Sirius Radio and the FCC Decision: When Price Increases Are Coming

| About: Sirius XM (SIRI)

With the Federal Communications Commission (FCC) Memorandum Opinion and Order filed yesterday, July 27th, 2011, Sirius XM Radio (NASDAQ:SIRI) has now been given the all clear by the FCC to raise its subscription prices and is no longer bound by the three-year pricing condition contained in the commission’s July 25th, 2008 decision approving the merger of Sirius Satellite Radio Inc. and XM Satellite Radio Holdings Inc. into a single Satellite Radio service provider.

We find on this record that the evidence does not support at this time the extension of the price cap beyond the period the Commission imposed in the Merger Order and the condition will therefore expire on July 28, 2011.

– Federal Communications Commission

Along with its decision, the FCC noted how the audio entertainment marketplace has changed in the three years following the Sirius and XM merger, noting that “new audio services have emerged as viable consumer alternatives, including smartphone Internet streaming applications that can be used in mobile environments such as automobiles equipped with user-friendly interfaces.” It noted that Internet radio service provider Pandora Media Inc. (NYSE:P) has demonstrated “remarkable growth” in the three years following the merger. Rhapsody, Slacker, and iHeartradio were also mentioned as audio entertainment alternatives. In addition, the Commission reported that automakers Ford (NYSE:F), Toyota (NYSE:TM), MINI (NASDAQ:MINI), GM (NYSE:GM), Mercedes-Benz, and Hyundai (OTCPK:HYMLF) were in the process of introducing Internet-based streaming services in their vehicles. Furthermore, the Commission also noted that “data suggests HD radio has increased since the merger.”

While Sirius XM is now free from the voluntary commitment it made to implement price caps on certain subscription packages for a period of three years after the consummation of the merger, Sirius XM also made another voluntary commitment on May 12th, 2011 as part of a proposed settlement in the Carl Blessing et al. v. Sirius XM Radio Inc. class action lawsuit to not raise its prices through the end of the year. As part of the proposed agreement, Sirius XM committed to not raise the price of their basic Satellite Radio service, other programming packages or internet streaming services. In addition, Sirius XM agreed to not increase the U.S. Music Royalty Fee or decrease their multi-radio discount. Furthermore, Sirius XM said that its existing subscribers will be allowed to renew their current subscription plans at current rates prior to December 31st, 2011. As part of the agreement, Sirius XM also offered former subscribers who had terminated their subscriptions after July 29th, 2009 either a free month of basic satellite radio service or a free month of Internet streaming. Sirius XM also agreed to pay the costs of providing notice to the plaintiff class and not to oppose an application by counsel for the plaintiffs for reimbursement of up to $13 million of their fees and expenses. The proposed settlement does not require the company to admit to any wrongdoing or make any other cash payments to the plaintiff class or plaintiff’s counsel.

The Blessing case is still pending and several objections have been filed challenging the proposed settlement. The FCC declined a request by Carl Blessing’s counsel to extend the deadline for filing comments during its decision proceeding, also noting that they were “unable to entertain the request to consider certain litigation discovery documents and pleadings because no such documents were submitted in the record of this proceeding,”

The FCC also declined the WCS Coalition’s request that the Commission wait until there was a resolution of pending petitions for reconsideration in the Part 27 Proceeding before addressing its decision on Sirius XM’s pricing freeze. The FCC was clear that the WCS Coalition had previously raised its concerns regarding the pending Part 27 Proceeding in the context of its review and subsequent approval of the merger. Furthermore, the Commission reiterated that proposals based on interference concerns were more appropriately addressed in the relevant rule making proceeding. “The WCS Coalition’s interference concerns are irrelevant or, at best, tangential to the issue of Sirius XM’s pricing and accordingly they will be addressed solely in the separate pending Part 27 Proceeding,” the Commision stated.

When will Sirius XM be free to raise prices? Now that the company is free from the three-year pricing freeze as a condition of the merger, the only remaining wrinkle is the still pending Blessing case. With Sirius XM’s May 12th voluntary commitment to not raise its prices throughout the remainder of the year and several objections being filed challenging the proposed settlement, it may be awhile before a definitive answer is known. With the potential of pricing freedom being so attractive to Wall Street, it would likely be a catalyst and in Sirius XM’s best interest for a resolution in the Blessing case to be reached by the end of the year.

Disclosure: Long SIRI

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