By Carl HoweEngadget.com was ingenious enough to score a copy of the Sirius (SIRI) and XM (XMSR) merger presentation. Go to the link and take a look at it, and then come back here.
Now, without looking at the presentation again, what were the top three reasons that Sirius and XM claimed should make investors embrace this merger? If you were really paying attention, you might get a couple generalities, like greater programming choices and accelerated free cash flow. But did you see statements like "$X million increased revenue" or "profitability of at least $0.xx per share by 2009?" Nope. The only point really emphasized was that it was going to be easier for the two companies to compete in the marketplace with 14 million subscribers than they had 8 million and 6 million separately.
My take: This is a lousy presentation in both content and effectiveness. But the fact that executives mustered such a weak case illustrates a more significant issue: satellite radio is a lousy business. Satellite radio has immense fixed costs that never go away and requires huge marketing expenditures to capture subscribers. Regulatory issues are huge, yet the subscriber revenue stream is weak at best. The two companies came to the joint realization that the only business model that could work ever make them profitable in finite time would be to gain monopoly pricing power, just as the cable TV industry did. That's why these companies want to merge: they need less direct competition and more revenue.
But there are huge risks out there preventing Sirius and XM from achieving that monopoly position. For one thing, the FCC has to say that they approve, and the chairman of the FCC has said would be prohibited by its rules. And while the two companies intend to merge their broadcast systems, it's not quite clear how that would work, since the two technologies are incompatible. Do they intend to replace the 14 million devices already in the market? What will that do to customer loyalty (hint: it won't help it)? And more importantly, what will that do to the combined company's cost structure?
This merger is like two sinking ships colliding. The two companies have thrown millions of investor dollars overboard chasing the likes of Oprah and Howard Stern, yet now they are pleading that they need more faith, time, and money to stay afloat. Perhaps instead of merging, a better survival strategy might be to abandon ship.
Full disclosure: The author has no positions in XM or Sirius.