Sirius and XM Merger finally approved by the FCC

mutelight

http://www.businessweek.com/technology/content/jul2008/tc20080725_360276.htm?chan=rss_topEmailedStories_ssi_5

The FCC Approves the XM-Sirius Merger
The satellite radio pioneers have the green light to unite, but pressure from rivals and declining car sales threatens to turn satellite radio into a niche market

by Olga Kharif

After more than 16 months in regulatory limbo, the planned merger between XM Satellite Radio (XMSR) and Sirius Satellite Radio (SIRI) finally got the go-ahead. Late on July 25, the Federal Communications Commission voted 3-2 to approve the deal without imposing many conditions that might have reduced the appeal of the merger.

A green light from the top communications regulator was the last government approval needed before combining the satellite radio pioneers. Regulators fretted that a merger of the two principal satellite radio companies would create a monopoly that could raise prices and freeze out competitors. But digital music delivered over the Internet has revolutionized how people get and listen to songs, and helped flood the market with competition.

Pressure from rivals, along with the slump in demand for satellite radio-equipped cars, leaves XM and Sirius in a precarious position. "The biggest question mark is how this product thrives in an era of difficult financing and where people have alternative means of getting radio," says Blair Levin, former FCC chief of staff who is now managing director at Stifel Nicolaus (SF). Since the deal was announced in February 2007, Sirius shares have plunged 43%, to 2.25 on July 25, while XM stock has tumbled 40%, to 9.28.

Many of the conditions the FCC could have imposed in the name of protecting consumers and fostering rivalry were left by the wayside. "The merger is in the public interest and will provide consumers with greater flexibility and choices," FCC Chairman Kevin Martin said in a statement. The FCC will require the combined company to keep prices steady for three years—not six, as some had expected. The commissioners also asked XM-Sirius to set aside 8% of its channels for noncommercial programmers; some analysts speculated the company may be asked to set aside as many as one-quarter. But caving in to pressure from Congress, the FCC said it will require the merged company to allow any manufacturer to make a device able to catch satellite radio. The agency may also conduct an inquiry to determine whether XM-Sirius should be required to make their satellite radios capable of receiving high-definition radio signals, a competing technology. And the FCC imposed a $19.7 million fine on the companies for past rule violations and asked the two companies to make interoperable radios, which can receive both XM and Sirius streams, available within a few months. "It could have been a lot worse," says Paul Gallant, an analyst at Stanford Group.
Channels À La Carte

None of that is to say XM and Sirius got off easy. The FCC held to a condition that the new company charge for radio channels on an à la carte basis. While XM and Sirius volunteered to implement this pricing method in an effort to allay regulators' concerns, it may nevertheless hamper the company's ability to increase revenue. "No one exactly knows how that's going to go," Levin says.

Theoretically, flexible pricing might encourage more people to sign up for service. But it may not work out that way in practice. Most people sign up for satellite radio after buying new cars. A few dollars' price difference in a service plan may not push that many more buyers to subscribe. Instead, many existing XM or Sirius users may simply downgrade to the cheaper option. "In this economy, every discretionary expense is going to get a bit more scrutiny," says Larry Rosin, co-founder of Edison Media Research, a consulting firm. The combined company's average revenue per user could drop.

Tuna Amobi, an analyst at Standard & Poor's, which, like BusinessWeek, is owned by The McGraw-Hill Companies (MHP), is also concerned about the company's ability to wring cost savings, which some analysts say will total as much as $4 billion over five years. Cutting expenses won't be easy as the company implements merger conditions, pays compensation to employees whose jobs are made redundant by the merger, and issues debt to fund operations and restructuring costs. Neither company is profitable on its own.
A Survival Move

The companies are combining against the backdrop of an economy in decline. The slowdown is being felt especially hard in the auto industry, which makes up the lion's share of new satellite radio subscribers. General Motors (GM) expects the number of cars sold in the U.S. to drop to 14 million this year from 16.1 million in 2007. "We need to see success from the auto channels and synergies for [the markets to continue] to support the stocks," says Stanford Group analyst Fred Moran.

Worst of all, there are plenty of competing ways for consumers to get their music—be it HD radio, Apple (AAPL) iPods and other digital music players, or music-enabled cell phones. Since the merger was announced, Web radio has enjoyed a resurgence. Apple's iPhone and other devices able to sample Web radio via wireless connections, and store thousands of songs, have taken the world by storm. According to JupiterResearch's June survey of 2,000 U.S. Internet users, 23% now listen to audio on the Web, and 26% own an iPod. "The prospects [for satellite radio] are likely to already own an iPod," says Jupiter analyst Barry Parr.

And now that the FCC will allow for satellite radios to be integrated into any device, such as an iPod or a terrestrial radio, that could raise competition for XM-Sirius another notch. Goldman Sachs (GS) analyst Mark Wienkes wrote in a June report (BusinessWeek.com, 6/24/08) that it's "unlikely that the industry can generate returns sufficient to justify the current valuation" and raised questions whether satellite radio would survive without the merger.

Approval from the FCC goes a long way to ensuring survival of the industry, but there's no guarantee satellite radio will thrive. The more likely scenario, says Jupiter's Parr, is that it ends up being a "niche product." Now out of limbo and free to combine, XM-Sirius has the unenviable challenge of trying to prove him wrong.

They certainly slapped on plenty of stipulations. :rolleyes:

Also interesting how the article mentions HD radio as "high definition radio" which it most certainly is not, it is just a brand name and is not an acronym for high definition.

The great news is that they are going to continue support for all XM and Sirius radios out there. :cool:

bigaudiofanatic

Yes Finaly Hehe Alrightttttt I Can Not Wait Never Ever Have To Listen To Am/fm Again!!!!!!!!!!!!