Now that Federal Communications Commission Chairman Kevin Martin is working to rally his troops around approving the merger between XM Satellite Radio (NASDAQ:XMSR) and Sirius Satellite Radio (NASDAQ:SIRI), investors may be tossing confetti, donning party hats, and ducking champagne corks.
Hold the bubbly.
This isn't the end. It's barely the beginning. The companies still have to get the FCC's official blessing, line up deal financing, and sober up long enough to battle a very competitive marketplace in portable audio.
The good news is that shares of XM and Sirius are trading for less than they did when the merger was first announced. Today's investor is getting in at an attractive price point with the synergy-spinning union closer to becoming a reality.
The bad news is that pessimism is priced into the shares for a reason. Hopefully, XM and Sirius can sway the skeptics, and I have a game plan to make it happen.
1. Slash marketing for now
Good luck trying to sell a satellite-radio receiver at the retail level these days. Consumers know the current models don't offer interoperability. New devices that are capable of receiving both XM and Sirius won't be rolling out for several months; they may not even hit the market until next year.
This is like Apple (NASDAQ:AAPL) trying to push its first-generation iPhones when the public knows that better -- and cheaper -- models are only weeks away. The rub is that Apple usually has new products ready to launch, right around the time when Steve Jobs takes to the stage wrapped in denim and black turtleneck, ready to roll his fancy slides.
XM and Sirius don't have that luxury. They can't even start a low-level campaign to promote the interoperable units that don't exist yet.
Most of satellite radio's marketing outlay goes to new-car manufacturers, and that isn't going to change. However, XM and Sirius should conserve capital by delaying advertising campaigns until it's show time.
2. Nurture transparency with current subscribers
I understand why XM and Sirius have tried to keep a low profile during this 16-month courtship.
"XM and Sirius have been lambs instead of lions," I wrote two months ago. "They have let others do the bragging about the deal's merits because they still have regulators to appease. It just wouldn't be appropriate for them to be thumping their chests and flexing their pecs at a time when they are trying to convince the FCC that their union will be harmless to the competitive landscape."
However, that doesn't explain why the companies have been vague in their communications with their subscribers. I'm not saying this as an outsider. I have been a subscriber to both XM and Sirius for several years, and there has been a total lack of merger-related emails.
Yes, regulators are keeping XM and Sirius from huddling together to map out integration issues until the merger gets the green light. This doesn't mean that many of the 17.9 million subscribers have the same burning questions.
- If XM and Sirius have to set aside 8% of their channels to noncommercial and minority-owned broadcasters, will existing content go away, or will quality suffer as signals are compressed further?
- What will the upgrade process be for the interoperable receivers, especially for the Sirius subscribers who have lifetime subscriptions?
- Will automakers tied to existing brands offer both XM and Sirius?
I realize I can't have immediate answers, but XM and Sirius failed by not updating their subscribers along the way. Maybe this deal would have been approved sooner if XM and Sirius had mobilized their subscribers into demanding speedier approvals out of the FCC and the Department of Justice. You can't fix the past, but you can become more transparent in the future.
3. Win back investors with real projections
Both companies have played it close to the vest in spelling out the financial potential of the companies combined. Even the otherwise chatty and charismatic Mel Karmazin has leaned on third-party projections in singling out the potential for billions in realized synergies.
Once the FCC nods, the modesty has to end. What do you think Mr. Market is telling XM and Sirius by pricing their shares at steep discounts to what prices were four years ago, when they had far fewer subscribers? It is a lack of confidence. It is the belief that even with nearly 18 million paying users, that everything from the iPod to Research In Motion's (NASDAQ:RIMM) new iTunes-compatible smartphones to RealNetworks' (NASDAQ:RNWK) Rhapsody subscriptions to the buoyancy of CBS's (NYSE:CBS) Last.fm are eating into the demand for satellite radio.
Bring a stallion to the pony shows.
4. Don't let it end there
Income statements will improve substantially after the deal is completed, but one can ride the efficiencies only so far. There are ways to take advantage of reaching the most rabid radio fans in the country, and this goes beyond what's possible organically.
Regulators won't necessarily flinch if you buy Napster (NASDAQ:NAPS) to streamline the process of incremental digital download sales or even a music-discovery site such as Pandora or Slacker to reach out to nonsubscribing music lovers.
Finish line? The future is just getting started.
Other recent stories on the long courtship of XM and Sirius:
