The screws are tightening on the proposed merger between Sirius Satellite Radio (NASDAQ:SIRI) and XM Satellite Radio (NASDAQ:XMSR).
Remember when Federal Communications Commission Kevin Martin threw his support behind the deal last month? The two companies had agreed to his concessions, which included freezing subscription rates for three years and allocating 8% of their channels to non-commercial and minority-owned broadcasters.
The problem is that Martin is just one of five commissioners, and XM and Sirius can't advance further unless three of them nod in agreement.
The 17-month courtship got some pro-merger news on Friday, when it was reported that another FCC member -- Jonathan Adelstein -- is on board. Unfortunately for the satellite-radio providers, Adelstein's proposed concessions go even deeper than what Martin wants.
Adelstein is looking to freeze subscription rates for six years, with 25% of the channels earmarked for public-interest programming. He also stipulates that any subsidized receivers must also allow for the open reception of HD radio.
This is getting ridiculous. If this is what it takes to get hitched, I have just one word of advice for Sirius: Run!
Don't look back in anger
As the faster growing of the two companies, Sirius is in the best position to go it alone. It hasn't had to refinance its debt or tap credit lines, the way that XM did this summer in moving to utilize a credit facility from General Motors (NYSE:GM).
This doesn't mean XM is doomed. XM announced this morning that it now has nearly 9.7 million subscribers on board. That's just 17% more than it was watching over a year ago, but it still signifies growth at a time when many figured that satellite radio's popularity would fade in light of cheaper alternatives and waning auto sales.
Despite the automotive slide, XM's growth is coming from new-car sales. It just posted its fifth consecutive quarter of record results on the automaker side. So even though carmakers are struggling, Detroit would be in an even bigger funk if GM weren't pushing XM and Ford (NYSE:F) weren't promoting Sirius.
What? You thought this was just a story of two money-losing broadcasters? No way. Sirius and XM have been rudderless as they wait for the deal to be approved, and the wait is affecting everything from a unified marketing message in the auto-dealer showroom to what goes on the rack displays at your local Best Buy (NYSE:BBY).
It's been a couple of years since XM and Sirius sold briskly through the consumer-electronics superstore, but a merger was supposed to change that situation. A la carte programming, interoperable receivers, and money to blow on an ad campaign would have trickled down to automakers, retailers, and companies that rely on advertising.
Look around at what happens when the FCC allows the weeds to grow unchecked for 17 months. Do you still think inactivity is a victimless crime?
Plan B for Sirius
Sirius needs to do more than call the FCC's bluff. It needs to re-evaluate its urge to merge in the first place. Both Sirius and XM are substantially larger than they were when they announced plans to hook up in February of 2007.
Each company has a large enough subscriber base to turn a profit, or at least be consistently cash flow-positive. The synergies behind a combination would be great, but who would agree to freeze rates for six years?
Record labels already have a deal in place in which their royalty share increases from XM and Sirius. As the NFL, baseball, and Howard Stern deals come up, they, too, will likely command higher markups. If XM and Sirius can't raise rates for six years, they could suffocate. What would happen to a cable provider like Comcast (NASDAQ:CMCSA), or a satellite-television company like DirecTV (NYSE:DTV), if it couldn't pass on programming increases to its subscribers? Synergies or not, you don't want to see what XM and Sirius will look like in four to five years if they can't have consumers help pay for their growing overhead.
Then you have requests for the allocation of a growing chunk of XM's and Sirius' spectrum to public-interest programming. With the 19 million collective subscribers lacking interoperability out of their present receivers, surrendering 25% of their bandwidth for non-commercial channels means less premium content. It may not matter once the next generation of interoperable receivers become the standard, but for now, that requirement is just crowding out the content that consumers are currently willing to pay up for.
So why play this game? Walk away, XM. Run away, Sirius. Pull the rug from under the lobbyists, legislators, and regulators who have been making you stand around and wait for 17 months. You're both strong enough to survive on your own. You may need to cut costs, make difficult programming decisions, and possibly increase rates, but at least you can do those things now, while you still have the freedom to do so.
This was a great deal a year ago. Given the humiliating mountain of concessions, it's a joke today.
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