5 Reasons Why Sirius-XM May Still Fail

Now that the Department of Justice has given the merger between XM Satellite Radio  (Nasdaq: XMSR  ) and Sirius Satellite Radio (Nasdaq: SIRI  ) its blessing, this is no time to start partying on the lifeboat.

Even with the FCC likely to nod along and deal financing expected to come together, there will be some real challenges to make a combined XM and Sirius thrive in a rapidly changing marketplace.

I'll be back on Friday with five juicy opportunities for Sirius-XM, but today I want to highlight the five reasons why this merger isn't the slam dunk it may appear to be at first glance.

1. The iAlternative isn't going away
A lot has happened since Sirius announced its intention to hook up with XM 13 months ago. Apple (Nasdaq: AAPL  ) has always posed a threat to satellite radio with the iPod, but here are a few recent developments out of the Apple camp that should give pause to satellite radio's path to eardrum domination:

  • Audio input jacks are becoming standard features in more cars, easing the process of streaming portable iPods through car stereos.
  • The launch of last year's iTouch model gives the iPod Web-browsing functionality, allowing users to stream countless Internet radio stations within Wi-Fi range.
  • Since this past summer's launch, the iPhone is on target to sell 10 million units by the end of the year. There's no Wi-Fi needed to make the Web connection since this is, after all, a phone.
  • Rumor mill fodder has Apple developing a music subscription program, widening the music discovery options to a wider extent than the dozens of commercial-free music channels available in satellite radio. Sure, Napster (Nasdaq: NAPS  ) and RealNetworks' (Nasdaq: RNWK  ) Rhapsody have been around for ages, but this is Apple we're talking about here.

2. WiMAX is the way of the future
Internet radio has been a soft-bellied alternative to satellite radio in the past. It's not because of the quality. There are a ton of great Web-based stations out there, and audiophiles will be quick to knock the actual sonic quality of satellite radio given the tight compression necessary to deliver so many channels.

However, now that companies like Google (Nasdaq: GOOG  ) are diving into the WiMAX plan -- providing wider nets of Web-tethered coverage -- access to free online programming like Internet radio will eventually be portable.

Don't judge Internet radio solely on what it is today. If and when WiMAX gets off the ground, it will create a new wave of Web-streamed programming options.

3. HD Radio is here
It's true that HD Radio has been slow to take off. You need special receivers to listen to HD Radio content, and that means early adopters are the ones footing the high tabs to pick up the first wave of receivers. Automakers have been mostly reluctant to add that as an option (especially when there's more money for them to make by pushing satellite systems).

HD Radio has also been knocked around for the nondescript HD tag in HD Radio. It provides better sound quality than conventional terrestrial radio, but it's not high-definition as the HD seems to imply.

However, what really makes HD Radio shine is the ability for terrestrial operators to provide different content within the same FM or AM frequency. So a single channel -- say 98.7 on your FM dial -- can provide country-western, death metal, and baroque through the same frequency. My example is extreme, but it will give things like a single news station the chance to offer all-traffic and all-weather channels, too, eating into some of the strengths of satellite radio's dedicated stations.

4. The birth of ad-supported streaming
Did music fans buy satellite radio to enjoy commercial-free music or to enjoy the deeper play lists? Penny-pinchers who answer the latter may rejoice once they find that music discovery sites like Pandora and Slacker are putting out portable players that provide free, ad-supported, niche-specific stations.

The Slacker player costs between $200 and $300, depending on whether you want the capacity for 15, 25, or 40 stations at one time. That's in the ballpark of portable XM and Sirius players, except without the monthly subscription fees.

5. Cheaper satellite radio 
One of the only concessions that Sirius and XM offered to win regulatory approval was the eventual rollout of a roughly half-priced subscription plan with a limited number of channels. Paying $6.99 a month for their 50 favorite nonpremium channels may be a more compelling subscription plan than the current $12.95 smorgasbord.

Will XM and Sirius be able to win more incremental subscription revenue than they lose to existing users downgrading? Will lower revenue per subscription in a truly scalable model pan out?

I guess we won't know until we get there, though it's safe to assume that satellite radio's cost in building a second-tier receiver will be essentially the same. The key to make this work is turning more of those inactivated in-dash paperweight receivers into paying subscriptions.

See you on the flipside come Friday
Too dour? Too bleak? I'm definitely not bearish on satellite radio. I had even once recommended XM to Rule Breakers subscribers (with an eventual sell recommendation at a higher price than today).

However, I still see reasons for optimism here. Come back on Friday when I'll highlight many of the opportunities available in a post-merger world.

There are two sides to every story.

Here are some other recent XM stories on its long courtship with Sirius:


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