XM Radio 2008 Annual Report Download - page 18

•2007 vs. 2006: For the years ended December 31, 2007 and 2006, revenue share and royalties were
$146,715 and $69,918, respectively, an increase of $76,797, or 110%. This increase was primarily
attributable to the determination by the Copyright Royalty Board of the royalty rate under the statutory
license covering the performance of sound recordings. The 2007 royalty rate of 6% of gross revenue resulted
in royalty expense of approximately $48,100, of which approximately $25,900 was recorded in the fourth
quarter of 2007. The growth in revenues and increase in our OEM subscriber base also contributed to the
increase in revenue share and royalties.
We expect these costs to increase as we continue to experience revenue growth and expand our distribution of
SIRIUS and XM radios through automakers, as a result of statutory increases in the royalty rate for sound recording
performances and as a result of the inclusion of the full period results of XM.
Customer Service and Billing. Customer service and billing expenses include costs associated with the
operation of our customer service centers and subscriber management systems as well as bad debt expense.
•2008 vs. 2007: For the years ended December 31, 2008 and 2007, customer service and billing expenses
were $165,036 and $93,817, respectively, which represents an increase of $71,219 primarily due to the
Merger. XM’s customer services and billing expense accounted for $59,821 during the year ended
December 31, 2008. The remaining increase was primarily attributed to higher call center operating costs
necessary to accommodate the increase in our subscriber base and higher total transaction fees on the larger
customer base.
•2007 vs. 2006: For the years ended December 31, 2007 and 2006, customer service and billing expenses
were $93,817 and $76,462, respectively, an increase of $17,355. This increase was primarily due to call
center operating costs necessary to accommodate our subscriber base, transaction fees due to the addition of
new subscribers, and an increase in bad debt expense. Customer service and billing expenses, increased 23%
compared with an increase in our subscribers of 38% year over year.
We expect our customer care and billing expenses to decrease on a per subscriber basis, but increase overall as
our subscriber base grows due to increased call center operating costs, transaction fees and bad debt expense
associated with a larger subscriber base as well as the inclusion of the full period results of XM.
Cost of Equipment. Cost of equipment includes costs from the sale of SIRIUS and XM radios, components
and accessories.
•2008 vs. 2007: For the years ended December 31, 2008 and 2007, cost of equipment was $46,091 and
$35,817, respectively, which represents an increase of $10,274. The Merger related increase of approx-
imately $12,299 was offset partially by lower costs.
•2007 vs. 2006: For the years ended December 31, 2007 and 2006, cost of equipment was $35,817 and
$35,233, respectively, an increase of $584.
We expect cost of equipment to vary in the future with changes in sales through our direct to consumer
distribution channel; however, such expenses are expected to increase as a result of the inclusion of the full period
results of XM.
Sales and Marketing. Sales and marketing expenses include costs for advertising, media and production,
including promotional events and sponsorships; cooperative marketing; customer retention and compensation.
Cooperative marketing costs include fixed and variable payments to reimburse retailers and automakers for the cost
of advertising and other product awareness activities.
•2008 vs. 2007: For the years ended December 31, 2008 and 2007, sales and marketing expenses were
$231,937 and $183,213, respectively, which represents an increase of $48,724. The Merger increased sales
and marketing expense by $60,964 of the increase, which was offset partially by a reduction in consumer
advertising.
•2007 vs. 2006: For the years ended December 31, 2007 and 2006, sales and marketing expenses were
$183,213 and $203,682, respectively, a decrease of $20,469. Excluding share-based payment expense of
$15,607 and $19,543 for the years ended December 31, 2007 and 2006, respectively, sales and marketing
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