It's been a monster year for Sirius XM Radio(Nasdaq: SIRI) and its investors, but what will the new year bring? Let's dive into the four questions whose answers will ultimately dictate the stock's direction come 2011. The satellite radio giant ended a rocky 2009 on a cautiously optimistic note. Sirius XM closed out the year with 18.5 million subscribers, and CEO Mel Karmazin was publicly targeting 500,000 net additions for 2010. Sirius XM hit 19 million subscribers as Karmazin projected, but then kept going. It passed the 20 million mark earlier this month, likely closing out the year with more than triple the 500,000 net subscribers it was originally expecting.
Now is when things get interesting. Auto tracker Edmunds is projecting marked sequential and year-over-year improvement in new auto sales this month. This is naturally good news for Ford (NYSE: F) and General Motors (NYSE: GM), but it's even better news for Sirius XM. Roughly half of the new car buyers who purchase vehicles with factory-installed XM or Sirius receivers stick around as paying subscribers after their free trials run out. Over time, more of these drivers will be simply replacing existing accounts, but it's still a key driver for subscriber growth. Unlike Ford and GM, which have to build every incremental car sale from scratch, Sirius XM has a more scalable model beyond the initial subscriber acquisition costs. Healthy car sales now translate into healthy subscriber growth in the future. It will be a challenge for Sirius XM to top the 1.6 million net subscribers it is aiming for in 2010, but the improving economy and brisk auto sales will help.
2. Is this the year that mobile streaming matters? Sirius XM turned heads when it began offering mobile streaming in June of last year. However, those same heads began shaking when it was revealed that Sirius star Howard Stern would not be available for streaming subscribers, along with some of the play-by-play sports coverage. It didn't help that Sirius XM was pricing its Apple (Nasdaq: AAPL) application at the same monthly rate of its receiver-based subscriptions though existing accounts got a big price break for mobile streaming as an add-on feature. Sirius XM went on to roll out applications for Research In Motion's (Nasdaq: RIMM)BlackBerry devices and smartphones powered by Google's (Nasdaq: GOOG) Android. It didn't really matter. The typically chatty Sirius XM hasn't bothered to release actual mobile streaming data, likely implying that it's not much of a needle mover.
This may all change come 2011. Howard Stern's new five-year deal kicks in next month, and it now allows for mobile streaming. The broader adoption rate of smartphones also opens up the possibilities especially to those who aren't heavy commuters though the pricing may still be an issue relative to the freely available smartphone audio content. It's still an area worth watching, especially as it opens the door for eventual expansion outside of its satellite reach.
3. Are subscription rates inching higher? One of the conditions that regulators imposed in approving the 2008 merger between Sirius and XM is that the satellite radio monopoly couldn't increase its basic rates for three years. Well, that restriction is toast come next summer. Sirius XM has juiced up its rates elsewhere along the way. It introduced a music royalty fee. It jacked up the price that family accounts were paying on additional receivers. However, the basic $12.95 monthly rate has held up. Will Sirius XM bump its rates higher this summer? How badly will churn take a hit if consumers refuse the increase?
Investors generally applaud rate increases. Netflix (Nasdaq: NFLX) shares hit a new all-time high last month, after the flick flicker announced its first rate hike in six years. Despite concerns over defections, shareholders usually key in on the margin-widening potential of those who stick around to pay the higher ransoms. It's also generally seen as a sign of confidence. Does Sirius XM have this kind of flexibility? We may find out as early as summer.
4. Will Sirius XM 2.0 be a game changer? One of the bigger wildcards is the next generation of satellite radio. Sirius XM has been largely quiet on the upgrade, beyond pointing to a rollout in time for the 2011 holiday season. Karmazin has also alluded to more content and greater functionality. More channels? More interactive features? Any significant improvements will help attract new listeners, retain existing subscribers, and give Sirius XM pricing flexibility. In an ideal world, Sirius XM 2.0 is the upgrade that makes satellite radio relevant again at the retail level and silences fears about the platform being a transitory technology.
Sirius XM 2.0 may be the ticket that truly raises the bar. The actual fruits of the upgrade's labor may not be felt until 2012, but it's a question that will be easier to answer once we know what Karmazin is bringing to the table here. Yes, 2011 is going to be just as interesting as the past couple of years. Investors are no doubt hoping that it will be just as lucrative as 2009 and 2010 have been.