The US FCC chairman has come out in favor of the merger between Sirius Satellite Radio and XM Satellite Radio, as long as price provisions previously offered and a number of other conditions are adhered to. If the majority of the FCC commissioners now agree, then there is nothing left to stop the merger going ahead.
It has taken 24 months since the question was asked and successive acceptances that the merger is the only way forward have come, separated by the longest of times. Three months ago the Justice Department was the last to agree, and now, if the FCC chairman can carry the rest of his commissioners, the final acceptance will emerge shortly.
At the time we said that it was just a matter of time before the merger was agreed. It makes simple sense, the rising cost of acquiring customers has been evident among them both, and the chance that aggressive churn will begin to cut in, as customers which mostly acquired the satellite radio with their car, begin to change chars. Also more and more services ‘ for instance the ICO Communications seat back TV ‘ are targeting the bundling of a device and a service, with a motor vehicle, as a route to market.
Customer acquisition has been costing each company just over $70 per subscriber which runs close to $100 million each per quarter, and content is eating another $120 million. Investors will only be able to see a decent return once these two companies stop fighting one another and merge their 17 million customers, merging device orders and content purchasing at the same time.
We see the best strategy going forwards as a cut of around $400 to $500 million in costs out of the two budgets, then pushing up the Average Revenue Per User by adding new services, which would drive cash into the bank, pay down debt and prepare the merged entity for a future which is fraught with challenges.
These challenges are not insignificant. XM and Sirius use slightly different radio modulations, and must repopulate their audience with players that can receive both, while retaining, at least for a while, the separate costs of two demodulators, two sets of codecs and two players and two DRMs, and two sets of patent royalties on each device.
Satellite radios are no long the $300 purchase they were at the beginning of this new approach to radio, but similarly the price of HD radio devices in the US are coming down and the rise and rise of MP3 players and iPhones and iPods as a culture, complete with an accessory eco-system which reaches into cars, remains a threat, as does MediaFLO and all the mobile TV efforts, which come with audio channels, and the cellular operators which want to integrate all future music into handsets.
The simple issue is that the head start that satellite radio received against these rivals will be frittered away and two organizations will head towards irrelevance and bankruptcy in the long term, unless they can now be merged and share costs.
So why has it taken the FCC Chairman so long to reach the conclusion that he is in agreement with the merger, after initially stating under current regulatory rules, there can be no merger of the two, since there is a ban on a single owner for both pieces of satellite spectrum, built into the regulations when the licenses were issued.
There’s your principle right there. If the FCC doesn’t show that reversing one of its mandates over spectrum is a weighty and slow moving process, it would invite every license holder up and down the radio spectrum to begin renegotiating their license terms every five minutes. Which is why the FCC has spent two years on a merger worth only $7 billion, and yet it could rush through the SBC, AT&T and Bellsouth mergers in a fraction of the time.
But the time to give the deal the go ahead has finally come. When the two announced that they were thinking seriously about a merger, their combined market capitalizations were close to $12 billion, now they have fallen to below $7 billion. It’s hard to view any merger as creating a monopoly, when investors continue to lose their interest in such a supposed monopoly. Any more prevarication will be too destructive to investment interests, and have the potential to leave 17 million Americans with a radio service in danger of failure, taking with it the current outlet for some of American’s favorite sporting events.
The conditions that Kevin Martin suddenly finds acceptable were originally suggested by the eventual CEO of the merged group, Mel Karmazin and included a three-year price freeze for services, and new cheaper price plans ranging down to $6.99, new ‘a la carte’ options and devices which can receive both services. However another condition appears to have emerged which is currently being considered by the FCC.
The idea is to get the merged entity to give up control of defining the function of devices, and offer an ”open radio” standard so CE companies can create their own devices, instead of the status quo which allows the satellite radio companies to define all the devices on their network and hand out plum contracts. This is a dramatic change to the style of the network and would potentially alter the service so that it was a strictly retail proposition, taking away a huge set of costs from the merged satellite radio company.
Normal terrestrial radio would be sure to complain over any such provision, although Sirius and XM are likely to jump at the idea.
There is so far no indication which way the other four commissioners will vote, but a vote can be called any time now that the Chairman has issued a recommendation.