XM Radio 2012 Annual Report Download - page 62

•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 decreased as a percentage of equipment revenue.
The decrease was primarily due to lower volume of direct to consumer sales.
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 and chip sets; commissions paid to 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, marketing, loyalty payments to distributors
and dealers of satellite radios or revenue share payments to automakers and retailers of satellite radios.
•2012 vs. 2011: For the years ended December 31, 2012 and 2011, subscriber acquisition costs were
$474,697 and $434,482, respectively, an increase of 9%, or $40,215, and decreased as a percentage of
total revenue. The increase was primarily a result of higher subsidies related to increased OEM
installations occurring in advance of acquiring the subscriber, partially offset by improved OEM subsidy
rates per vehicle and increases 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.
•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.
We expect total subscriber acquisition costs to fluctuate with increases or decreases in OEM installations
and changes in our gross subscriber additions. Changes 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 in 2013. We intend to continue to offer subsidies,
commissions and other incentives to acquire subscribers.
Sales and Marketing includes costs for advertising, media and production, including promotional events and
sponsorships; cooperative marketing; customer acquisition and retention, and personnel. Cooperative marketing
costs include fixed and variable payments to reimburse retailers and automakers for the cost of advertising and
other product awareness activities performed on our behalf. Customer acquisition and retention costs include
expenses related to direct mail, outbound telemarketing and email.
•2012 vs. 2011: For the years ended December 31, 2012 and 2011, sales and marketing expenses were
$248,905 and $222,773, respectively, an increase of 12%, or $26,132, and remained flat as a percentage
of total revenue. The increase was primarily due to additional subscriber communications and retention
programs associated with a greater number of subscribers and promotional trials, and higher OEM
cooperative marketing.
•2011 vs. 2010: For the years ended December 31, 2011 and 2010, sales and marketing expenses were
$222,773 and $215,454, respectively, an increase of 3%, or $7,319, and decreased as a percentage of total
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