Sirius-XM deal is sweet music for consumers

Even though a combination would technically be a monopoly in satellite radio, a merger of the two could actually be good news for radio listeners. Here's why.

By Paul R. La Monica, editor at large

NEW YORK ( -- If Sirius Satellite Radio and XM Satellite Radio are allowed to go through with their plans to merge, there will only be one satellite radio network left in the U.S. But make no mistake: this would not constitute your classic monopoly.

As long as a combined Sirius (Charts) and XM (Charts) decided to keep their monthly subscription rate around $12.95 a month, it's tough to imagine how this deal would be bad news for consumers or investors.

Consumers may soon be able to get XM and Sirius stations from one satellite receiver if investors and regulators approve the merger between the two companies.
Shares of both Sirius and XM have tanked during the past year due to concerns about subscriber growth and increased competition.

A merger of the nation's two satellite radio firms makes a lot of sense. Consumers that really wanted all that satellite radio has to offer have previously been stuck having to choose one or the other or bite the bullet and buy subscriptions to two services. That works out to $25.90 a month.

Those who want to hear the outrageous antics of Howard Stern as well as fellow shock jocks Opie and Anthony have to subscribe to both Sirius and XM. Sirius is the exclusive home of Stern while the Opie and Anthony show airs on the XM network.

If you are a big sports fan, you have also been out of luck. XM carries all the Major League Baseball games but no football. Sirius, on the other hand, had exclusive rights to the NFL but no baseball.

And even if you did subscribe to both services, having two satellite radios in a car is not really feasible. Plus, if you wanted to get both services at home, you'd still need to buy two separate satellite radio receivers. That's silly. It would be like having one radio that only worked for AM stations and needing another radio that only worked with FM channels.

"One can argue that the biggest complaint of satellite radio consumers is the lack of choice. This merger would give all consumers and all customers of either satellite operator all of their programming," said Frederick Moran, an analyst with Stanford Group.

The deal should be good news for investors in both companies as well. Sirius and XM have been extremely volatile stocks over the past few years.

Both companies have spent heavily on marketing and programming talent in order to outdo the other. That has eaten into earnings and cash flow. The two are also years away from generating a true profit because of the immense costs required to launch and maintain their services.

Presumably, a merged entity would be able to reach profitability faster than either XM or Sirius would have done independently.

A combined Sirius-XM also will have more negotiating power with the big auto manufacturers, who remain a big source of new subscribers for these firms.

Sirius currently has exclusive agreements with Ford (Charts) and DaimlerChrysler (Charts) to have radios pre-installed while XM has partnerships with General Motors (Charts) and Honda (Charts). Toyota offers both services, depending on the model of the automobile and which dealer the car is bought from.

But XM and Sirius face an uphill battle.

Kevin Martin, the chairman of the Federal Communications Commission, said as recently as last month that a deal was not possible according to current FCC regulations. He did add, however, that the rules could wind up being changed in the event of a merger.

The Department of Justice also has to approve the deal. And on the surface, you could see why some would think that a combination of Sirius and XM should be shot down on antitrust grounds.

Maurice McKenzie, an analyst with Signal Hill Capital Partners, points out that the FCC turned down a proposed merger between satellite TV companies DirecTV and EchoStar Communications in 2002. He thinks the government will take a long, hard look at the Sirius-XM deal.

"This is going to face significant hurdles with regulators as well as legislators," McKenzie said.

And the National Association of Broadcasters (NAB), a trade group that represents local radio and TV station owners, issued a blistering critique of the deal Monday afternoon. In a statement, NAB spokesman Dennis Wharton called the planned merger an "anti-consumer proposal" and urged federal regulators to reject the deal.

But let's be honest. XM and Sirius aren't just competing with each other. They are competing with Apple (Charts)'s iPod as well as the scores of new cell phones that play music.

Sirius and XM are also competing against traditional radio, which contrary to popular opinion, isn't dead yet. The major radio stations have been fighting back with Internet radio and high definition radio offerings.

"My sense, from the guys I talk to on Capitol Hill, is that the market definition for this merger will be mobile entertainment and not just satellite radio -- things like iPods and the iPhone as well as regular radio. The regulators will look at the market very broadly," said David Bank, an analyst with RBC Capital Markets who follows both companies.

And keep in mind that XM and Sirius combined only have about 14 million subscribers. There are still millions of stalwarts out there who refuse to pay for radio and never will. So the worst thing that the new Sirius-XM could do is try and jack up the price.

Not only would they alienate existing subscribers of the two services, they'd probably scare away many prospective customers as well.

And McKenzie said that thanks to the expected reduction in expenses that would take place as a result of the deal, there's probably no need for Sirius-XM to raise monthly rates. So listeners could wind up with a much broader menu of music, talk and sports programming without having to pay more.

"Because of significant cost savings, Sirius and XM could maintain the current pricing structure. From a consumer perspective, subscribers could benefit from a more efficient platform," he said. "It would not be the most prudent move to have an immediate price increase."

Stanford Group's Moran added that the government may even step in and force the companies to promise not to raise prices as a condition for approving the deal.

"What will come into question is whether Sirius and XM would have too much pricing power and the ability to gouge the consumer. That could be easily handled with a stipulation of price controls by the FCC," he said.

A member of RBC Bank's family owns shares of Sirius but his firm has no investment banking ties with Sirius or XM. Other analysts quoted in this piece do not own either stock and their firms have not done banking for either company. Top of page