The Proposed Merger of XM and Sirius Satellite Radio - Case Study Example

The Proposed Merger of XM and Sirius Satellite Radio 2007 Introduction Sirius Satellite Radio and XM Satellite Radio Holdings Inc are the only two satellite radios operating in the United States for the last six years. The two companies have grown with nearly similar programming, totaling 14 million subscribers from coast to coast as well as in Canada. At the end of 2006, XM, based in Washington D.C, had a subscriber base of 8 million while Sirius, based in New York City, subscriber base grew by 80 percent over the previous year following signing up celebrity talk show host Howard Stein, to 6 million (New York Times, 2007). In February 2007, the two companies announced that they would merge, created a combined entity valued at $13 billion, including $1.6 billion in debt (Lieberman, 2007). By the merger, XM shareholders are proposed to receive 4.6 shares of Sirius for each share of XM (IBLS Journal, 2007). Sirius’ chairman, Mel Karmazin, is proposed to be the chairman of the combined entity. The merger is proposed despite the fact that the two companies were given licenses to operate on the condition that they would not own each other’s license (New York Times, 2007). The proposal is seen a last-ditch effort by the two biggest rivals in the Satellite Radio space to overcome accumulated financial losses, which is currently $6 billion in the books of the two companies. Although the Federal Communication Commission (FCC) initially considered the merger proposal as an infringement on industry competition, it has subsequently mellowed down and the FCC Chairman has reportedly said that rules can be altered in the view that the market has changed over the years, with more free radio options that pose as direct competition to satellite radio. However, anti-trust concerns on monopoly pricing as well as undue advantage over the free-to-air radio remain with the possible merger of the two biggest players. In this paper, I will study the evolution of satellite radio in the US, the competition it faces, the fallout of the merger proposal, codenamed Project Big Sky by XM (New York Times, 2007) in terms of programming and reach, the investors’ perception and the financial viability of the merger. The Evolution of Satellite Radio in the US Satellite Radio entered the radio market in the early years of this millennium. Till then, audio entertainment, particularly in the car, consisted of FM/AM radio channels, audio cassettes, CDs and more recently hard drives and MP3. The idea behind satellite radio was the success of satellite television that succeeded despite the availability of free-to-air television on the basis of subscription fee for television programming transmitted through the satellite. Satellite radio, the first radio service to be based on subscription fee, was launched with the advantage of better reception while driving long distances, national broadcasts as opposed to local FM bandwidth and, perhaps most important for consumers, free of commercials during music programs. To compete with free radio, the two Satellite radio players – Sirius and XM – experimented with content, charged a low subscription fee and innovated on add-ons like free installation, rebates on hardware and free service through tie-ups with retailers (arstechinca). Satellite radio licenses were given to the two companies, Sirius and XM, in 1997. Satellite radio then posed as competition to traditional free radio and the FCC took seven years to grant license, particularly in the face of objection from the National Association of Broadcasters (NAB), which claimed that the purpose of satellite radio that was to be aired nationally was in contrast to the “traditional American values of community and cohesion” (quoted in Hazlett, 2004). While the satellite radios had to commit to air local content to get licenses, the traditional radio had by then began expanding from local content to more national programming. XM and Sirius launched national services in 2001 and 2002 respectively. Currently Sirius has 130 channels, of which 65 are commercial free all-music channels and the rest air talk, news, sports and entertainment programs. On the other hand, XM has 170 channels, of which 68 are music channels and 21 for weather and traffic. Both radios charge $12.95 as subscription fee, with lower fees for longer commitment periods. Both connections can be cancelled any time of the month. While XM offers pro-rata refund on longer connections, Sirius charges $75 as cancellation fee (satelliteradiozone). To access satellite radio, the consumer has to buy the receiver worth $200-500. The types of receivers that the two radios require are not compatible with each other. To access satellite radio, the listeners requires the satellite radio antenna that picks up satellite signal anywhere in the US, the satellite radio receiver which enables selection of channels and satellite radio tuner that delivers the satellite signal from the antenna to the receiver. Technically, the programming on the CD ROM or the hard disk at the broadcasters’ facilities are encoded, then combined in a multiplexer, transmitted to the satellite and then to the listeners’ receivers. However, Sirius and XM use different encoders, frequencies of transmission and technology. Hence, in case of the merger, the streamlining of the technology and the hardware used both by the broadcaster and the listener would not be a simple process (arstechinca). Despite the local content in addition to national programming and the various add-ons that the two radios have been providing, neither XM nor Sirius have yet become financially viable. There were rumors of bankruptcy at XM in 2002 and Sirius offered large equities to bondholders to prevent the company from going bust in 2003 (Hazlett, 2004). Although the two companies have added subscribers rapidly, more so by adding celebrity talk show hosts like Oprah Winfrey or Howard Stein (Sirius), baseball host Bob Edwards (XM) and musician Bob Dylan (XM), the costs of such expensive programming have cut a dent in the account books. The two radios have been aggressively competing with each other to offer more attractive programming. Since each is cutting into the other’s market share, the merger is expected to provide a cumulative benefit to the investments of the two radios. Programming Comparison Both XM and Sirius offer similar programming choices in music, sport, news and entertainment. The two radios have been spending heavily on acquisition of celebrity show hosts, like Sirius signing up of Howard Stein on a $725 million cash and stock deal that prompted the 80 percent growth in the number of subscribers last year (New York Times, 2007). With the merger, the two companies are looking towards streamlining programming by eliminating duplication similar genre music. XM has a wide variety of content, especially in music – the decades’ music from the 40s, 50s, 60s, 70s, 80s and 90s are mostly commercial free. Besides, there are the channels for country, hits, rock, urban, jazz & blues, dance, latin, world and classical music. There are two channels for kids – Radio Disney and XM for Kids. The news channels are mostly drawn from television and have the entire range of MSNBC, Fox News, CNN Headline News, CNBC, Bloomberg, The Weather Channel, CNET News and BBC World Service. Similarly, the sport channels include coverage of ESPN Radio, ESPN News, Fox Sports Radio, Sporting News and NASCAR Radio but all of these carry commercials. The three commercial-free comedy channels are very popular, with Bill Cosby, Andrew Dice Clay, etc. (arstechinca). Compared to XM, Sirius too provides a wide variety of music channels (65 compared to XM’s 69), most of which are commercial free. But, Sirius does not have a kids channel and less programming for comedy, books, etc. Among sports channels, the major attraction of XM is in the Major League Football while that of Sirius is in National Football League, National Basketball Association games and National Hockey League games. XM has garnered the highest listener draw by signing up Oprah Winfrey and Gayle King for a weekly reality radio show while Sirius’ major attraction is with Howard Stein. Although these are the most prestigious shows for the two radios, these are also the most expensive ones. Besides, XM has smart radio shows with Opie and Anthony, Bob Andrews and Ellen DeGeneres while Sirius has the Martha Stwart show providing advice on living rights. In news, XM has FOX News while Sirius has tied up with NPR, the best of public broadcast radio (satelliteradiozone). On the whole, XM’s competitive advantage is in the genre music according to decades, with focus on women and older listeners while Sirius targets a younger audience, with the exclusive deals with National Football League, National Basketball Association and National Hockey League. . The Competition with other radio media While most radio signals can travel 30 to 40 miles, satellite radio signals can broadcast from as much as 22,000 miles away. Particularly while driving in cars, radio signals are far clearer through the satellite than through terrestrial radio (satelliteradiozone). Besides AM/FM radio, satellite radio now faces competition from ipods, digital audio broadcasting (DAB) and internet radio. The rationale of the merger of XM-Sirius is therefore projected as the competition that satellite radio faces with respect to these other media that has come into the market lately and did not exist when the licenses were granted to Sirius and XM. Traditional analog radio broadcasters in the US are banking on HD Radio, which would transmit signals over and above the normal AM and FM bands digitally, to take on the competition from satellite radio. Although nearly 1,000 radio stations in the US broadcasts in HD Radio, only the new channels are transmitted through the HD Radio. A number of initiatives are being taken by the analog radio transmitters to go digital. For example, Clear Channel has tied up with Microsoft to create MSN Direct HD Service to provide local content to home and car radio HD receivers and the HD Radio Alliance plans to commit $250 million to develop the format (Damerjian, 2007). By the end of 2008, 2000 of the country’s 13,000 radio stations plan to turn digital although it costs about $100,000 to add a digital transmitter to a radio station. Digital radio is free and thrive on localized content while satellite radio’s key drivers are national coverage and the variety of content, despite the subscription fee. With multicasting, digital radio has the potential to take on the competition that satellite radio has put up (Davidson, 2005). The other new competition that the satellite radio faces is from internet radio that may be associated with a terrestrial radio station or independent. Broadcasting through the internet, or webcasting, provides the listener continuous stream of audio quite like traditional radio. Many internet radio offers a wide range of content – music, news, sport and weather – quite like any other radio medium and can be transmitted across the world and is free for the listener. Recently, however, the Copyright Royalty Board announced the per play royalty rates for music played on the internet radio, that has removed much of its competitive advantage (Digital Podcast, 2007). Antitrust issues The US Senate has expressed its reservations regarding the antitrust issues involved in the XM-Sirius merger. The antitrust laws in the US are based on the 1890 Sherman Antitrust Act and the 1914 Clayton Act. Although the main principle of the law is that there should be sufficient competition in the market and monopoly powers in price-fixing should be avoided at any cost, there have been many revisions of the laws in the past. On the other hand, there are arguments that laws should ultimately be in the interest of the consumers (Surowiecki, 2007). XM and Sirius have argued that the competition is not necessarily between satellite radio players (there being only the two of them) but across different radio players, including the AM/FM, digital and internet radio since all of them provide similar content albeit through different technologies and reaching local or national listeners. It has bee found that nearly 50 percent of radio advertisements are shared by the top four stations and there is considerable overlap of content across the stations (Surowiecki, 2007). Hence, in this new scenario of competition across a wide variety of radio stations, antitrust laws perhaps will not hinder the merger between XM and Sirius as long as their monopoly power does not lead to higher subscription fees. The companies have in fact agreed to a price limit being imposed by the FCC. Investors’ Reaction to the Merger Although investors had reacted favorably to rumors of the XM-Sirius merger, share prices of the two companies in fact fell after the merger was formally announced. This shows that investors are not convinced about the reduction of costs of the two companies, following the merger, since much of the costs are incurred on account of expensive celebrity hosts and deals with NBA, MLB and other sports leagues. Besides, there are concerns of the incompatibility of the XM and Sirius radio receivers and whether the merger will lead to higher costs of radio receivers, prompting listeners to shift to AM/FM, digital or internet radio. The clinching point of the financial success of the merger will be the streamlining of content and cost-cutting through reduction of overlapping content. Works Cited Liberman, David, How Sirius-XM Merger would cut companies’ costs still unclear, USA Today, February 20, 2007, http://www.usatoday.com/money/media/2007-02-19-xm-sirius-talks_x.htm New York Times, Merger would end Satellite Radio’s Rivalry, February 20, 2007, http://www.nytimes.com/2007/02/20/business/media/20radio.html?ex=1329627600&en=c6026ee40b4c237b&ei=5088&partner=rssnyt&emc=rss Satellite Radio Zone, Sirius XM Comparison, http://www.satelliteradiozone.com/Satellite-Radio-Comparison/ Arstechnica, Satellite Radio Review, July 2, 2002, http://arstechnica.com/reviews/other/xm-radio.ars Hazlett, Thomas, Local Motives: Why the FCC should scrap its absurd rules for satellite radio, March 16, 2004, http://www.slate.com/id/2097247/ Damerjian, Dave, Will Digital Radio Boom in the US? Wired, January 18, 2007, http://www.wired.com/science/discoveries/news/2007/01/72514 Davidson, Paul, Digital radio emerges into the future, USA Today, August 23, 2005, http://www.usatoday.com/tech/products/gear/2005-08-23-digital-radio_x.htm Digital Podcast, Bye Bye Internet Radio, 2007, http://www.digitalpodcast.com/podcastnews/2007/03/08/bye-bye-us-internet-radio/ Suroweicki, James, Satellite Sisters, New Yorker, March 19, 2007, http://www.newyorker.com/talk/2007/03/19/070319ta_talk_surowiecki Read More