The Senate Judiciary Committee's got questions. Sirius (NASDAQ:SIRI) CEO Mel Karmazin's got answers. Are they the right answers? Is there anything that he can say to win the regulatory approval for his company's planned merger with XM (NASDAQ:XMSR)?
Karmazin spoke before the Senate's Subcommittee on Antitrust, Competition Policy and Consumer Rights yesterday. If you think that that's a loaded name for a governmental subcommittee, that's got nothing on the weight on Karmazin's shoulders right now.
Satellite radio needs this. An industry that should have been turning a profit with a few million subscribers is deep in the red with 14 million collective members. Sky-high programming costs, pricey signal repeaters and replacement satellites, royalty-hungry music makers, and chunky marketing budgets have combined to make this a far more costly endeavor than anyone could have imagined.
Party like it's 2002
I was one of those early dreamers. Nearly five years ago, I wrote "The Spirit of Satellite Radio," singing the industry's praises just as Sirius was landing its first 7,000 subscribers. The cynics were missing so much then. Even the rare bulls were only cautiously optimistic about the growing potential of subscription revenue (and to a lesser extent, ad money).
I saw something bigger than that. Satellite radio has often been compared to the aural equivalent of satellite television or cable television, but those outlets simply broadcast third-party content. In XM and Sirius, I saw a medium that could build its nascent brands around proprietary content. Sure, DirecTV (NYSE:DTV) has a hit with The NFL Ticket, and Comcast (NASDAQ:CMCSA) users love the library of on-demand freebies, but those companies are still at the mercy of others to obtain original content.
This is where satellite radio lost its way. Instead of calculated moves to build unique content, both companies opened up their checkbooks to sign major sporting leagues. I love football. I love baseball. I don't love overpaying as a spectator sport.
Sirius inked a seven-year, $220 million deal with the NFL. I never understood why a product geared mostly to car-dwelling commuters would spend so much on Sunday content, especially when free radio has at least the local team covered. Are the displaced fans that lack television access on Sundays that big a target audience? XM's aim was a little better with baseball, with games throughout the week, but it has been a dud. If you care to argue otherwise, explain to me why there isn't a seasonal bump in new XM subscribers just as spring training wraps up.
Satellite radio then took the smarter step of booking star talent in spoken content. The $500 million five-year Howard Stern deal at Sirius and the $55 million three-year Oprah Winfrey deal for XM were expensive, but at least the Stern deal has proved to be worth it. It's no coincidence that Sirius began landing more net new subscribers than XM since the 2005 holiday season, and hasn't looked back since. That's Stern in action right there, my friend.
The real art of the deal
Karmazin is saying a lot of things that make sense. Arguing that 14 million combined XM and Sirius subscribers pale in comparison to 237 million cars with AM/FM radios, nearly 90 million Apple (NASDAQ:AAPL) iPods, and 230 million PCs with Internet radio streaming functionality makes sense. Unfortunately, he still has long odds to convince the public that two satellite radio firms weren't a duopoly, and that a successful union wouldn't create a monopoly.
The quotable Karmazin preaches cross-content opportunities that will make it cheaper for consumers to cherry-pick content from each service without having to pay twice as much. What isn't being shouted from the rooftops, however, is that the combined company would save a whole lot of money, and that it would have a surprising amount of leverage over its programming.
That last point is important. Why did Sirius pay so much for Stern? Because XM was initially bidding for his services as well. How much less could Stern have been paid to bolt from terrestrial radio at CBS (NYSE:CBS)? We may never know, but this is the only time that satellite radio has gotten its money's worth out of a megasigning. Oprah's presence on XM over the past two quarters hasn't sparked much of a migration.
With baseball and football deals expiring in a couple of years, how would a combined Sirius-XM fare? Pretty good, one would think. You would no longer have one trying to wrestle a property from the other, the way the two companies battled over NASCAR.
That's what the deal is ultimately about. Yes, there are service redundancies that will be shaved if the companies combine. However, the real benefits will come when you no longer have to spend ad money and bankroll hardware subsidies to fend off your only pure rival. And when that hotshot celebrity or sporting league sits down to talk about a new content contract or a renewal, the leverage will all be resting on Karmazin's side of the desk.
So let the questions come. Karmazin's already dreaming up the ones that he will be asking in the future:
- Your music label wants promotional access to my 14 million listeners, and you want me to pay you how much?
- Are you telling me that broadcasting Arizona Cardinals football games is worth a million bucks a year to my listeners?
- What have you done for me lately, Oprah?
- Hey, Parsons, can you believe we pulled this one off?
Rick recommended XM to Rule Breakers subscribers in 2005, but the position has since been liquidated. There will be two fresh recommendations in the next monthly newsletter -- which comes out tonight, by the way -- and it's available as part of a 30-day free trial subscription if you want to check it out.
Longtime Fool contributor Rick Munarriz is a Sirius and XM subscriber, but he does not own shares in any of the companies mentioned 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.
