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Sirius XM Sets Its Sights on Telematics
Posted by: Muhammad Bazil (IP Logged)
Date: December 6, 2013 10:23AM

Sirius XM (SIRI) has been quite busy lately. Already a leader in the satellite radio market, they now have big plans in the works to expand their service from their already expansive entertainment options to also include navigation and engine diagnostics among others.

Because of this, there has been some speculation about a possible buyout or merger with General Motor’s (GM) successful subsidiary, OnStar. But the situation is more complicated than a simple sale of OnStar to Sirius XM for a lot of reasons.

Why Would GM sell?

OnStar is a very profitable component of GM’s holdings, making it seem unlikely that they would be willing to part with it, even in exchange for a substantial share in the stock. With an estimated $2 billion in revenue (and that’s on the conservative side), OnStar represents an important part of business with huge potential for growth and increased profitability.

On the other hand, this potential has its limits. As a subsidiary of GM, OnStar can only grow so much. Other automobile manufacturers, reluctant to use OnStar due to the conflict of interest, are starting to develop their own competing telematic systems rather than partner with OnStar.

While these competing systems are a long way from being a serious threat, Sirius XM’s expansion into the market could prove dangerous for OnStar since the former is independent and not limited to a single manufacturer. Thus, the potential for growth is far greater with Sirius.

Could Sirius XM Really Afford It?

While OnStar could potentially go much further with Sirius than with GM, we still have to consider that they are a much smaller company relative to GM. And cutting through all the regulatory restrictions that prevent OnStar from being installed in vehicles produced by other automobile manufacturers will be expensive. Sirius XM may not have the capital to back the big plans they have.

In order for the company to really become a major player in this market, then, they will have to partner with a manufacturer. And based on their expressed interest in OnStar, it would appear they are well aware of this necessity. But if GM is not game, they may have to go somewhere else or abandon their plans to break into this emerging — and potentially extremely profitable — market.

Future Competitors or Future Partners?

With all this in mind, and considering GM has plans of its own to start including entertainment features in its OnStar system, it would seem we are looking at some pretty serious competition in the future as both companies compete more and more for control of the same markets.

OnStar has announced plans to start expanding further into foreign markets, integrate their system with a cellular network as well as add a slew of new services beginning in 2014. And on the other side, we have Sirius XM already dominating in the services it offers and investing in the technology to provide services similar to OnStar.

Thus, from appearances, it would seem they are poised for battle. But there is another side to the coin. A merger or partnership between Sirius XM and GM’s OnStar could mean bigger returns for both parties involved.

First of all, the two companies have already teamed up in providing both services to customers with GM vehicles. And GM is well aware of the potential for growth if OnStar were to become independent of GM. There is also a huge advantage to being able to offer a combined OnStar/Sirius XM platform in vehicles not only because the option will be much more attractive to potential customers but because it could streamline both the billing and the marketing for the service.

Second of all, a merger or partnership between the two companies would save both of them from a long and costly battle that will undoubtedly occur if their business plans continue to converge on the same market. Together, they could both stand to profit enormously. Apart, they would eventually have to fight tooth and nail.

Conclusions

While it would seem at the outset that GM is better served keeping a tight grip on their exclusive and successful OnStar subsidiary, the story gets more complicated when you look at the direction the market is going.

Telematics is a fast-growing market and stands to be a major source of revenue for the successful businesses who manage to break into it early enough. And with the already established name of OnStar, GM is in a great position to benefit from this.

However, keeping the company tied with the GM name is preventing a full realization of the potential of OnStar. Negotiating a merger or partnership with Sirius XM could be an elegant solution for propelling the business forward.


Stocks Discussed: SIRI, GM,
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