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Needless to say, the blogosphere has been afire in the wake of the big Sirius (SIRI) /XM Satellite (XMSR) merger announcement. And I'd like to chronicle some of these discussions here. But to sum up the tone, the key themes could be characterized by the following two statements: (1) "A reduction in competition is bad for both price and product quality;" and (2) "This is a merger of financial necessity, having nothing to do with better serving the customer or delivering a better product."

These sentiments are intuitively logical and passionately felt by those who either subscribe to one or both products and/or have followed the evolution of satellite radio. Some other comments get right to the essence of the macro issue: is satellite radio really a product for the long haul, or will substitutes eventually chip away at the model and render its existence moot? Is SIRI/XMSR destined to go the way of Iridium? Is satellite radio kind of like an oil well, a fundamentally depleting asset that can be milked for a while before it runs dry? These are some of the questions that dominate the discussion, and absolutely need to be considered in the wake of this potentially (assuming the various mucky-mucks sign-off) historic merger.

I think there is little doubt of the financial motivation of the SIRI/XMSR tie-up. It reminds me a lot of the in-market bank mergers I looked at as an M&A associate in the late 1980s; it's principally about the cost savings, while some revenue accretion is possible due to increased pricing power. But this entire line of thought needs to be considered in light of the over-arching issue: is premium synchronous (real-time) radio worth it (for news, sports and other real-time media) in a world where the lion's share of content can be consumed easily, flexibly and cost-effectively in an asynchronous (time-shifted, on demand) manner? I think this is THE question for the long-term investor. Because if satellite radio is here to stay, economics at scale could look pretty attractive. But if not...

Camp #1: "This Merger Stinks"

This is view held by many Internet denizens in-the-know, including, yes, Doc Searls. I'm leading off with the Doc because his well-thought out view encapsulates the views of many out on the Internet.

From The Doc Searls Weblog 02/19/2007: A ground-level view of the XM/Sirius merger in the sky

There are a number of problems with this merger; but they're also problems with satellite radio in general:

  • Antitrust. There are too few companies — just two — in satellite radio here in the U.S.; and soon there will be only one. Imagine if one company owned the whole FM band. It's like that. (Yes, I know Clear Channel sort-of does in many places, but what's dead about terrestrial radio is not on the table here.) The only thing keeping this merger out of antitrust territory is the still experimental nature of the whole medium, and the fact that neither company as it stands is known for its profitability. (Sirius reported positive cash flow only late last year.)

  • Program quality. The new company will presumably encourage production of radios that receive both services, which will be nice. But what will lack of competition between Sirius and XM do for programming on either of the former sides? There may be more money to buy better quality talent or whatever; but I find it hard to imagine how a drop in competition will improve anything. Which brings us to...
  • Monoculture. I don't care how diverse the programming becomes, it's still coming from too few companies. When the choice gets down to one, I guarantee that programming will have a homogenous quality to it. There's already a self-sameness to both Sirius and XM, and that's sure to be the case with Xirius or whatever they call the new company. And I say this as a generally pleased Sirius customer. At some point Xirius' homogeneity will not compete against the absolute heterogeneity that listeners already find outside the walled garden(s) of satellite radio.
  • Obsolescence. When the two services started (around a decade ago), a total of 300 different "channels" (around 150 apiece) seemed like a lot. The program choices for listeners on either XM or Sirius far exceeded the sum of available sources from terrestrial radio. But now the sum of all program choices runs into the thousands or perhaps even millions. Yes, satellite radio is live while most of the other choices are just stored files; but files are easier to distribute and lend themselves to iPod-style listening. (On the "T" this morning here in Boston, I noted that a quarter of all the commuters in my subway car were listening to something on earphones. I'm sure it wasn't radio — satellite or otherwise.) As Dave says, listeners want to program their own "stations". Many listeners, which we used to call "consumers" are now also producers, for themselves and others. Where does satellite radio fit in that picture? I don't think even Mel Karmazin knows. Meanwhile, the whole system continues to leverage an understanding of How Radio Works that is, to say the least, not current — much less future-proof.
  • Costs. The running costs of maintaining satellite radio infrastructure is high, to say the least. Too high? Not as long as the company remains profitable. Which brings us to...
  • Revenues. Subscriptions may be enough. But if they're not, what will happen when something better obsoletes the kind of advertising that has sustained radio for the duration? I may be wrong about this, but I've long believed that the inherent inefficiencies of broadcast advertising will doom the model in the long run. I haven't been right yet about that, so feel free to continue not believing me.
  • I'm not saying I don't approve of the merger, by the way. If this is what we need to keep satellite radio alive, all the better. But I think it's important to keep the downsides in mind — not just for the merger, but for satellite radio itself.

    From Poplicks.com 02/19/2007: Xirius Satellite Radio - An uncivil union

    Today is another sad day for music. I'm gravely disappointed to hear the news that XM and Sirius are planning to merge.

    Even though FCC rules forbid one from buying out the other, their financial problems will probably lead to an approval of the merger, especially with this monopoly-friendly administration. I doubt XM or Sirius stockholders will stop this unholy marriage.

    Even though this merger will surely lower both of their operating costs, this money-grubbing alliance can only lead to higher monthly fees in the future, more commercials, and the eventual squashing of voices and artists that satellite radio has managed to introduce into many pockets of the continental US.

    ********************

    The obvious point of this rambling post is that the competition between XM and Sirius has forced both to constantly offer more diverse programming, deepen their catalog, cater to specific groups (e.g., there's a Korean language channel on Sirius!), and, to some extent, play fewer commercials.

    But after an XM-Sirius merger, I can easily imagine that satellite radio will soon be only marginally better than terrestrial radio, which is like saying that herpes won't be as bad as cancer.

    Ouch. That's pretty brutal, but a sentiment shared by many. Check out this post from stereogum. By the way, you really need to click through to read this post because the comments are terrific.

    From stereogum.com 02/19/2007: XM AND SIRIUS HAVE THE URGE TO MERGE

    But whatever, this is where they are, bound by their budget books to come together, hoping it'll save 'em from insolvency. But most importantly for you, the subscriber: There's no more competition! Instead of two companies desperate to lure your subscribing dollars via superior content, the monolithic beast will be able to frame their product simply, in a can't lose scenario: "It's us or terrestrial." Where XM and Sirius could have pushed each other to develop interesting new programs and a keep a commitment to good, quality playlists, they'll now be able to rest easily on the medium's inherent trump card: commercial-free music. We don't subscribe (though we used to have Sirius); we're good with our iPods and Peel. But the loss of another potential filter for new music is a bummer. Granted, the merger may be financially necessary; but does anyone actually think it'll create a better product?

    This tone of resignation related to the merger - due to its necessity for financial reasons - is vastly offset by concerns over the impact on competition, and its effect on the quality of the product and the price of service delivery. But look at the breadth of views from some of the comments to this post:

    Admittedly, I haven't listened to XM for probably about a year, but the programming I heard was like the "all music" channels you get on cable...song after song, no real feel for continuity or groove between songs, no DJs. Which you would think would be cool, but like the all music channels on cable, isn't. The lack of DJ really bothers me for some reason; without one, it's just mindless. Chuck: I'm guessing they'll just re-broadcast the redundant programming across two platforms until the "new" receivers come out. But that had better not render my old receiver useless.

    Posted by: Ferris at February 19, 2007 10:06 PM

    First, if they merge, there will be no more competition in the satellite radio market. With one firm, there is little reason why a company would want to provide a better product. Financially necessary? What the hell is that? They want to merge into a monopoly, make more profit, and say "to hell" with the consumer.

    Here is an illustration: Do you live in a city with one cable company? How are prices? Do you like them? Do you think the service could be better? Of course, you do. However, the municipality has given your cable company the sole franchise for cable service. With the government backing them, why would they want to change or provide a better service?

    Basically, competition tends to drive prices down and increase quality.

    I'll await the FCC's ruling on this horizontal merger.

    Posted by: brad at February 19, 2007 11:39 PM

    Of course XM/Sirius will have competition. It's called Internet Radio and it is (usually) free. Unless you specifically want to listen to Howard there are probably 1,000's of IR streams that are programmed as well (or better) than satellite. Satellite is more mobile for now, but that is changing too. I regularly listen to IR on my Treo on the train & walking around town.

    >Posted by: Jim at February 20, 2007 10:18 AM

    Let's face it: consumers and investors alike are groping around trying to figure out what all this means. Except for the clear and present concerns over perceived lack of competition in satellite radio, the online commentary is all over the map.

    Camp #2: "Who Cares About the Merger - What About the Business Model?"

    There was a very interesting post on BusinessWeek.com yesterday that made the argument that satellite radio is not catering to the savvy, younger demographic, specifically those who leverage asynchonous channels to get their content in the absence of a compelling synchronous offering.

    From BusinessWeek.com 02/21/2007: Satellite Radio Falls on Deaf Ears

    My 17-year-old ought to be the target audience for Sirius Satellite Radio (SIRI) and XM Satellite Radio (XMSR), the two competing companies that now are asking the Federal Communications Commission for a green light to merge. After all, she spends much of her life with an ear glued to anything that will satisfy her urgent need for the soothing vibrations of Blink-182, the White Stripes, and a bunch of other groups that may have come and gone by the time you read this. Apple's (AAPL) iTunes is the start page on her computer, and she plugs her iPod into her 1999 Jeep. Her computer, well, that plays tunes as well, usually when she's cramming for a test.

    But ask my Madeline whether she'd like a subscription to one of the satellite radio companies and you'd get a blank stare. Tell her that it costs $12.95 a month, and she'll quickly calculate that it's the equivalent of 13 iTunes downloads. In short, the folks who think they'll one day make a market out of signing legions of folks who want crystal clear radio signals might just as well try to sell Madeline a landline telephone. You're yesterday's consumer product even before you've found a market. A decade or so after opening business, the two services have, they say, around 14 million subscribers—or a little more than half the number of folks who bought iPods from Apple in the past quarter.

    ********************

    Bernoff doesn't necessarily share my downbeat assessment of satellite's future—he rightly points out that people will still pay for convenience, quality, and choice—and he figures wall-to-wall Howard Stern, easy listening, or other types of music qualify on all scores.

    He may have a point. There are plenty of those out there who want to hear their radio sans advertising, in a nice, crystal clear sound, without the crackles. But I take my cues from Madeline, whose generation represents the future of the media business. And they want their media in a much more convenient form than Sirius and XM can give it to her—like now. If they want to hear Howard Stern (and, thank goodness, Madeline doesn't) they want to download him, or get a podcast of his latest show. And if they want music, they want it on their own terms, whether it's in a car, a laptop, or from those iPod headsets that seem to dangle from the ears of everyone under the age of 35.

    Yes, yes, I know that the satellite boys understand all of this: They offer online subscriptions, specially made radios to deliver their signal. I get it. But Madeline won't. And that's the problem, guys.

    I personally find this line of discussion quite compelling and worthy of consideration. Where does the high-value demographic reside? How do they consume digital content? Who are the key influencers that can jump-start a brand without a $1 billion advertising and marketing campaign? Today's young thought leaders know what they want and know when they want it, and simply use technology as the means to get it fast, quickly and cheaply. Their time is their own, and they don't want to operate on anyone else's schedule. Remember DVRs? A world without ads, except those you choose to see? This is not the world of satellite radio, but more the world of Apple. So what about Apple? Apple flirted with Mel and Sirius back in 2005, only to spurn them:

    From CNNMoney.com 02/09/2005: No satellite radio for iPod?

    NEW YORK (CNN/Money) - Mel Karmazin, the new CEO of Sirius Satellite Radio, said he's talked recently with Apple Computer (AAPL) about adding satellite radio to its popular iPod music player.

    "I've spoken to (Apple CEO) Steve Jobs," said Karmazin, speaking Wednesday morning at a media conference in New York. He declined to elaborate, other than to say that the "current thinking" at Apple (up $0.40 to $81.30, Research) is that "they don't need to put a satellite radio in their box."

    ********************

    April Horace, a satellite radio analyst with Janco Partners, said the consensus among industry watchers is that satellite radio and the iPod would be "the killer app." Apple's apparent apathy aside, she said there are significant legal and technical hurdles to clear before satellite radio can be added to the iPod or any other MP3 player like it.

    "Do I think (a satellite radio-MP3 player combo) is going to happen some day in the future? Absolutely," said Horace. But whether XM or Sirius nabs Apple or another MP3 maker like Sony or Virgin first is anybody's guess, she said.

    Awww, poor Mel. But the recent merger announcement has rekindled thoughts that maybe, just maybe, the time is right for Apple and SIRI/XMSR to discuss satellite radio integration with the iPod.

    From digitalmediawire 02/20/2007: Does a Sirius and XM Merger Make Way for an Apple Deal, iPod Integration?

    Although dismissed as a possibility for a long time due to anti-monopoly laws, the satellite radio rivals Sirius and XM on Monday announced that they were going to try to do the sensible thing and merge into one company. Legal issues aside, the interesting question is now how the combined forces of Sirius and XM will stand up against other formats of music consumption? The announcement specifically mentioned the threats from "iPods and mobile phone streaming". This is where the focus rightly should be - the merger should be seem in the light of increased pressure to compete with not just radios, but with the digital music players that replace them.

    The news of the merger resurrects the possibility of iPod integration with satellite radio. This idea has been killed off by Apple CEO Steve Jobs after negotiations with Sirius chief Karmazin “failed to impress” (see Financial Times article here). Jobs mentioned a lack of interesting content as a key obstacle back in 2005.

    If and when Sirius and XM are allowed to merge, that would mean many more channels in one place, once some of the fat has been trimmed off. Moreover, the blog AppleInsider notes that Apple is certainly no stranger to the concept and was caught trademarking the possibility of satellite music streaming in its enigmatic “Mobile Me” application.

    Now that's kind of interesting. Big question is whether anything much has really changed since Apple said no to Mel two years ago. Does the value Apple gets from synchronous media really offset the costs and complexity of such a deal, especially when the core of its user base has grown up with an asynchronous mind-set? I'm not so sure. Anyway, it makes for interesting conjecture.

    Camp #3: "It's Big, It's Complicated, But it Could be Good"

    Even in the wake of the announcement life goes on, especially given the long and rocky regulatory gauntlet this deal will have to run before getting approved. So far, from the consumer end, this uncertainty doesn't seem to have adversely impacted sales of satellite receivers.

    From Postbulletin.com 02/21/2007: Sales of satellite radio receivers remain steady

    What kind of reception is a proposed merger between the two satellite radio providers picking up from Rochester music and sports fans?

    Sirius Satellite Radio and XM Satellite Radio announced the plan earlier this week, and it doesn't seem to have hurt sales of each company's equipment.

    ********************

    The proposed merger, however, has clouded the issue of which company offers which -- sports or music.

    "Some people are buying (equipment) because they say it will be lumped together," Conard said. "They say it won't matter (which system you choose) eventually."

    XM radio receivers can't receive signals from Sirius and vice versa. The companies are working on developing a receiver that could receive both signals.

    In the meantime, they said, assuming the deal goes through, the companies would make other arrangements to provide programming that's currently exclusive to one provider to listeners of the other, such as getting Major League Baseball games -- currently only available on XM -- to Sirius listeners.

    From TECHNORIDE 02/21/2007: How the Sirius-XM Merger Affects You

    Sirius and XM combined will likely provide more services to customers, who will no longer have to worry if they've made the right choice between buying Sirius hardware and XM hardware. But the cost of service will go up, and I wouldn't be surprised if your monthly bill hits $20. At the same time, every car built from 2010 on will have a satellite decoder standard in the car's radio. That's my take on the effects of the merger: more choices, and more costs.

    ********************

    A combined channel would have all the sports, but most likely some or all would be premium channels. In the merger announcements, Sirius and XM talked about providing "a la carte" opportunities. Translation: "a la cash register." You'd also have the opportunity to get both Howard Stern and Oprah Winfrey, instead of Howard on Sirius and Oprah on XM. But they, too, may be a la carte.

    Most subscribers are annoyed they can't get all the sports programming on both the satellite channels. With the merger, they could. But I don't see any near-term mobile (in-car) audio alternative that will offer all sports programming across the country, as opposed to the Bruins in Boston, the Capitals in Washington, and so on. And satellite—both TV and radio—has been a godsend for, say, the Philadelphia sports fan who now lives in San Francisco. With no competitive pressure, there's room for a combined provider to see just how much the market will bear, the way Disney World does with admission prices.

    A single company's pooled resources might be better able to fund satellite TV to the car over satellite-radio frequencies. For a DirecTV experience that's the same as in your house, with dozens of channels, you'd still need a three-foot revolving dish (such as TracVision provides). But a couple of channels of child-entertainment fare could happen inside five years. A la carte? Of course.

    So this camp is acknowledging of the possible risks of the merger, especially as it relates to pricing, but is more hopeful as it relates to delivering a satisfying all-in-one product with greater breadth and depth than either has alone, with the benefits of greater financial resources to deliver an increasingly robust array of content. This doesn't sound so bad. And it is good to see that consumers aren't paralyzed in the wake of uncertainty. At least those who were intending to buy are still buying. But is the merger announcement stoking fresh demand? Too early to tell, but I'd strongly doubt it.

    Conclusion

    Clearly the jury is out, but cynicism abounds as to the consumer benefits of the merger. Less competition, less incentive to create new, high-value content, greater pricing power, none of this good for Jane and Joe Consumer. Yet many, if not most, acknowledge the financial rationale (if not the necessity) of the deal. That said, there is a meaningful camp that questions the long-term viability of the satellite radio business model, particularly in light of the wide and growing array of programming substitutes available in an asychronous, on-demand fashion. And this appears to be where much of the growth in digital media resides. So where does this leave Sirius and XMSR? Good question. And certainly a challenging one for investors.

    Disclosure: The author does not hold a position in the securities of these companies.

    Source: The Jury is Out on the Sirius/XM Merger