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Are You Paying Too Much for Satellite Radio?


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Sirius XM Radio (SIRI) kicked off the year with a record 27.3 million subscribers to its premium audio service, gaining 1.75 million more accounts through 2014.

It's easy to see why Sirius XM is so popular. Terrestrial AM and FM radio stations can be limiting in their offerings, and sitting through blocks of ads can be a tiresome trade for free content. However, with Sirius XM rolling out a pair of price hikes since 2012 -- and passing on a music royalty fee to members a few years earlier -- it naturally leads to considering the ultimate value for satellite radio.

It's a decision that is ultimately subjective, but one should probably note that Sirius XM didn't have to increase its rates when it did in 2012 and again in 2014. This isn't the same company that was on the brink of bankruptcy in early 2009. It has rattled off 16 consecutive quarters of profitability, and free cash flow keeps expanding with every passing year.

Sirius XM is certainly entitled to its success. No one is saying that a platform -- even one that's practically a monopoly when it comes to satellite radio -- should be hit with a high ceiling. Consumers have a choice, and they're willing to pay up for the service in record numbers. However, dig deeper into the numbers and explore the alternatives, and satellite radio may not be the best choice for you.

Dissed Content

Growing companies certainly have a right to boost their rates, but it always helps when they are returning the favor by investing more money in new content. Netflix (NFLX) is a perfect example. It's seen its content streaming obligations balloon from $5.7 billion to $9.5 billion in less than two years. That's money that Netflix has squared away in future content.

Sirius XM hasn't been as aggressive. In fact, in one regard it's gone the other way: Its content and programming costs have decreased over the years. It went from $370.5 million in 2009 to just $297.3 million last year. Revenue and subscriber counts have naturally moved higher in that time, so we're talking about content and programming going from 14.7 percent of its revenue five years ago to just 8.4 percent in 2014.

There are a couple of good reasons that Sirius XM can get away with paying less. For starters, unlike Netflix, where there's no limit to the breadth of its catalog, there are only so many channels that Sirius XM can offer without degrading the audio quality of broadcasts. There's also the allure of audience, as on-air talent is willing to take less money to reach Sirius XM's growing audience. Even the mighty Howard Stern is reportedly making less now per year than he was during his initial five-year contract.

Sirius XM's Business Structure

This doesn't mean that Sirius XM is ripping you off. In fact, the one thing it can't escape is the escalating royalties that it has to pay record labels, artists, and sports leagues. Sirius XM's revenue share and royalties surged from $486.9 million in 2009 -- or 19.3 percent of that year's revenue -- to $810 million, or 22.8 percent, now.

Sirius XM gets a chunk of that back through its subscriptions, where it charges a U.S. music royalty fee, which currently stands at 13.9 percent above the regular rate. The Copyright Royalty Board has an agreement where Sirius XM has to pay a slightly higher percentage of its revenue every year to keep playing music. However, if we add up both expense line items -- programming and content as well as revenue share and royalties -- we see that today's subscribers are getting less bang for their buck.

Clearly, Sirius XM represents a fair value to a growing audience or else its subscriber count would be going the wrong way. Despite the growing number of alternatives presented by the connected car -- anyone with a newer-model car and a Bluetooth-enabled smartphone can stream free or nearly free audio content apps through their car's speaker system -- there's still a sizable audience willing to pay for the seamless access to satellite radio. They appreciate the breadth of content and perhaps that it doesn't tax their smartphone data plans. Satellite radio is here to stay, but you'll have to work the math and size up the alternatives to determine if it's right for you.

Motley Fool contributor Rick Munarriz owns shares of Netflix. The Motley Fool recommends and owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. Check out our free report on one great stock to buy for 2015 and beyond.


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