There's never a shortage of speculation when it comes to Sirius XM Radio (Nasdaq: SIRI) as an investment. Now there seems to be a debate as to what CEO Mel Karmazin meant when he told Jim Cramer last week that the impact of a January price hike on the satellite radio operator's subscriber base has been "very modest" so far.
Is that good? Is that bad?
Sirius XM's decision to increase its monthly rates by 12% in January wasn't inconsequential. The media giant wasn't allowed to move its primary rate higher for three years as a condition to having the merger between Sirius and XM approved by regulators. Sirius itself had been at $12.95 a month since its inception a little more than a decade ago, though it has tacked on new fees for Internet listening and increased the rates on family plans in recent years.
The 12% increase seems fair on the surface. Check your cable bill. Surely it has gone up by more than 12% over the past three years -- unless you've smartened up and switched providers or called up to negotiate a lower rate.
However, programming and content costs have actually declined over the past year -- unlike cable and satellite television companies that need to pay more for their content with every passing year.
Not like Netflix
Netflix (Nasdaq: NFLX) was raked over the coals after its new pricing structure that increased some rates by as much as 60% kicked in last summer. The video specialist paid the price in the form of huge defections during the third quarter. Streaming subscriptions began climbing again during the fourth quarter, though DVD plan customers continue to bolt.
Comparing a meager 12% increase to a 60% spike seems outrageous, but at least Netflix could point to the skyrocketing streaming costs to justify the new pricing. Will subscribers let Sirius XM pull off the price increase?
"I'm trying to get my arms around why you should be worth $15 billion and not $7 billion or $6 billion like Netflix," Cramer pointed out during a critical moment in last week's Mad Money segment.
"I don't make the valuation," Karmazin responded relative to the disparity. Rightfully so. It's not Karmazin's fault that Sirius XM is worth more than twice what Netflix is -- and actually more than three times as much if we introduce net debt to arrive at the more accurate enterprise value metric. Mr. Market's the one to ask about that.
However, Karmazin did speak up about the January price increase.
"Our consumers have been really loyal and they really love our product," he said. "The reaction has been very modest. Very modest. So, you know, we feel very good about, you know, the subscriber growth in light of the fact that we put in a price increase."
Very modest? What does that mean? Are folks not leaving at all, or is the number of defections being offset by the higher revenue?
Thankfully, we don't really have to guess. Karmazin gave us a meatier response just last month.
As the world churns
There is really no such thing as an inconsequential price increase. If a company had pricing elasticity to charge more -- it would.
However, Sirius pretty much spelled out the impact of January's increase during February's quarterly conference call.
"We expect churn to be up modestly this year, probably in the 2.1% range," Karmazin said at the time. "Without the price increase, we would be providing self-pay churn guidance consistent with past year's of 1.9%."
Not only is the word "modest" used both time, but he's actually giving investors the answer.
What does the 0.2% difference in the monthly churn rate imply? Given Sirius XM's 21.9 million subscribers we're talking about a little more than 40,000 subscribers leaving -- on average -- in any given month because of the price increase. Over the course of 2012 we're looking at roughly 500,000 subscribers leaving because of the increase.
Is that a lot? Is that a fair trade-off?
Well, it is. Investors may have been disappointed with last month's subscriber guidance -- hearing that Sirius XM is targeting 1.3 million net additions this year after tacking on 1.7 million more members last year -- but Karmazin is saying that it would have probably added slightly more than last year's 1.7 million if it wasn't for the January rate increase that will take roughly 18 months to work its way through most of its accounts.
In case you're wondering, it is worth it.
Having premium subscribers willing to pay more for satellite radio will make the platform more attractive to advertisers on the channels that do play commercials. Sirius XM's guidance also justifies the strategy. In calling for free cash flow of $700 million -- a huge 75% boost over 2011 and a headier pace than its projected 10% top-line growth -- Sirius XM is telling you that it's placing more emphasis on generating more real money that it can use than some fancy subscriber or revenue milestone.
This is a business, and Karmazin is growing it the right way.
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.
