After months of rampant speculation, the nation’s only two satellite radio companies, XM Satellite Radio Holdings Inc. and Sirius Satellite Radio Inc., announced plans to merge as each aims to fend off mounting losses through an expanded blend of music, talk and sports. Predictions run the gamut as to what the deal could mean for Sirius’ and XM’s mobile offerings. Each company currently has exclusive deals with the major wireless carriers to provide its mobile service to customers.
But before subscribers start getting excited about listening to Howard Stern, Oprah Winfrey, NASCAR races, National Football League football games and Major League Baseball games all on the same device and service, the pending merger must overcome a steep hurdle before it receives the blessing of federal regulators. After all, the Federal Communications Commission blocked a similar deal in 2002 when satellite television giants EchoStar Communications Corp.’s attempted merger with rival DirecTV was killed with a 4-0 vote, claiming it would “decrease competition, create a potential for higher prices and lower service, and negatively impact future innovation.”
Merger details
While there are similarities that can be drawn from the failed 2002 deal, just as much is unique about the pending marriage of XM and Sirius, not to mention the makeup of the FCC board. Rather than a buyout, Sirius and XM executives have called their proposed deal an “all-stock merger of equals” with a combined value of about $13 billion, which represents their estimated worth as one, including $1.6 billion in debt.
Sirius has reported losses of $3.4 billion over its five-year run and XM reported a quarterly loss of $231 million by mid-2006, but said it had positive cash flow by the year’s end, according to reports. The losses have mounted as each of the satellite radio providers have competed tooth-and-nail to bring exclusive talent and content on board. Sirius shelled out $500 million to bring Stern away from the terrestrial airwaves last year, including another $300 million in stock for meeting subscriber goals. XM brought Winfrey on board with a three-year, $55 million contract. And both companies have put millions of dollars into the pot to acquire satellite-exclusive professional sports deals.
Today the FCC bars a single company from controlling the satellite radio market, but FCC Chairman Kevin Martin has already indicated that rules can be changed in certain cases. “The companies would need to demonstrate that consumers would clearly be better off with both more choice and affordable prices,” he said in a statement released after the plan was announced.
Martin added that the hurdle would be high.
Furthermore, the marriage would have to meet antitrust approval from the Department of Justice; however the companies are expected to argue (as they long have) that their competition goes beyond satellite radio and well into the markets of traditional radio and mobile audio players, such as mobile phones and iPods.
Sophisticated lobbying effort
There are technological barriers to the deal as well. Neither service can be received on the other’s receivers, but XM Chairman Gary Parsons and Sirius CEO Mel Karmazin said the companies have already begun developing a device that could receive both signals.
Despite the significant impediments both companies face, a cursory look at investor and analyst reports indicate that a majority believe the climate in Washington is prime for a sophisticated lobbying strategy to convince the FCC that consumers will benefit if the two entities become one.
Considering the FCC’s huge workload, the transaction isn’t expected to be resolved until early 2008.
