The Tycoon Report

XM and Sirius Sitting in a Tree

Wednesday, February 21, 2007 | Wayne Mulligan

Unless you’ve been living under a rock for the last couple of days, chances are you’ve heard about the proposed merger between the two satellite radio giants, XM Satellite Radio (Nasdaq: XMSR) and its only “real” competitor, Sirius (Nasdaq: SIRI.)

Under the current deal, this would be another “merger of equals” where each company’s shareholders would have an equal stake in the combined entity.

While these “merger of equals” deals have a spotty track record (AOL-Time Warner, ahem) due to two massive egos' (and lots of smaller ones within the two) never really being able to blend, this deal could actually pan out…

That’s if a number of other obstacles could be cleared.

Let me go over a few very briefly…

1.  Regulatory Issues

Possibly the single most glaring issue in front of this merger is the fact that when the only two satellite radio licenses in the US were issued, there was a regulation put in place that specifically stated these two companies could never merge.

That should nip this situation in the bud, but we currently have a very pro-business chairman heading up the FCC, Kevin Martin.

And while he hasn’t completely signed off on the deal, he did say that he’s open to looking at it and acknowledged that the 1997 regulation will have to be reversed.

Basically, he says that he’ll need to see that the consumer’s life will be made better by allowing these companies to merge – that’s going to be a tough sell considering Mr. Martin has been known to be awfully “buddy buddy” with the big players in traditional broadcast radio.

Which brings me to my next point…

2.  Competition

Just before, I said that Sirius was XM’s only “real” competition – that’s because it’s the only other satellite radio provider in the country.

But that doesn’t mean that these companies aren’t facing an onslaught of competition on other fronts – traditional broadcast radio, for example.

While subscribers to satellite have to pay a monthly fee for their music and talk shows, broadcast radio listeners get their stuff completely free of charge.  That’s a very tough hill to climb, in my opinion, but certainly not impossible if the quality of content and absence of advertisements is that much more appealing.

But these providers are also getting hit by an unexpected competitor as well – Apple (Nasdaq: AAPL).

That’s right, Mr. Jobs isn’t only taking swings at Sony (NYSE: SNE) and Microsoft (Nasdaq: MSFT,) he’s also ripping into XM’s and Sirius’ growth with his little iPod, too.

With the evolution of the iPod and the accompanying adapters that allow it to be played while driving in your car, listeners get a completely customizable and ad-free music experience (almost free of charge.)

The one thing missing was the talk-radio aspect, but Pod-casts have certainly cured that – I find myself listening to everything with my iPod, from earnings conference calls to my favorite technology show, Diggnation.

3.  Integration

But that’s not all!  We’re forgetting the one key hurdle that many mergers fail to leap over – integration risk!

Just because the guys at the top of Company A and Company B think the combined company will be a great idea, all the little guys throughout the companies might not agree, and that spells trouble for the new entity.

A very basic example would be as follows:

Let’s say XM has a very bright Director of Marketing, and so does Sirius – which one goes and which one stays?

Or do they try to do something clever like create two people for the same position…this always leads to problems by the way!

These are tough questions and could certainly add many unnecessary complications to an already precarious situation for both companies.

As it is, they’re losing money individually (about $1 billion for Sirius and a little over half-billion for XM,) and growth hasn’t been nearly as robust as both companies originally anticipated.

The Upshot…

But there’s definitely some silver lining in this cloud…

By merging certain channels, the company could improve the experience for subscribers and cut its costs.  The Wall Street Journal quoted Mel Karmazin as saying they could merge their Christian channels into one which would result in tremendous cost reductions and content improvements across the board.  

Both companies also have a ridiculous roster of talent, which, if brought under one roof, could convince consumers that going satellite is the best move.

And speaking of the consumer, they/we might also be in need of a decrease in choice for satellite radio providers.  When going to buy a new car, you pretty much get what the dealer has available (Sirius or XM,) and you never really know which is better.

Worse yet, you decide to get a satellite radio for your existing car, and you can't figure out which service is better - Sirius has Howard Stern but XM has Oprah.  Which is better?  In the past, it's been a tough call.

But now consumers can just check off “Satellite radio” like they would “Power windows” and be done with it.

In any case, the first step is to get through the regulators.  XM-Sirius can jump over the other hurdles after they climb over this mountain first.




Wayne Mulligan
Contributing Editor
The Tycoon Report