XM Radio 2011 Annual Report Download - page 62

We expect overall satellite and transmission expenses to increase as a result of costs associated with our
enhanced internet-based features and functionality, while costs associated with our in-orbit satellite fleet and
terrestrial repeater network remain relatively flat.
Cost of Equipment includes costs from the sale of satellite radios, components and accessories and
provisions for inventory allowance attributable to products purchased for resale in our direct to consumer
distribution channels.
•2011 vs. 2010: For the years ended December 31, 2011 and 2010, cost of equipment was $33,095 and
$35,281, respectively, a decrease of 6%, or $2,186, and remained flat as a percentage of total revenue.
The decrease was primarily due to lower volume of direct to consumer sales.
•2010 vs. 2009: For the years ended December 31, 2010 and 2009, cost of equipment was $35,281 and
$40,188, respectively, a decrease of 12%, or $4,907, and decreased as a percentage of total revenue. The
decrease was primarily due to lower inventory write-downs, lower sales through distributors and reduced
costs to produce aftermarket radios.
We expect cost of equipment to vary with changes in sales, supply chain management, and inventory
valuations.
Subscriber Acquisition Costs include hardware subsidies paid to radio manufacturers, distributors and
automakers, including subsidies paid to automakers who include a satellite radio and subscription to our service
in the sale or lease price of a new vehicle; subsidies paid for chip sets and certain other components used in
manufacturing radios; device royalties for certain radios; commissions paid to retailers and automakers as
incentives to purchase, install and activate satellite radios; product warranty obligations; freight; and provisions
for inventory allowances attributable to inventory consumed in our OEM and retail distribution channels. The
majority of subscriber acquisition costs are incurred and expensed in advance of, or concurrent with, acquiring a
subscriber. Subscriber acquisition costs do not include advertising, loyalty payments to distributors and dealers of
satellite radios and revenue share payments to automakers and retailers of satellite radios.
•2011 vs. 2010: For the years ended December 31, 2011 and 2010, subscriber acquisition costs were
$434,482 and $413,041, respectively, an increase of 5%, or $21,441, and decreased as a percentage of
total revenue. The increase was primarily a result of the 12% increase in gross subscriber additions and
higher subsidies related to increased OEM installations occurring in advance of acquiring the subscriber,
partially offset by improved OEM subsidy rates per vehicle and a $6,052 increase in the benefit to
earnings from the amortization of the deferred credit for acquired executory contracts recognized in
purchase price accounting associated with the Merger.
•2010 vs. 2009: For the years ended December 31, 2010 and 2009, subscriber acquisition costs were
$413,041 and $340,506, respectively, an increase of 21%, or $72,535, and increased as a percentage of
total revenue. The increase was primarily a result of the 25% increase in gross subscriber additions and
higher subsidies related to increased OEM installations occurring in advance of acquiring the subscriber,
partially offset by improved OEM subsidy rates per vehicle and an $18,275 increase in the benefit to
earnings from the amortization of the deferred credit for acquired executory contracts recognized in
purchase price accounting associated with the Merger.
We expect total subscriber acquisition costs to fluctuate with increases or decreases in OEM installations
and changes in our gross subscriber additions. Declines in contractual OEM subsidy rates and the cost of
subsidized radio components will also impact total subscriber acquisition costs. The impact of purchase price
accounting adjustments associated with the Merger attributable to the amortization of the deferred credit for
acquired executory contracts will vary, in absolute amount and as a percentage of reported subscriber acquisition
costs, through the expiration of the acquired contracts, primarily in 2013. We intend to continue to offer
subsidies, commissions and other incentives to acquire subscribers.
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