recorded in a third quarter.
So far this year, we’ve delivered $825 million of free cash flow, which is an increase of 32%. On a per share
basis, our free cash flow is increasing even faster, about 37% from $0.097 last year to $0.133 so far this year.
The lifeblood of our radio business is our content, and it’s fundamentally why we have all of our subscribers.
We’ve added a number of great new channels, new hosts and new shows this quarter. We’ve bolstered our
music offering with 3 new music channels for dance, women’s pop and country audiences. We’ve just finished
the month-long special channel featuring Barbra Streisand’s music as the iconic star debuted a new album
at #1 and appeared in our exclusive Town Hall series. We’ve added the inspirational Joel Osteen Radio as a
full-time channel and launched the TODAY Show Radio, giving our subscribers access to live audio feeds of
TODAY from both coasts. We’ve added a full-time Bleacher Radio—Bleacher Report Radio channel; a new
daily show on Mad Dog Sports Radio with Stephen A. Smith, the popular sport media personality; and added
a show by Hall of Fame Golfer Freddie Couples to the growing lineup of our PGA TOUR Radio.
Working with YouTube, we’ve created YouTube 15, an exclusive weekly countdown show that uses their
trending data to showcase the newest music emerging online.
In November 2014, it appeared increasingly likely that Sirius XM (and other broadcasters of digital music) might
be liable for damages for not paying royalties on pre-1972 sound recordings. Three courts had ruled against
payments. The disputes related in part to a federal law crafted in 1995 and to the interpretation of state laws in
California and New York. One of the judges noted the following
works “by means of a digital audio transmission.”…. By establishing a “new digital performance right [that]
applies to digital audio transmission ... [but] not to traditional broadcasts and most other free transmissions,”
Sirius is correct that this holding is unprecedented (aside from the companion California case, which reached
the same result), and will have significant economic consequences. Radio broadcasters—terrestrial and
satellite—have adapted to an environment in which they do not pay royalties for broadcasting pre-1972 sound
recordings. Flo and Eddie’s suit threatens to upset those settled expectations. Other broadcasters, including
those who publicly perform media other than sound recordings, will undoubtedly be sued in follow-on
actions, exposing them to significant liability. And if different states adopt varying regulatory schemes for
on a state-by-state basis (admittedly, an unlikely result, since such behavior could well cause broadcaster to
lose interest in playing their recordings) it could upend the analog and digital broadcasting industries.
Should Sirius lose these cases relating to the royalty rights for pre-1972 sound recordings, it would very likely
incur a one time charge of unknown amount (to cover past infractions) and, going forward, have to pay royalties
to broadcast pre-1972 recordings. Quite possibly, Sirius would be able to recover some/all of the ongoing
increased royalties by increasing the Music Royalty Fee that it was separately charging its subscribers (this fee
was a surcharge on top of the regular subscription price a customer paid).
For the very latest information on developments at Sirius XM, we urge that you check the press releases and the
investor relations sections at www.siriusxm.com.
