August 2009 brought with it the peak in auto sales in the United States. For satellite radio, which relies heavily on the auto sector for subscribers, the news may bring a sigh of relief, but there are many things to consider.
Cash for Clunkers was a driver of sales, and increased foot traffic in dealerships, but the program has ended, and there are many who think sales will return to lower levels when $4,500 incentives are missing. In the first month of the program, 180,000 cars were sold with incentives. This represented about 18% of the sales figure in July (July sales approached 1,000,000). In August, 500,000 more cars sold under the program. This translates to about 40% of the cars sold in August (August sales were 1,260,000). Absent Cash For Clunkers, sales would have been flat, if not worse than 2008.
For satellite radio the news would seem to be bitter sweet. On one hand, there are now more satellite radio equipped cars in the channel than without the program. On the other hand, there is a vehicle shortage, and sites such as Edmunds are predicting terrible sales in September, thereby reversing the boost we saw in sales due to Cash for Clunkers.
Getting more specific, there are short and long term impacts. The boost in sales for July and August will add subscriptions. This will help in the long term. In the short term, the company Subscriber Acquisition Cost (SAC) will increase, and Average Revenue Per User (ARPU) will be impacted to the downside.
SAC will go up because the costs associated with a ramp up in production means that the company must invest into chipsets and pay vehicle installation subsidies. Simply stated, the company is investing money into radios that will translate into subscribers down the road. SAC will take a hit, but the pay-off comes when the trial subscriptions become self paying.
ARPU will take a hit because of the number of vehicles that are in production but not yet sold. Makers such as Chrysler, Ford, BMW, and Mercedes are counted as subscribers at the time of installation. The money for those subscriptions is deferred revenue (a liability) until an actual person buys the car. Durning this period of time (from production until sale) these subscribers are RPU averages. The more $0’s you have, the lower the average. Long term, the company will generate subscriptions, but short term, these unsold cars hit the ARPU line in a negative way.
If sites such as Edmunds are correct in that September, and perhaps even October sales, will be bad, then we have not seen the jumpstart that would deliver a balanced flow between supply and demand. Had Cash for Clunkers lasted into September, the perception would be that increased sales would continue. That perception disappeared when the program closure came suddenly a bit over a week ago. Now, the benefit that would have been delivered by three months of stronger sales in a row for the auto sector has evaporated.
