Sirius, XM Merger a Victory for Customers, Shareholders Alike

Published May 1, 2008

The U.S. Department of Justice has approved the planned merger between Sirius and XM Satellite Radio–which, pending Federal Communications Commission (FCC) approval, should be good news for everyone who hitherto had to choose between the Howard Stern Show and Robert Aubrey Davis’s VOX or subscribe to both services at double the cost in subscription and equipment.

Fans of bawdy humor and Josquin Deprez are in high spirits. For stockholders, however, jubilation isn’t in order–the very survival of their investments is at stake.

Adam Thierer, director of the Center for Digital Media Freedom at the Progress & Freedom Foundation, said, “It was always questionable whether the satellite radio sector could sustain two healthy competitors. For two satellite radio operators to thrive in such a fiercely competitive environment they needed to just be focused on one primary target: Terrestrial radio. Even then, it would be tough for two small firms to bust into the market and compete against these old broadcast giants.

“Hopefully this merger will ensure that satellite radio remains a vibrant competitor in our new media marketplace for years to come,” Thierer continued.

FCC Approval Likely

With Sirius shares at press time trading at $2.80 and XM Radio shares at $11.80, and both trending downward, the proposed merging rate of 4.6 Sirius shares to 1 XM Radio share may be the least concern for shareholders: Getting anything out of the investment seems rather the order of the day.

The Justice Department approved the merger on March 24 after determining the existing radio sector would not suffer from it. FCC, which has never denied a merger that Justice approved, is likely to follow suit.

FCC’s concerns, focused on the “public interest” in having more than one satellite radio competitor, may be addressed in part by the two companies offering bundling of themed or select programs, giving the customers more choice. The ability to combine shows previously requiring two separate subscriptions is also cited in the merger’s favor.

Wayne Crews, director of technology studies at the Competitive Enterprise Institute, cautioned against opposing the merger, particularly as it might influence future state interventions into the free market.

Crews noted, “Rather than calling the satellite industry a ‘separate market’ in need of bureaucratic administration, all parties will ultimately profit from its being recognized as what it is–one of many ascendant competitive options populating media and entertainment.

“If the FCC believes the technology marketplace cannot discipline itself and that micromanagement–even a forcibly mandated corporate non-integration–qualifies as sensible public policy, then no intervention is off-limits for any competitor,” Crews warned.

More Subscribers, No Profits

There is little doubt that unless the two companies hang onto each other they will most likely hang separately: Neither has been able to make money in the past seven years, despite ever-increasing subscriber lists currently totaling a combined 17 million.

XM Radio Vice President of Corporate Affairs Chance Patterson did not confirm the synergistic cost savings of anywhere up to $7.2 billion reported by Citi analyst Eileen Furukawa.

Patterson argues the relative cost savings associated with combining operations had not yet been calculated, but he said XM didn’t disagree with the numbers being reported. He named R&D, marketing, and programming as the most likely sources of significant savings in a combined company.

New Receivers Needed

Patterson said existing customers could expect to receive “select programming” from both services on either platform within six months after a merger. Whether Howard Stern, Oprah, the National Basketball Association, Major League Baseball, and Metropolitan Opera Radio will make the final cut is not clear at this point.

To receive all programming options available from both stations and benefit from the a la carte option of picking a select number of favorite stations, customers would have to buy an interoperable receiver. Though such equipment exists, because of an FCC requirement imposed when the companies started business, it has not yet been made commercially available because it hasn’t been needed until now.

The biggest growth potential for a combined company would be in the new car market, equipping new models with satellite radio receivers, Patterson said.

But even with new markets and substantial synergies–all assuming FCC approval, which Patterson considers the final obstacle for the projected merger–the diversity of today’s radio market suggests success might have to come quickly if it is going to come at all.

HD Radio (traveling on terrestrial signals of FM radio stations), WiMAX mobile broadband broadcasting (with Google at the forefront), and Internet Radio-compatible iPods may challenge satellite radio as the digital (and portable) medium of choice for the next decade.

George A. Pieler ([email protected]) is a senior fellow with the Institute for Policy Innovation. Jens F. Laurson ([email protected]) is editor-in-chief of the International Affairs Forum.