XM and Sirius Smell the Finish Line

Can it be? Is the Federal Communications Commission finally doing what it should have done several months ago?

The Wall Street Journal reported this morning that FCC Chairman Kevin Martin is urging his regulatory staff to approve the combination of XM Satellite Radio (Nasdaq: XMSR  ) and Sirius Satellite Radio (Nasdaq: SIRI  ) .

With the two apparently agreeing to his concessions, the FCC is unlikely to block the merger that will now be beneficial to consumers. The final decision could come in as little as three weeks, pushing the approval into July, a whopping 17 months after the merger was announced.

Give and ye shall concede
What are those concessions, exactly?

They aren't deal breakers.

  • Subscription fees will be capped for three years.
  • The company will set aside 8% of its channels, to be leased to non-commercial and minority-owned stations.
  • Licensing of receivers will widen to include more manufacturers, as well as the introduction of interoperable radios, within a year of the deal's close.
  • Eventually, customers will be able to cherry-pick the channels they want through a la carte options.

Let's go over what XM and Sirius are conceding to win the FCC's blessing. Holding rates goes against the perpetual increases you see in cable and satellite television, but it's in the nascent industry's best interest to keep fees low. The companies are struggling as a value proposition in retail channels, with all of their recent growth coming from new car installations. The market is not receptive to higher prices, even if XM and Sirius would love to offer premium programming down the line. Besides, XM and Sirius will be too busy clicking their heels as they count the billions in realized synergies.

Leasing out 8% of its bandwidth is a mixed blessing. It will bring opportunities for minority-minded terrestrial companies like Inner City Broadcasting and Spanish Broadcasting System (Nasdaq: SBSA  ) to ride the satrad wave. Licensing revenue would also add to the combined company's top line. The flip side to the move is that today's radios aren't interoperable. That means that subscribers will have to give up some of their existing stations or put up with aural-quality deterioration through tighter signal compression.

Throwing out a wider licensing net would be a good thing. Satellite radio wants as many receivers out there to rake in subscription revenue, and the industry's recent failures at the retail level show that the current product isn't cutting it with consumers.

Letting subscribers opt for lower-priced plans is also a good business move. In fact, this was a concession that XM and Sirius agreed to last summer, ready to offer half-priced plans a year after the deal is completed.

I guess that's why they call it terrestrial
The ironic loser in all of these concessions is the National Association of Broadcasters. Terrestrial radio's lobbying arm has spent money to influence lawmakers and shape public opinion against the merger.

It hasn't worked. More importantly, the concessions that will make satellite radio more attractive to consumers -- like lower prices, broader programming, and more manufacturers cranking out receivers -- will make terrestrial radio even less relevant.

This was going to happen anyway. Terrestrial radio has bigger fish to fry, like automakers installing input jacks for portable media players and music-stocked cell phones, or even Ford (NYSE: F  ) actively promoting its CD-ripping in-dash hard drives.

Terrestrial radio's advantage is fresh, local programming, and it's better served promoting that than earmarking lobbying dollars to impede progress elsewhere. If it needs that point hammered home, let it keep plucking the "she loves me not" petals with every concession that XM and Sirius have had to make to get this deal approved.

The FCC is finally coming around to making the right decision. Now let's see the entire radio broadcasting industry follow suit.

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Longtime Fool contributor Rick Munarriz is such a big satellite radio fan that he subscribes to both XM and Sirius. He does not own shares in any of the companies in this story. He is also a member of the Rule Breakers analytical team, seeking out the next great growth stock early in its defiance. The Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 17, 2008, at 7:58 PM, airwaves1065 wrote:

    Everyone continues to MISS the biggest concern about the merger of XM and SIRIUS and that is, since the beginning, both companies have blatently IGNORED the very rules laid out by the FCC for them. Why would anyone believe they'd find 'religion' and finally actually do what they said they'd do? I am a SIRIUS shareholder and I also owned AM/FM radio stations for 34 years; you'd think, as a former radio station owner and current SIRIUS shareholder, I'd be in favor of the merger and I am so long as the 2 companies have iron clad rules they not only agree to abide by but actually do. Both companies, again, have a history of ignoring rules and simply doing whatever pleases them.

    Bill Wertz

    Wertz Media Consulting

    Friday Harbor WA

  • Report this Comment On June 18, 2008, at 3:03 PM, deadlinedub wrote:

    Subscription fees will be capped for three years????? Why did Exxon and mobile not have to cap there prices on gas for three years??? Oh I forgot, because the politicians are getting paid by the oil companys and the NAB..... because satellite radio is WAY more important to americans than gas..... Let the oil companys get rich rich rich, but put these two companys under....

  • Report this Comment On June 20, 2008, at 12:17 PM, gpsxsirus wrote:

    As a subscriber to Satellite radio I find the notion of this merger being good for the consumer to be absolutely ludicrous. Without competition we're going to see less variety in offerings and once the three year cap has ended we're going to see higher prices.

    I have Sirius in my car and a XM unit I move between my home and my car. There are very comparative stations on each. Some of them XM does better, some Sirius does better. After the merger they're not going to want to continue having what they'll see as multiples of the same station and I fear that it is very likely that quality on the whole will suffer. An example being that they both have a 'Chill' station. XM Chill is a favorite of mine that I'll listen to when I want to just drive and and destress. Sirius Chill I feel seriously misses the mark. I'm sure there are people who would say the reverse, that Sirius gets it right. The point is mixing the two stations would detract from the quality no matter which side you prefer.

    I thoroughly enjoy my satellite radios but I also expect the quality to go down quite a bit after the merger has settled. At which point I will probably end my subscriptions and stick to MP3s for my music.

  • Report this Comment On June 23, 2008, at 3:36 PM, Matt8265 wrote:

    The only people that oppose this merger are those related to the NAB.

    Why does the NAB protestith so much?

    1. They have the monopoly.

    2. They don't pay performer royalty as XM and Sirius do.

    This is fully the case of the pot calling the kettle black. People love satrad... people hate AM/FM ... it's just that simple.

    The merger passes the 'Public Interest test' that the FCC is obligated to apply.

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