Satellite Radio – The XM-Sirius Merger

As most of you probably know Sirius Satellite Radio and XM Satellite Radio formerly merged on July 29th, 2008. If you are like most people, your first reaction was “WHAT?”

The knee-jerk reaction was that this created a monopoly, the very thing the FCC (Federal Communications Commission) is supposed to guard against, and how the heck did this happen? Many of you probably remember the Bell Telephone monopoly and how in 1984 it was forced to split. This resulted in AT&T and seven smaller regional companies called the “Baby Bells”. It did not hurt the industry and in fact, resulted in competition that has contributed to keeping telephone costs down. It’s a whole new ballgame today though.

As far as Sirius and XM go, though it was called a merger, it was technically a takeover or acquisition of XM by Sirius. In 1997 (was it really that long ago?…how time flies!) the FCC granted two licenses for satellite radio networks in the U.S. and stipulated at the time that one of the holders of the licenses would not be allowed to gain control of the other. This merger then was very controversial and it was surprising, to say the least, that the FCC would allow this to happen.

Well, it didn’t actually happen overnight. The official announcement of the merger took place on February 19, 2007. Just one month later they filed a “Consolidated Application for Authority to Transfer Control” at the FCC. On March 24th, 2008, more than a year later, the U.S. Department of Justice, Antitrust Division closed its investigation of the two companies and cited that there would be no harm to consumers or to competition. On July 25th, 2008, the FCC approved the merger in a 3 to 2 vote, though even this vote was questionable as it was purely along party lines (though when there are only 5 people voting….). Sirius XM Satellite Radio came into being just four days later, in the U.S. XM Canada and Sirius Canada are still operating as wholly separate companies.

There were, of course, two schools of thought on the subject.

The benefits of the merger were expected to be:

Since both companies will now operate as one entity, the cost of licensing the material to be broadcast should be reduced. Obviously, less staff will be required to run the newly merged company and programming will be able to be spread across the combined satellite constellations of both companies. The variety of programming is expected to increase. For instance, if all the duplicate channels are done away with, that leaves more programming space available for which new contracts can be written. The subscribers from both services would benefit, though since the merger there have been claims by some that the programming has suffered. As one company, more money can be spent in order to develop new products. For example, both XM and Sirius now carry satellite weather and traffic, undreamed of at the time that satellite radio was first launched. It is fully expected that new technologies will lead to new product development and that the freeing up of funds by the merger will enable this to happen more quickly. As one company, bankruptcy was averted by both. When attempting to get approval for the merger, the companies argued that bankruptcy by both would result in less competition for land-based radio stations and for streaming services like Pandora.

The cons of the merger were expected to be:

That as a monopoly, so to speak, the company could raise subscription rates. That happened in March 2009, as rate hikes were announced, but the Sirius CEO Mel Karmazin has offered to fix prices so as to satisfy regulators and the consumers. That new development would be hampered. Opponents argued that XM’s competition with Sirius is what prodded both companies to develop new products, such as smaller receivers with many more features. By far the largest argument went to the consolidation of these two companies resulting in a monopoly. In essence yes, but it was argued that there was actually more competition outside of these two companies, as there were competitors streaming audio content to portable devices, such as cell phones. ClearChannel Communications offers an application that allows access to all of their radio stations, which includes the same type of content available on satellite radio. Both the iPhone and Blackberry, and now others, are capable of receiving streamed music. Pandora and Slacker are two other competitors that offer online listening, but do not offer live DKs, news or talk radio.

So, what has been the real result so far? Well, both companies used huge star power to lure consumers to their particular company. Now the consumer can have the best of both Sirius and XM when it comes to Oprah, Howard Stern, Bob Dylan and others. The same holds true for sports. The NFL and NASCAR were on Sirius and MLB, NHL, PGA and Indy Racing were on XM. There has been some confusion as far as programming changes, but not enough for people to drop their subscriptions en masse. Evidently the prior Sirius subscribers want the BEAT returned and prior XM subscribers want BPM back.

There’s no doubt that there will be further changes. This new company is, in effect, still in its infancy regardless of the combined experience. There will be bugs to work out and a new way of doing business, but you can be sure that Sirius XM Satellite Radio is betting on success.