The news came as a shock, as longtime rivals Sirius Satellite Radio Inc. and XM Satellite Radio Holdings Inc. announced their plans to merge as a "merger of equals," according to their mid-February release.
The companies claimed a win-win situation for stockholders, consumers and retailers alike. They promised to narrow the competitive gap between satellite radio services and broadcasters.
Retailers can improve their profit margins, as satellite radio will become the providers of choice for radio aficionados—with more programs, more choices, and more technological breakthroughs. On paper, this seemed like a match made in heaven.
During the past several months, Sirius and XM each dished out hundreds of millions of dollars to woo established entertainers such as Howard Stern and Oprah Winfrey, and to sign contracts with major sports associations, in order to keep the other from gaining market share.
Sirius did not wish to be outdone by XM, nor the other way around. XM became the exclusive satellite radio broadcaster of Major League Baseball almost from the first day and signed on Opie & Anthony (Gregg 'Opie' Hughes and 'Anthony' Cumia) and Oprah Winfrey in 'Oprah & Friends.' Sirius was granted exclusive broadcasting rights to NASCAR through 2011, signed Howard Stern, Martha Stewart, and the NFL.
The proposed merger will be a tax-free, all-stock combination. Each XM shareholder will get 4.6 shares of Sirius for each XM share, resulting in 50 percent ownership apiece for existing Sirius and XM shareholders.
Mel Karmazin of Sirius will become CEO of the new company, and Gary Parsons, current XM Chairman, will assume the Chairman position.
Kamazin said in the release, "This combination is the next logical step in the evolution of audio entertainment."
There is much work to be done, however. Both companies' shareholders, the Federal Communications Commission (FCC) and the Justice Department must approve the deal. Once approved, the companies may begin to eliminate duplicate functions, lay off employees and complete their tie up at the end of 2007.
Eerie Similarities
Back in the mid-1990s, Sirius and XM each paid $80 million to obtain satellite radio broadcast licenses from the FCC. At the time, the FCC put a caveat prohibiting the two companies from gaining ownership of the other's license, according to Knowledge @ Wharton (KW), the business research arm of the University of Pennsylvania.
BusinessWeek magazine cited otherwise. In an article from 2005, it quoted former FCC Commissioner Harold Furchtgott-Roth that the licenses did not "specifically prohibit a merger."
XM, based in Washington, D.C., began its operations on September 25, 2001, and Sirius started in July of 2002 out of its headquarters in New York.
Both companies' monthly, annual and two-year charges are exactly the same, down to the penny, which smells a bit like price fixing. Sirius offers 125 and XM 160 digital channels, and each company owns three satellites.
XM lost $667 million during fiscal year 2005, while Sirius reported a net loss of $863 million.
A Different Take
The merger between these two companies does not bode well for consumers, but makes good sense from a business point of view, suggest professors Peter Fader and Gerald Faulhaber of the Wharton School of Business at the University of Pennsylvania during an interview with KW.
Competition is healthy. Both companies had a different—but equally appealing—lineup of programs. "In fact, one of the things that we'll miss by seeing the merger is the competition among them," said Fader. "They wouldn't have had some of the kinds of innovative programming that they currently have, if they hadn't existed as rivals."
Much like cellular phone companies, both XM and Sirius were more interested in gaining new customers or stealing customers away from the other, instead of striving to keep existing customers onboard. They focused mainly on topping each other by signing popular personalities—often at exorbitant costs that cannot be sustained in the long run. Fader thinks that the companies decided to merge because going alone would be too costly over time.
Fader thinks that XM and Sirius may have gone overboard to gain new customers. "They really need to stop focusing on outdoing each other and focus more on just retaining customers and giving them what they want."
The professors do not foresee another monopoly on the rise, given the competition the combined company would face from local radio stations, terrestrial radio technologies, digital radio streams, Internet radio, and so on. Fader even mused, "They are really a small player."
It's still unclear if one company is gaining more than the other from the merger. Neither is in good financial condition and both are saddled with debt. They are similar in their products and use similar technology. Faber says that consumers actually had a hard time telling them apart, so merging is not going to change the industry, except reduce the cost of doing business.
Fader didn't give a prediction on the success of the merger. Though, he has seen failed mergers that brought similar business trends into the marriage.
The big question is, will the FCC and the antitrust division of the Justice Department approve this merger? Faber contends that it depends who is on the Commission and which political party is in the driver's seat.
Will Regulators Give Their Blessings?
It is going to be a tough go, if the rule that they may not possess each other's license holds true.
A precedent does exist in the industry. The FCC and Justice Department rejected a prior merger between two direct broadcast satellite services—EchoStar Communications Corp. and DirectTV in 2002. Both had financial difficulties like Sirius and XM. They also used a similar argument that Sirius and XM may bring up—that they could compete more easily with cable providers as one entity. Another issue at hand for the 2002 merger was the license transfer.
In 2002, FCC Commissioners, in separate statements, voiced concern over monopolistic tendencies and losses to consumers. Interestingly enough, consumer groups reacted differently. They supported the merger and saw it as a tremendous benefit, putting a dent into the monopoly of cable TV providers. They voiced their concern as to why instead of blocking the merger, the FCC did not ask for a restructured combination.
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