The Associated Press carried a piece this week saying that FCC Commissioner Jonathan Adelstein is trying to squeeze extra, harsh concessions out of Sirius Satellite Radio and XM Satellite Radio, as part of their merger conditions.
He was always expected to vote against the merger given that he has, in the past, made a big thing out of not going with government support for big media. However apparently he is prepared to add his vote to the two Commissioners that have already publicly said they would support the merger, FCC Chairman Kevin Martin and Republican Robert McDowell, but only if the combined company agrees to a six-year price cap and to make over a quarter of its satellite capacity for public interest and minority programming.
If Adelstein thought for a moment that voting against the merger would pay off, he’d go ahead and do that, so this move tells us that he expects it to go through and is just trying to get the kinds of conditions that will ‘castrate’ the business for some time to come. In truth the deal is necessary in order for either company to be profitable, and despite continued growth in the subscriber base since the two businesses announced their mergers, the rate of customer acquisition and the price for each added customer, tuntil very recently, continued to rise, as do the content programming costs for both.
The idea seems to be that if the other two Commissioners are inclined to either say no, or more likely not be seen to be the one to say yes, then Adelstein might as well chance his arm. The six year price cap is not a problem as far as we can see. It means a discount the size of inflation every year, in a music market which is experiencing price erosion all the time. But dictating content may have a deleterious effect on the new service, especially since it is likely that it will force a major rethink on a planned content shake-up as the two services are merged. The 25% amounts currently to 75 radio stations for non-commercial (what does that mean? Since most of the stations do not carry advertisements) and minority programming as opposed to the 24 that the two companies have already conceded for this purpose.
Democrat Commissioner Michael Copps is widely thought to be preparing a no vote, although given the weight of opinion in favor of this merger, there can be no guarantee that Commissioners will take entrenched positions ‘ a no vote will lead to the collapse of the two operation’s share prices, which may well trigger a run on the entire media sector ‘ not something the FCC will be keen to be seen to have triggered.
Which puts even more pressure on Republican Deborah Taylor Tate, who would then feel she has to vote the merger through, despite this losing her many friends in her traditional support base.
As interesting as this ‘local’ politics is, this is a merger that is a year past its sell-by-date and the FCC will use whatever means it has at its disposal to get it out of the way in the next few weeks.
The other big issue is that both companies have offered to adopt an “open radio” standard so that they do not design all of the devices which are used on the services, and allow consumer electronics operations to make it a purely retail proposition.
Adelstein additionally is asking that each device that is subsidized by the new service also has a second tuner in it so that other local radio stations can also be received.
This week XM launched a $400 million offering of senior notes as one of a series of deals to refinance certain debt in connection with the pending merger. This is perhaps the last obstacle in the way of the merger apart from the FCC’s blessing, which now needs to come one way or another, within weeks. If the FCC gets this one wrong, we sense prolonged legal action from not just one direction (the companies) but from more than one (investors).