Why Sirius XM Is About to Cut a Deal With Your Car Insurance Company

By Markets Fool.com

Image source: SiriusXM.com.

Continue Reading Below

Sirius XM Holdings' satellite radio technology now comes installed in three of every four new cars and trucks that come off the assembly line. But the company's biggest area of potential growth doesn't lie with new-car buyers, but with the people who buy used.

Sirius thinks it can double or even triple the number of used-car owners signing up for the service. But to do so, the satellite radio provider has had to get creative in its approaches.

Its latest experiment: partnering with auto insurance companies. Sirius has inked a deal with one insurer and says it's on the verge of another.

The first deal is with Liberty Mutual Insurance. The second insurer has yet to be named, but CEO Jim Meyer called it a "significant insurance company."

Owner data is the objective

Continue Reading Below

Liberty is the seventh-largest auto insurance company in the U.S., covering some 9 million premiums, according to insure.com. For comparison, the nation's largest insurer, State Farm, covers more than 33 million.

Much like the dealerships do, Liberty will provide the satellite radio company with owner and vehicle information when cars change hands. That gives Sirius the ability to reach out to buyers of cars with installed radios and offer free trials of the service.

It's one prong of a multi-pronged approach to capture data and connect with owners of used cars that have Sirius XM technology already installed.

Meyer said the company is "experimenting ... and learning about what works best."

"So we are trying to get accurate, good data from as many places as we can," he said.

Calculating costs will be key

Sirius has not disclosed the costs of the deals it has in place with insurers -- or with the independent car dealers and service stations it also has contracts with. But there are two areas where the costs of signing up new subscribers are calculated, and both are on the rise.

Subscriber acquisition costs, which include the costs associated with getting automakers to install the radios and line customers up with free trials, were up 8% for the first quarter as compared with last year. That number was lower than Sirius XM's subscriber revenue growth, which came in around 11%.

Sales and marketing costs, where other efforts to reach car buyers are calculated, were up 13% for the quarter, however, outpacing subscriber revenue growth. Investors will want to keep their eye on these costs. It's important for Sirius to figure out ways to best tap the used-car market with efforts like it's making with insurers, but it has to be wary of the costs involved.

Used cars are the bigger opportunity

It has good reason to experiment. Used cars offer Sirius a potentially long runway for continued subscriber growth.

Of the nearly 240 million cars and trucks on U.S. roads right now, only about 17 million of those will have been purchased new over the past year. That means that Sirius technology made its way into about 12.7 million new cars that hit the road. The problem for Sirius is that many of those new-car buyers may have already tried the satellite radio service and either subscribed or decided it wasn't for them. That limits the growth potential on the new-car front.

The used side is a much different picture. More than twice as many used cars are expected to change hands this year, and many of those buyers will be seeing Sirius XM technology for the first time.That makes the used market the bigger opportunity for Sirius XM to keep growing its now 30 million paying subscribers.

But one that's more difficult to navigate

Reaching those used buyers is not as easy, however. Sirius XM has had to adopt a truly eclectic assortment of approaches to do so. Perhaps more important than the deals with insurers are those with used-car dealers. The company has agreements with about 18,000 dealerships across the U.S. to offer buyers free three-month trials; these dealerships report back to Sirius with buyer information so it can follow up. That number has grown in each passing year, and was up nearly 1,000 dealerships from earlier this year.

The company also has been ramping up efforts to add independent car lots to its list of dealers providing information on sales as well as inking deals with service stations. Executives say it will continue to look for ways to find those used car owners. Investors should stay tuned for progress and updates on the costs involved.

The article Why Sirius XM Is About to Cut a Deal With Your Car Insurance Company originally appeared on Fool.com.

John-Erik Koslosky has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.