Sirius and XM Get the Justice Go-Ahead
The music is playing, finally, for Sirius (SIRI) and XM (XMSR). On Mar. 24, 13 months after America's only two satellite radio providers announced they were hooking up, the U.S. Justice Dept. green-lighted the deal, declaring that the $13 billion combination would not create a harmful monopoly. "We determined after a very thorough and comprehensive investigation that we should not challenge the transaction and have closed our investigation," said Assistant Attorney General Thomas Barnett in a conference call announcing the decision. "The evidence did not support a relevant market limited to just the two satellite providers."
Justice's decision hinged on a broad view of that market. Rather than consider satellite radio as a sector unto itself, with only two players, Justice officials saw the "relevant market" as the audio-entertainment industry. Under that definition, Sirius and XM have multiple competitors, including terrestrial radio, Internet music stations, online streaming music sites, download services such as Apple's (AAPL) iTunes, and even Web-connected mobile devices of the future. "The likely evolution of technology…made it even more unlikely that the transaction would harm consumers," said the Justice Dept. in a statement.
Sirius and XM officials took the news with quiet optimism. The companies declined to comment outside of a staid official statement confirming the decision and noting that they still have one more regulatory hurdle to clear: the Federal Communications Commission. Although the FCC traditionally does not block mergers after Justice Dept. approval, neither company wanted to celebrate prematurely. "The charter for the spectrum they were awarded says they do need to be owned by separate entities that must compete against each other," says David Niederman, an analyst at Pacific Crest Securities. Despite this caution, however, Niederman believes the deal "probably will get passed."
Investors apparently think so, too: Shares of both companies spiked after the announcement. XM's stock closed the day up 15.5%, rising to $13.79. Sirius saw its shares jump 20% before settling down to $3.15, an increase from $3 earlier in the day.
Making Headway on the Road
If the merger goes through, Sirius and XM will have a lot to celebrate. Both companies have hemorrhaged money in their bid to compete for the marquee talent needed to encourage customers to invest $70 to $200 in a satellite radio player and an additional $8 to $13 a month in subscription fees. Sirius reported operational losses of $327.4 million for 2007, which was an improvement over its $513.1 million in operational losses for 2006. XM reported 2007 losses of $682 million, a roughly $37 million improvement from the prior year. April Horace, an analyst at Denver-based Janco Partners, anticipates that the combined companies could eventually save $4 billion in operating expenses over six years. XM had 9 million subscribers as of the end of last year, up 18% from the previous year, vs. 8.3 million for Sirius, up 38%.
But XM and Sirius also have to hope that access to the best names from each service will fuel broader adoption of satellite radio. Despite a roster with such stellar names as Howard Stern, Martha Stewart, and ESPN Radio (Sirius) and Oprah Winfrey, Bob Dylan, and Major League Baseball (XM), neither service has made much headway in the booming market for portable players, for instance. But those devices are making headway in autos and SUVs, the core market for XM and Sirius. About 40% of cars sold in the U.S. today come with sound systems that are compatible with Apple's iPod music player. That's the same percentage of consumers who told J.D. Power and Associates in 2007 that they had satellite radio capability in their cars.
The merger would present myriad technical issues (BusinessWeek.com, 3/5/07), such as making the competing players compatible with a combined service. Both companies maintain that they can sell radios capable of playing stations from both services within 12 months of regulatory approval. But it's not clear what kind of initial investment that would take and how it could contribute to more short-term losses. Radios capable of playing both services are currently in development, according to company spokespersons.
The companies also have to solidify what subscription packages would look like under the combined service. They have said they would offer eight different subscriber options, two of them enabling subscribers to pick and choose which stations they want from either service. Those à la carte options, which are likely to cost more than a simple music-only offering, will be available only to subscribers with the new combined radios.
Opponents of the merger, such as Consumers Union and Common Cause, worry that it would lead to higher prices for both satellite radios and subscription fees. Justice ultimately decided pricing was not an issue since, once subscribers shell out $100 or more for a device, they often will not switch satellite providers because one lowers its subscription price by a couple of dollars.
The combination has also been opposed by the powerful National Association of Broadcasters, which represents traditional radio broadcasters. In a statement released by the group, NAB Executive Vice-President Dennis Wharton said: "We are astonished that the Justice Dept. would propose granting a monopoly to two companies that systematically broke FCC rules for more than a decade. To hinge approval of this monopoly on XM and Sirius' refusal to deliver on a promise of interoperable radios is nothing short of breathtaking."
Both Sirius and XM have long maintained that subscribers want the services to merge (BusinessWeek.com, 7/14/05). After Justice's announcement, the companies released a list of dozens of consumer groups and corporate advertisers that favor the combination, including Ford Motor (F), the National Taxpayers Union, and the NAACP. General Motors (GM), which puts the radios in many of its new cars, says a merged company would be able to offer more programming choices.