Would XM-Sirius merger help consumers?

John W. Schoen Senior Producer • Profile • E-mail

The proposed merger of the two major providers, XM Satellite Radio and Sirius Satellite Radio, would be a great deal for both companies. A multi-billion arms race for new customers have left both sides bleeding red ink, so a truce would make the combined company much more profitable.

But the merger still has to win approval from federal regulators, who will be asking the question that’s on the minds of millions of existing and potential satellite radio subscribers: Would this move be a good deal for customers? To answer the question, they'll be weighing whether a combined service would face enough compeition to make the merged company think twice before raising subscriber fees and loading up programs with ads.

Launched at the beginning of the decade, XM and Sirius have been slugging it out to attract new subscribers by signing pricey programming deals and, more recently, offering automakers generous incentives to install their receivers in new cars.

In 2004, Sirius, the smaller of the two, made a big splash with a five-year, $500 million deal with the self-proclaimed “King of all Media,” Howard Stern. It’s also paying $220 million to carry National Football League games.

XM has shelled out $650 million for an 11-year deal with Major League Baseball and a three-year, $55 million deal with Oprah Winfrey. Both services offer dozens of channels of commercial-free music; some talk channels include limited advertising.

Both companies have also spent heavily to sign auto makers to exclusive deals to install their receivers, which can only pick up signals from one service. XM has lined up GM, Toyota, Honda, Porsche, Hyundai and Nissan; Sirius radios are installed in Ford, DaimlerChrysler, BMW, Audi, Mercedes, Volvo, Volkswagen, among others. While these deals vary, they include a split on both the sale of the unit and the monthly subscription fee.

All of which has made it hugely expensive for Sirius and XM to sign up new customers; roughly $152 for each new Sirius customer and about $108 for each new XM customer, according to Wedbush Morgan Securities, a research firm that follows the industry. At $13 a month, those new subscribers bring in a little over $150 for Sirius. Both companies also face the cost “churn” from subscribers who try the service and then drop it.

As a result, neither company has yet reported a profit — after more than a decade of signing up programs, distributors and subscribers. With subscriber growth slowing, investors have been selling both stocks, which lost nearly half their value last year alone. A combined company would save investors billions, Sirius CEO Mel Karmazin and heir-apparent of the new company told analysts on a Tuesday conference call.

But it remains to be seen whether Karmazin and XM Chairman Gary Parsons will get a chance to show Wall Street what a merger could do for their investors. That’s because, according to many analysts, the companies face long odds winning approval for the deal from federal regulators who are charged with protecting consumers from creating monopolies with too much pricing power.

“Right now, it's hard for us to see this as having anything better than maybe a 40 to 50 percent chance to survive the regulatory review,” said Thomas Burnett, director of research at Wall Street Access.

That review will start with the terms of the original sale of the broadcast rights by the government in 1997, when the FCC set aside two satellite slots specifically to promote competition. Under the rules of the sale, a merger was forbidden; that rule would have to be changed for the merger to go through.

Regulators will also have a precedent in front of them: the 2002 proposed merger between DirecTV and Echostar’s dish TV network. That deal was killed because regulators said it could hurt competition and leave customers subject to higher prices.

And the merger will likely face opposition from some members of Congress, who have recently sided with owners of so-called “terrestrial” radio — the AM and FM stations available for free — with a bill that would bar satellite radio from offering local stations. The National Association of Broadcasters, the lobby that represent those stations, has already urges its friends in Congress to block the XM-Sirius merger.

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