The planned merger between XM Satellite Radio (NASDAQ:XMSR) and Sirius Satellite Radio (NASDAQ:SIRI) isn't going to get regulatory heads nodding. To think otherwise would be both naive and ignorant of the FCC's past in shooting down similar proposed nuptials.
Let's go back to 2002, when the FCC didn't allow DirecTV (NYSE:DTV) and EchoStar's (NASDAQ:DISH) Dish Network to hook up. If the two leaders in satellite television were denied their shot, what makes anyone think that the only two players in satellite radio will get a chance to snuggle?
And at least satellite television had a big gorilla in the room to point to. DirecTV and Dish argued that a combination would help them compete against the more popular cable operators. The services were duplicating hundreds of channels. A combination would have helped free up the spectrum for even more programming content.
It was a good argument, but the FCC didn't buy it. The companies ultimately came up short in proving that the merger was being done in the public interest.
How can XM and Sirius fare any better? Satellite television pointed to the grip of cable operators, but can satellite radio point to the market superiority of terrestrial radio without snickering? When your corporate slogans are "the best radio on radio" and "beyond AM, beyond FM, XM," who is going to believe you? You can't argue that you're being suppressed while you're waving that big "No. 1" foam finger at your audience.
You argue that satellite radio has had healthier early-adoption rates than cell phones and DVD players did, and then you're going to beg the court to have mercy? With Internet radio, HD radio, cell phones, and portable MP3 players all serving up music, XM and Sirius hope to obfuscate the reality that they are the only two premium subscription services that can afford to pay a ton of money to automakers and retailers to push their product. Case closed.
Let's say that I'm wrong
The deal can still pass. Stranger things have happened. Even if I see XM trading at a steep discount to the proposed terms of 4.6 shares of Sirius -- a clear indicator that even Wall Street believes this is a parade to nowhere -- maybe some FCC bigwig thinks life would be sweeter with Stern and Oprah coming together and will push this thing through.
Even if that happens, it won't matter. Sure, there will be savings. Economies of scale will make it cheaper to service 13.6 million subscribers than to watch over 7.6 million at XM and 6 million at Sirius. And they won't have to run ads against each other. I get that. But here's what you may not get: Satellite radio has been adding fewer net subscribers since 2005. This year is going to get worse.
Year | Net New Subscribers (XM + Sirius) |
|---|---|
2005 | 2.7 million + 2.2 million = 4.9 million |
2006 | 1.7 million + 2.7 million = 4.4 million |
2007 | 1.4 to 1.6 million + 2 million = 3.5 million |
What's holding the consumer back? Show me the radio fan who is holding out on subscribing until he can have both Martha Stewart and Opie & Anthony streaming out of the same receiver. I'll wait.
Go ahead and Google "cancelled XM" and "cancelled Sirius," and you will find some pretty common complaints. Poor quality of compressed audio, bad reception, and a lack of value are the main culprits. Landing the next 13.6 million users will be hard. Keeping the current 13.6 million users will be even harder.
Along the way, satellite radio didn't prove to be the dream sector that I thought it would grow into when I recommended XM to Rule Breakers newsletter subscribers two years ago. I'm sorry about that.
I thought this would grow into a high-margin niche with a ton of valuable proprietary content, diverse revenue streams, and a sticky service. Instead, we're getting a business that will be in perpetual need of replacing old satellites and signal repeaters. Subscription revenue is still the aorta. Churn continues at a feverish pace.
Programming costs have spiraled out of control and pushed breakeven targets further out at every turn. A merger would help, especially as a negotiating tool for a content provider that wants a presence on satellite radio, but the industry dynamics have changed. The avid radio listeners have come in for a taste, and way too many are spitting out what they find.
The lackluster market reception received by overseas provider WorldSpace (NASDAQ:WRSP) should have clued us in on the suffocated potential of satellite radio. If you want to learn more about lackluster reception as it relates to XM and Sirius, just look up some disgruntled ex-subscribers. They're getting easier to find these days, and that's something that no combination of assets can fix.
When two non-swimmers embrace in the ocean as a means of survival, that's usually the catalyst to make both sink even faster.
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XM is a former recommendation in the Rule Breakers newsletter service.
Longtime Fool contributor Rick Munarriz has been a Sirius satellite subscriber since 2004 and an XM subscriber since 2006. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.
