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Sirius XM's Plan Comes Clear: Last Long Enough to Raise Prices

Sirius XM Radio (SIRI) has been struggling since the two satellite radio companies, Sirius and XM, merged in 2008. But yesterday's earnings announcement showed revenue up 6.9 percent for the first six months of the year and net income up a whopping 342 percent.

More importantly, investors and the industry get a sense of the company's secret strategy: charge customers more money. The end of an FCC price freeze means that Sirius can raise its rates. And raise them it will -- probably losing significant numbers of customers in the process, but that won't really matter to the company. In the end, it will make more money than ever before.

As CEO Mel Karmazin said during the earnings call:

As I mentioned last quarter, Sirius has never increased our base price of $12.95 since we started service nearly 10 years ago. This is despite the massive expansion of our premium content over those years. 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. Early next year, for the first time since the merger, we will be able to price our service as we see fit. As always, our price will be based upon the value we deliver to our subscribers in the context of a robust and competitive audio entertainment environment.
The end remark is just another version of "all the market will bear," and that is sometimes more than many financial analysts think. Karmazin pointed out that when Sirius passed along higher music royalties in the form of a music royalty fee (MRF), there wasn't much churn:
So for the subscriber, obviously, that was an increase in price. And it was in the teens that the MRF added because of the copyright royalty decision. So there, we had a double-digit price increase affecting the consumer, and our churn remained relatively flat.
In other words, Sirius isn't a charity. The company plans to do a trade-off that is really a simple equation:
(old number of customers)x(average rate) < (new number of customers)x(new rate)
So long as the old number of customers times the old rate -- the existing revenue stream from subscriptions -- is less than the new smaller number of customers times the new higher rate, Sirius makes more money which, in theory, drives up the stock price. Even if the company increased average prices by 20 percent, a loss of 10 percent of the paying customers would still mean a total revenue increase of 8 percent, and because there is no additional cost to get the revenue, it becomes profit.

That does assume the economy won't get bad enough to make people give up all sorts of things they'd otherwise pay for, like cable TV or satellite radio. If that happens, a price increase could prove to be a disaster.

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Image: Flickr user Nina Matthews Photography, CC 2.0.
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