by James Brumley | January 6, 2014 10:32 am
By almost all accounts, Sirius XM (SIRI) is the classic American success story.
The company effectively created an industry — satellite radio — from scratch. And being the organization to develop it, SIRI has been the one to dominate that industry: The company boasts roughly 26 million subscribers now, up from only 1.6 million subscribers at the end of 2003. Even more impressive is how that subscriber base drove $3.7 billion worth of revenue for Sirius over the past four quarters. Not bad.
As is the case for any technology-dependent company, however, the sheer passage of time is a threat to Sirius XM. In fact, 2014 may well be the technological tipping point that makes the stock more of a liability than an asset.
To reiterate, you have to give Sirius XM a lot of credit. It created something out of nothing, and has turned a tidy profit for a few years by doing so. There are two realities, however, that should start to worry SIRI stock owners:
As to the first point, 69% of new cars sold in the United States are equipped with Sirius satellite radio receivers, and 44% of the new-car buyers that utilize the free six-month trial end up becoming paying subscribers. With an estimated 50 million receiver-equipped vehicles on the road now and an estimated 100 million such-equipped cars likely to be on the road by 2018, it would be easy to assume Sirius XM is sitting pretty.
It’s the second reality that has starting to cause problems, however, and it’s a bigger problem than most investors might appreciate. And no, being brought under the Liberty Media (LMCA) umbrella — as Liberty Media proposed on Friday — isn’t going to change either of these now-troubling realities for Sirius XM.
When Apple (AAPL) first unveiled the idea of connecting an iPhone to a car’s dashboard in 2012, it wasn’t viewed as a completely crazy idea. In-dash screens had already been introduced, GPS devices were already affixed to many consoles, and it was largely assumed the melding of personal consumer technology and vehicles was only a matter of time, and that time was soon. Nobody saw the melding of an automobile and an operating system as a looming game-changer though.
What a difference two years can make. Since then, Apple has been forging partnerships with BMW, Mercedes-Benz, General Motors (GM), and Honda Motor Co. (HMC). In some of this year’s models, for instance, Honda will be building in the technology that allows a driver to use the Apple’s iOS “Siri” assistant to retrieve e-mails, weather reports, and of course, driving directions.
Oh, and let’s not forget that one of the coolest things about an iPhone is that it can keep its owner perfectly connected with his or her cache iTunes songs and/or tuned into the newish iTunes Radio, which are now both available for listening via the vehicle’s dash. Suddenly that satellite radio receiver is starting to feel a tad redundant, and less powerful than the other device hooked up to your car.
And if there was still a smidgen of a chance that consumer-tech companies weren’t actually all that interested in dominating automobiles’ dashboards, Google (GOOG) just quelled it.
At last week’s annual Consumer Electronics Show in Las Vegas, the web-search giant and developer of mobile operating system Android unveiled — alongside Audi — a vehicle-centric version of the software that not only does everything the Apple iOS can do for a car (like offering maps and driving directions), but offers a built-in wi-fi connection for up to eight passengers’ mobile devices.
And thus begins the wireless-internet wars within your car. Apple may have fired the first shot using a device that’s constantly connected to wi-fi or mobile internet. Google has now fired back with a car that is the connected device. Never mind the fact that Pandora (P) has already generated more than a couple million in-car-radio account activations, via eight stereo manufacturers, with the service available in cars from 23 different manufacturers.
To give credit where it’s due, Apple is miles ahead of Google (and Pandora) when it comes to in-car mobile operating systems. Honda has already committed to adding the feature in some cars this year, with more carmakers rumored to be ready to do the same. Still, given that Google is now where Apple was a couple of years ago on the vehicle front, one can only help but wonder how many on-board wi-fi automaker partners Google will have in its corner by this time in 2016.
So what’s any of this got to do with Sirius XM? Nothing … and that’s the point. While Sirius XM has been cultivating its business based on a technology that’s now more than a decade old, the advent of a new and more powerful technology has reframed the question from “How could anyone ever unseat Sirius?” to “Will consumers prefer Apple or Android once wi-fi-connected cars become the norm?”
Just so there’s no misunderstanding, none of this is to say Sirius XM is on the cusp of bankruptcy. The company has millions of loyal fans, and could coast for years even if it never added another new subscriber from here. Indeed, Sirius XM has enough of a marketable product that Liberty Media is interested in acquiring the satellite radio outfit.
It’s also worth adding that Sirius XM satellite is a cheaper option than mobile broadband, if a consumer’s only interest is in audio entertainment. Sirius provides 24/7 unlimited access to a variety of radio station genres for about $15 per month, while mobile internet service costs roughly $10 per gigabyte of data. That’s enough bandwidth for about 200 songs, or ten hours’ worth of streaming audio.
Is that all the average Sirius XM subscriber needs were that subscriber forced to make a switch? That’s the question. The answer for at least some — perhaps too many — Sirius subscribers, however, is “yes”, which leads to the next obvious question … why would a Sirius XM customer continue to pay money for a service that can be provided at a similar price by a device that he/she is likely already carrying around anyway?
See, as of the middle of last year, more than half of all mobile phones in use in the United States were smartphones. Most of those smartphones are sold with mandated data plans in tow, whether those owners want them or not. Why not use what’s being paid for anyway? The proliferation of these data plans — especially now that data plans will make driving a car a more convenient experience — is making satellite radio more and more obsolete.
Liberty Media may be able to do something interesting with Sirius, but Liberty can’t change the underlying facts of the technologies in play here.
Fans and followers of Sirius XM will be quick to point out that the dedicated satellite radio service brings something to subscribers that simply isn’t available through any other venue. The quality of programming is one of those attributes that will keep some Sirius subscribers forever.
Fair enough. But that’s not likely to be enough for many Sirius subscribers, even if it will take a few years for that to become evident. And, no, the availability of Sirius XM’s broadcasts via the internet isn’t a game-changer. The stock’s bound to start struggling now, in the face of Sirius XM’s eventual displacement.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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