Sirius/XM Satellite Radio: Merger is Doomed

The FCC announced it is "seeking comment" on the proposed merger between the only two satellite radio companies in existence. Am I the only one who wonders why they are even bothering?

Based on recent decisions like the one in which the FTC contested the Whole Foods (WFMI) and Wild Oats (OATS) $560 million buyout, I cannot fathom a scenario in which the only two companies in an industry are allowed to form only one. While I feel the Whole Foods opposition is nonsensical, the fact there is opposition to it is what it is. The merger between XM Satellite Radio Holdings Inc. (XMSR) and Sirius Satellite Radio Inc. (SIRI), valued at $4.7 billion is currently being opposed by both consumer groups and the National Association of Broadcasters. Really, I cannot find anyone who favors the merger except folks and shareholders of XM and Sirius.

For a little history, we only need go back to the attempted Direct TV (DTV)-Echostar Communications (DISH) merger a few years ago. There we had two companies attempting to merge to create more competition against other pay TV companies (cable) like Time Warner (TWC) and Comcast (CMCSA). The FCC opposed and squashed it because they said the merger would eliminate competition in rural areas, and the same scenario holds true in this instance.

Also hurting this attempt is that we have no pay radio competition at all for the combined entity to argue they need to merge to help combat in other areas. The profitability with the two companies is not due to lack of consumer interest; it is due to moves like giving Howard Stern hundreds of millions of dollars to essentially do what he did for for a fraction of the price on free radio. Heck, if they had just waited, the guy probably would have pulled an Imus soon enough and got himself tossed off the air anyway, then they could have picked him up on the cheap. The only difference now is that without the specter of the FTC coming down on him at any minute, the cache and risk is gone and so all you have is a middle aged guy swearing on the radio - it gets boring after about three minutes. There is a reason he has not been in the news the last two years; nobody longer cares.

This attempt will be squashed and consumers will win in the long run. In the short term, shareholders will get hit.

XMSR vs SIRI 1-yr chart:

Comments

[Ron Casalotti:]

Using the Dish/Echostar precedent is a red herring. To say that a Sirius/XM merger would fail to serve rural areas is to pre-suppose that rural areas have no alternative radio sources. My, oh my, what ever did those areas do for radio entertainment before Sirius and XM came along? Oh that's right, they listened to the hundreds of AM and FM stations that serve them.

And I guess that also means they have no access to Internet based radio either. It's a wonder those small towns aren't changing their names to XM-ville or Sirius-land since apparently it's having these two - pay -companies available separately that keeps these towns connected to the 21st century.

Say the merger is wrong because the NAB objects? Please! This is the same NAB that fails to serve it's smaller and diversified markets by refusing to grant licenses to small market interests and favors consolidation of stations by giant mega-media companies like Clear Channel.

The only people really opposed to the merger fall into two groups:
1) Those who are uninformed as to what these companies do and how a merger can make it better, and
2) Those who've drunk the Kool-Aid the traditional radio megalopoly is serving.

2007 Jun 12 10:45 AM

[todd su:]

have you ever lived in rural America? Radio, like TV is not a given. There are places where no or only a couple of station are receivable. I am not talking about the midwest either, there are places in upstate NY, Pennsylvania, Vermont, NH. Maine etc etc etc where no radio is receivable....

2007 Jun 12 11:46 AM

[Malkiel:]

There's a third important group that oppose the merger: those of us serious citizens who see what a disaster deregulated am/fm radio ownership has been for the quality of public discourse and culture. Broad swaths of the country are subject to the Clearchannel effect, where right-wing hate radio is the only form of political programming, Paul Harvey functions as the news, and no new popular music exists beyond 1990. What the NAB doesn't get is that those of us who oppose the Sirius/XM merger will be gunning to break up up their member moguls when Democrats take control in '09.

And Todd Su is right, Ron is unaware that many parts of rural America are still struggling to get broadband internet connectivity and even cable tv. If not for the New Deal they would still be without phone service.

I agree with Todd Sullivan that once these guys get beyond the tooth fairy merger idea and use some fiscal discipline they have a business that will prosper and shares will recover. Satellite is the only way to go on cars, boats, and private planes...

2007 Jun 12 12:09 PM

[dave_kohl:]

Just because you don't appreciate Howard Stern is no reason to blame Sirius' woes on his contract. You should point out that Sirius had 600,000 subscribers when Stern made his announcement, and now approaches 7,000,000. That's also nearly double the number they had increased to when he joined them. If, as you say, it gets boring, then the number would have gone down, and not up. What's even crazier about the merger talks is that if the FM and AM stations were offering better and more ambitious programming in the first place, nobody would care what satellite radio did or didn't do.

ChgoDave

2007 Jun 12 12:29 PM

[griffnasty:]

ChgoDAVE please stop! You're making way too much sense. HOWARD STERN! He is really the reason why there is an opposition to a merger. I never knew satellite radio existed until Stern announced he was going there. And I bet the same goes for a lot of people. In fact, before his defection, regular radio use to sell ad time to satellite over their airwaves. No one gave a damn about satellite before Stern. It is so obvious that the NAB does not want the competition. They do not want consumers to have a listening option.

2007 Jun 12 04:07 PM

[todd su:]

actually the reason they ramped up membership was the inclusion of radios in ford vehicles that coincided with the stern signing. they would have picked up millions of new folks without stern and managed to save a few hundred million in the process

2007 Jun 13 08:22 AM

[potstickerfan:]

Reveal your true motives for bashing Sirius and the proposed merger. Are you on the NAB take? Have some Neocon agenda? I always assumed that Seeking Alpha was using well researched and unbiased financial bloggers for their site. I can see from this post of yours, and others you have written (forcasting the failure of the iphone), that you are simply just another snake oil salesman trying to make a name for yourself by going against the grain. No one is for this merger but shareholders? Hardly. I own neither stock but I am passionate about the product. A merger would benefit the consumer, providing the best of both worlds on one receiver. Seems your chief argument against is that you dislike Howard Stern. How original. By the way, did you think of that 'Ford rollout increased subscriptions, not Stern' reply all yourself or did Clear Channel help you write it? That has to be the funniest line of 2007.

2007 Jun 14 04:05 AM

[Somersby:]

All this talk of ClearChannel, the NAB, et al, is irrelevant. The FCC opposes the merger for one single reason: Howard Stern mocked the FCC for over 20 years. So it's only too ironic that the FCC would be instrumental in doubling Stern's audience, which is what would happen if XM and Sirius merged. The FCC is loathe to do this. Nothing else is relevant.

2007 Jun 14 06:32 PM

[potstickerfan:]

Howard Stern is what is irrelevant. Like him or not, he should not be used by financial bloggers and responders like yourself as a reason/justification for a proposed merger failing. Now the FCC holds grudges? Last I checked, Stern's biggest beef was with Powell who is no longer the chairman. (And since when is fighting for 1st admendment rights concidered mocking?) It will be a sad day in America when the government starts making billion dollar decisions based on hurt feelings. The merger should be reviewed on the merits not on the content of its product. A yes vote would benefit the 20 million (and growing) current users of satellite radio.

2007 Jun 15 03:17 AM

[Somersby:]

That's a fair minded analysis, but I've listened to Stern for the last 20 years, and he has mocked the FCC constantly - to the thrill of his audience, including me. His first DVD (or whatever) was "Cruicified by the FCC" which, as the title suggests, essentially mocked the FCC, and which reflected his attitude toward them throughout his career. We both agree that the 2 companies should be merged, but Stern is definitely a wildcard in the deck. Whether his effect on the FCC is emotional or machiavellian, I do believe his effect is both significant and discouraging. Stern is both the savior of satellite radio, and, in a more subtle way, it's achilles tendon.

2007 Jun 15 03:56 AM