Wall Street Ponders Likely Sirius XM Price Hike Next Year

2:50 PM PST 08/12/2011 by Georg Szalai
Scott Wintrow/Getty Images

While many analysts expect a monthly increase in the $1-$2 range from the satellite radio company led by CEO Mel Karmazin, some say there could be more upside even in a weak economy given less user churn than at pay TV operators.

NEW YORK – Sirius XM Radio earlier this month once again signaled it plans to raise its monthly subscriptions prices next year, but Wall Street observers have different views on how big the hike could end up being.

While many analysts expect a monthly subscription price hike in the $1-$2 range, some say there could even be more upside.

"We continue to believe it would be appropriate for us to increase our pricing to be able to continue investing in and delivering the best audio content in the world," Sirius XM CEO Mel Karmazin said on the satellite radio company’s second-quarter earnings conference call.
He highlighted that Sirius has never increased its base price of $12.95 since its service launched about a decade ago.

“Early next year, for the first time since the merger, we will be able to price our service as we see fit,” he added, highlighting that the company’s inability to increase prices despite an expanded content lineup has kept a lid on revenue and average revenue per user.

The comments came just days after Sirius had received a regulatory order that ensured the end of pricing restrictions on the company that have been in place since the merger of Sirius and XM in 2008.

But what did Karmazin mean when he said Sirius XM would price its service “as we see fit?” Management didn’t give more specific guidance on the possible size of price changes.

Pricing would be “based upon the value we deliver to our subscribers in the context of a robust and competitive audio entertainment environment,” including the likes of Pandora, terrestrial radio and Internet radio, Karmazin said.

"Generally, when you raise prices that you tend to dampen demand," added Sirius CFO David Frear in when asked whether an increase could affect subscriber momentum. "We think that price increases make a lot of sense, given the programming we're delivering and given how long we've left the price unchanged."

Several analysts predicted price increases in the $1-$2 range that could have clear financial benefits. Tuna Amobi of Standard & Poor’s Equity Research has in his Sirius XM earnings model assumed a mid- to high single-digit price increase sometime early next year, which would amount to around 65 cents to close to $1.30 per month.

Morgan Stanley analyst Benjamin Swinburne said he assumes a base case scenario of a $1 rate increase, with “our bull case assuming $2.”

Similarly, Wunderlich Securities analyst Matthew Harrigan expects a hike of “a buck easily,” although he cautioned that “how much sticks after discounting is another matter” given that he expects “lots of promotions and retention activity.”

And Gabelli & Co. analyst Brett Harriss said he envisions a $1-$3 monthly price hike per subscriber. “Sirius XM has pent-up pricing power,” he had written in a report earlier in the year, in which he upgraded his rating on the company’s stock to a “buy.”

Harriss also argued that while pay TV operators have seen subscriber drop their service and look for cheaper alternatives, Sirius XM has more room to boost its price. “With a relatively modest subscription price, we think Sirius can raise prices without significantly impacting consumers’ budgets,” he said. “Sirius customers are loyal: 1.9 percent monthly churn is low compared to other subscription businesses and did not spike through the recession.”

“If the economy is weak, they could be more cautious,” said Maxim Group analyst John Tinker. “But they predict 1.6 million subscriber additions [this year], 14 percent growth, despite the Japanese car sales issue. They seem quite confident that their product is strong.”

Sirius ended the second quarter with more than 21 million subscribers. So, assuming unchanged subscriber figures and a $1 price hike for all users would give Sirius $21 million in additional revenue per month, or $252 million a year. That would be nearly 8.5 percent of the full-year 2011 revenue of approximately $3 billion that the company has projected.

Harriss earlier in the year estimated that a $1 increase for a 20 million user base would add about $185 in incremental earnings before interest, taxes, depreciation and amortization and boost the company’s value by 28 cents per share.

But analysts also highlighted that the math may not be this clear-cut given that Sirius subscribers are typically in contracts that lock in their monthly price until a renewal. Harriss, for example, said that the company could “begin raising prices slowly through reduced discounting and small increases on subscription renewals.”

Jim Goss, analyst at Barrington Research Associates, said that Sirius could also consider new price tiering options, which could mean new prices for some, but not others.

Tinker has higher price boost expectations than others on Wall Street. He envisions Sirius using the $16.99 per month cost of its “Premier” packages, which he said he heard is paid by about 10 percent of subscribers, to all users.

“It could be $16.99 for all, and they give all the best-of service,” he explained. “They couldn’t just raise prices by that much. Not many people will pay more immediately. People often have one- or three- year contracts, not many have lifetime contracts.”

Either way, Wall Street observers expect that the price increase – however high it will end up being - will boost the company’s finances and stock price.

Harriss assumes a 4 percent annual price increase from 2012 through 2015, which could boost average revenue per user from $10.39 in 2010 to $12.31 by 2015. “Given Sirius XM’s largely fixed-cost structure, we expect price increases will be highly accretive to value,” he said.

Email: Georg.Szalai@thr.com

Twitter: @georgszalai

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