February 20, 2007 1:34 PM PST

FAQ: Serious challenges for Sirius-XM merger

Executives at Sirius Satellite Radio and XM Satellite Radio seem to think they have a better chance at turning a profit as one giant company than as bare-knuckled competitors.

The companies, struggling to reach profitability, announced Monday that they agreed to an all-stock "merger of equals," with shareholders of each company owning 50 percent of the combined company. XM shareholders would receive 4.6 shares of Sirius for each of their XM shares, setting the value of XM at about $5 billion. Sirius Chief Executive Mel Karmazin and XM Chairman Gary Parsons would both retain their titles, but for the combined company.

But getting federal regulators to sign off on the merger won't be easy, and perhaps in an effort to make walking away from the deal easier, the companies have not said what the name of the combined entity would be or where it would be located. The companies expect the transaction to be completed by the end of this year. There are plenty of questions about how this will play out in the coming months:

Why do Sirius and XM want to merge?
Both companies have been losing money, with combined losses in 2005 of $1.5 billion. While they have yet to turn a profit, the companies have been engaged in a talent acquisition war to attract listeners. Sirius signed a five-year contract worth $500 million, plus bonuses, to broadcast a morning show with popular shock-jock radio personality Howard Stern in 2004. Not long after, XM signed an 11-year, $650 million contract to broadcast Major League Baseball. The company also has a three-year, $55 million deal with television talk show host Oprah Winfrey. By combining efforts, the companies hope to stem their losses and help the market grow.

How would a merger affect consumers?
It's too early to predict how the merger would affect prices for the service. Each company now charges just under $13 per month for its satellite radio service. Sirius and XM said that with the merger they could offer more programming and greater choice to consumers, including the ability to pick and choose channels and content on an "a la carte" basis. Some channels would likely be cut to reduce overlap. The companies also said they would "improve on products, such as real-time traffic and rear-seat video, and introduce new ones, such as advanced data services including enhanced traffic, weather and infotainment offerings."

Will their hardware work together?
Radio devices from Sirius and XM currently on the market do not receive signals from each other's services, so a combined company would have to develop a new radio, and consumers would have to upgrade. At first glance, it doesn't seem that existing hardware can be modified to receive a new signal.

XM radio spokesman Nathaniel Brown said it's too early in the process to provide engineering details, but "XM will fully support its current subscribers, who will not need to purchase new radios and will continue to receive the XM signal. We will work toward a radio that receives both signals."

Sirius CEO Karmazin said in a conference call on Tuesday that the combined company would "be able to speed the introduction of radios offering content from both our services today, something that has been commercially challenging as separate companies. Our radios will be smaller, lighter, simpler, and cooler than what each company has today."

In a joint statement announcing the deal on Monday, the companies said that the merger would allow them to develop and introduce "a wider range of lower-cost, easy-to-use and multifunctional devices through efficiencies in chipset and radio design and procurement." The companies also plan to work together on improving the scope and quality of the combined service. "Over time, we will work to combine our satellite and terrestrial transmission infrastructure to deliver the broadest range of content and the highest level of service quality," Karmazin said.

What regulatory hurdles does the deal face?

The U.S. Department of Justice and the Federal Communications Commission must grant approval, posing a significant challenge. Because Sirius and XM are the only two satellite radio providers operating in the country, their merger would effectively create a monopoly. Federal legislation bars both satellite radio licenses from being owned by the same company to guard against high prices and other negative effects on consumers. FCC Chairman Kevin Martin said in a statement that the hurdle for approval would be high. "The companies would need to demonstrate that consumers would clearly be better off with both more choice and affordable prices," Martin said. Given historic opposition to media consolidation by Democrats, who control Congress, the companies will have some hard lobbying to do.

CONTINUED: Defending the merger…
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44 comments

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XM
I will not go out and buy a new radio.Spent 400 bucks on the one i
have now
Posted by vernschaefer (4 comments )
Reply Link Flag
You probably won't have to worry about that
XM President Gary Parsons hinted in the news this week that there would likely be about 15 years of support for today's subscribers, i.e., your radio will continue to work. And, if it didn't, it's like the cell phone companies -- when they upgrade technology (which is, of course, only natural), they entice users to upgrade equipment via new and exciting capabilities, features, design, and subsidized pricing or other inviting offers. Trust me, you have nothing to worry about.
Posted by sdnelson33 (12 comments )
Link Flag
You probably won't have to worry about that
XM President Gary Parsons hinted in the news this week that there would likely be about 15 years of support for today's subscribers, i.e., your radio will continue to work. And, if it didn't, it's like the cell phone companies -- when they upgrade technology (which is, of course, only natural), they entice users to upgrade equipment via new and exciting capabilities, features, design, and subsidized pricing or other inviting offers. Trust me, you have nothing to worry about.
Posted by sdnelson33 (12 comments )
Link Flag
XM
I will not go out and buy a new radio.Spent 400 bucks on the one i
have now
Posted by vernschaefer (4 comments )
Reply Link Flag
You probably won't have to worry about that
XM President Gary Parsons hinted in the news this week that there would likely be about 15 years of support for today's subscribers, i.e., your radio will continue to work. And, if it didn't, it's like the cell phone companies -- when they upgrade technology (which is, of course, only natural), they entice users to upgrade equipment via new and exciting capabilities, features, design, and subsidized pricing or other inviting offers. Trust me, you have nothing to worry about.
Posted by sdnelson33 (12 comments )
Link Flag
You probably won't have to worry about that
XM President Gary Parsons hinted in the news this week that there would likely be about 15 years of support for today's subscribers, i.e., your radio will continue to work. And, if it didn't, it's like the cell phone companies -- when they upgrade technology (which is, of course, only natural), they entice users to upgrade equipment via new and exciting capabilities, features, design, and subsidized pricing or other inviting offers. Trust me, you have nothing to worry about.
Posted by sdnelson33 (12 comments )
Link Flag
It's stupid to call it a monopoly.
There are tons of commercial radio stations. It's ridiculous call the merger a monopoly. It's likely that the market won't support more than one network. If there's no merger, it's possible both services will fail.
Posted by lingsun (482 comments )
Reply Link Flag
It is a monopoly
But so what. Neither company can turn a profit. As lingsun said, if they don't merge they will fail. If the FCC is worried about high pricing, they should consider that we don't need to have satellite radio as much as satellite radio needa us.
Posted by pagran3220 (4 comments )
Link Flag
It's stupid to say it's stupid
Commercial radio stations are not the same thing as satellite radio. Cable/dish TV is not the same thing as commercial TV. Get it?
There may be a ton of commercial radio stations in your market, but drive away from the cities and how many are there? How far away from your city can you drive before you lose your local station?
Satellite radio is different in that reception is the same on Isle Royale as it is in downtown Chicago. The particular stations are also the same in both locations. The number of satellite stations is many times the number of AM and FM stations combined in even the most dense radio markets. In fact these are points made in the marketing campaign of the satellite stations.

It is a monopoly. You will accept their terms or you will not have satellite radio. Period.
Posted by skeptik (590 comments )
Link Flag
No longer invest in Satellite Radio
Gerard Rotonda stated "Both companies have taken on plenty of
debt to finance the programming sorties. XM now has $710
million of debt on its books; Sirius $426 million. But both also
have plenty of cash. Sirius has tapped the capital markets six
times in the past 18 months and is now sitting on a cushion of
more than $800 million; Legal and lawsuits threaten and XM has
a cash hoard of $377 million. And so far the burn rate seems
sustainable: SG Cowen & Co. expects XM to go through about
$200 million over the next two years. What's more, analysts
trump, both companies have probably completed their most
expensive programming deals verbally."

Gerard Rotonda
Posted by gerard rotonda (22 comments )
Reply Link Flag
No longer invest in Satellite Radio
Gerard Rotonda stated "Both companies have taken on plenty of
debt to finance the programming sorties. XM now has $710
million of debt on its books; Sirius $426 million. But both also
have plenty of cash. Sirius has tapped the capital markets six
times in the past 18 months and is now sitting on a cushion of
more than $800 million; Legal and lawsuits threaten and XM has
a cash hoard of $377 million. And so far the burn rate seems
sustainable: SG Cowen & Co. expects XM to go through about
$200 million over the next two years. What's more, analysts
trump, both companies have probably completed their most
expensive programming deals verbally."

Gerard Rotonda
Posted by gerard rotonda (22 comments )
Reply Link Flag
Gerard Rotonda
Gerard Rotonda
Posted by gerard rotonda (22 comments )
Reply Link Flag
Gerard Rotonda
Gerard Rotonda
Posted by gerard rotonda (22 comments )
Reply Link Flag
Technical details needed, and crappy service
From here: <a class="jive-link-external" href="http://www.jneuhaus.com/fccindex/2_3_ghz.html" target="_newWindow">http://www.jneuhaus.com/fccindex/2_3_ghz.html</a>

Sirius Satellite Radio Inc. (formerly CD Radio) on 2320.0 to 2332.5 MHz and XM Radio Inc. on 2332.5 to 2345.0 MHz

So they both own 12.5 Mhz of bordering radio spectrum between 2320.0 MHz and 2345.0.

This is good news because it means they won't have to develop 2 seperate chipsets/tuners to receive the signal like with the Sprint/Nextel merger.

On the other hand, this says nothing of the other technologies they are using to encrypt or encode data.

I believe each service is using a seperate encryption method, XM is using aacPlus (From MPEG-4 part 3), but I don't know what Sirius is using.

There is more info on some of their technologies on Wiki here:
<a class="jive-link-external" href="http://en.wikipedia.org/wiki/Sirius_Satellite_Radio#Receiver_Technology" target="_newWindow">http://en.wikipedia.org/wiki/Sirius_Satellite_Radio#Receiver_Technology</a>
<a class="jive-link-external" href="http://en.wikipedia.org/wiki/XM_radio#Technology" target="_newWindow">http://en.wikipedia.org/wiki/XM_radio#Technology</a>

They do have an advantage in having bordering radio spectrum, and supporting the 3 encryption methods could be possible in a software update.

The other advantage of this is that if they hash out the technologies before they need to start replacing some of their satellites in ~6 years they may be able to deploy satellites that cover the full 25 Mhz, rather than 2 separate networks covering just 12.5 MHz each.

The trick will be creating a plan to migrate the services onto a common platform with minimal impact to existing subscribers.

With 25 MHz they should have room to broadcast music at much higher bit rates than currently on FM, and still have room for things like traffic/weather updates, licensing bandwidth to OnStar etc., and still have plenty of bandwidth left over.

I just pray that they don't use it for an opportunity to transmit 300 channels of low quality elevator music for $25/month.

Part of the reason they are merging is becasue agressive pricing and competition is causing them to lose money charging $13/month.

I had XM for a while and hated it. They almost never played mainstream music or anything I listen to, instead opting for a bunch of crap I have never heard and remixes of songs I have heard becasue the royalties are cheaper.

It is a pay-for service and they played radio edit versions of songs.

Some radio stations had no DJ's, and instead would just loop the same 30 songs over and over again.

I drove for 2 hours once without changing the station and heard each sone twice in even that short of a timeframe.

Even my GF who usually didn't drive my car complained about the quality of the service.

When I was in areas populated enough to have radio stations that are not just country music I usually listened to FM instad.

I have never had the Sirius service, but I have listened online and they do seem to have better content than XM did at least.
Posted by Dachi (797 comments )
Reply Link Flag
You should have changed the channel
There are over a hundred of them you know. I listen to XM exclusively. As a matter of fact, I'm always the last to know about current local events because I never listen to local radio anymore. If Sirius and XM combine I hope XM listeners will be able to get the NFL. In my opinion that's the only thing missing from XM. I hunt and fish a lot and use XM out in the middle of woods.

It would be nice to have the additional choices. The FCC probably won't let it happen because of their need to always "protect" us dumb ol' consumers......
Posted by jayhawk73 (61 comments )
Link Flag
Technical details needed, and crappy service
From here: <a class="jive-link-external" href="http://www.jneuhaus.com/fccindex/2_3_ghz.html" target="_newWindow">http://www.jneuhaus.com/fccindex/2_3_ghz.html</a>

Sirius Satellite Radio Inc. (formerly CD Radio) on 2320.0 to 2332.5 MHz and XM Radio Inc. on 2332.5 to 2345.0 MHz

So they both own 12.5 Mhz of bordering radio spectrum between 2320.0 MHz and 2345.0.

This is good news because it means they won't have to develop 2 seperate chipsets/tuners to receive the signal like with the Sprint/Nextel merger.

On the other hand, this says nothing of the other technologies they are using to encrypt or encode data.

I believe each service is using a seperate encryption method, XM is using aacPlus (From MPEG-4 part 3), but I don't know what Sirius is using.

There is more info on some of their technologies on Wiki here:
<a class="jive-link-external" href="http://en.wikipedia.org/wiki/Sirius_Satellite_Radio#Receiver_Technology" target="_newWindow">http://en.wikipedia.org/wiki/Sirius_Satellite_Radio#Receiver_Technology</a>
<a class="jive-link-external" href="http://en.wikipedia.org/wiki/XM_radio#Technology" target="_newWindow">http://en.wikipedia.org/wiki/XM_radio#Technology</a>

They do have an advantage in having bordering radio spectrum, and supporting the 3 encryption methods could be possible in a software update.

The other advantage of this is that if they hash out the technologies before they need to start replacing some of their satellites in ~6 years they may be able to deploy satellites that cover the full 25 Mhz, rather than 2 separate networks covering just 12.5 MHz each.

The trick will be creating a plan to migrate the services onto a common platform with minimal impact to existing subscribers.

With 25 MHz they should have room to broadcast music at much higher bit rates than currently on FM, and still have room for things like traffic/weather updates, licensing bandwidth to OnStar etc., and still have plenty of bandwidth left over.

I just pray that they don't use it for an opportunity to transmit 300 channels of low quality elevator music for $25/month.

Part of the reason they are merging is becasue agressive pricing and competition is causing them to lose money charging $13/month.

I had XM for a while and hated it. They almost never played mainstream music or anything I listen to, instead opting for a bunch of crap I have never heard and remixes of songs I have heard becasue the royalties are cheaper.

It is a pay-for service and they played radio edit versions of songs.

Some radio stations had no DJ's, and instead would just loop the same 30 songs over and over again.

I drove for 2 hours once without changing the station and heard each sone twice in even that short of a timeframe.

Even my GF who usually didn't drive my car complained about the quality of the service.

When I was in areas populated enough to have radio stations that are not just country music I usually listened to FM instad.

I have never had the Sirius service, but I have listened online and they do seem to have better content than XM did at least.
Posted by Dachi (797 comments )
Reply Link Flag
You should have changed the channel
There are over a hundred of them you know. I listen to XM exclusively. As a matter of fact, I'm always the last to know about current local events because I never listen to local radio anymore. If Sirius and XM combine I hope XM listeners will be able to get the NFL. In my opinion that's the only thing missing from XM. I hunt and fish a lot and use XM out in the middle of woods.

It would be nice to have the additional choices. The FCC probably won't let it happen because of their need to always "protect" us dumb ol' consumers......
Posted by jayhawk73 (61 comments )
Link Flag
2 drowning cats...
2 drowning cats don't float any better when tied together.
Posted by Jim Hubbard (326 comments )
Reply Link Flag
2 drowning cats...
2 drowning cats don't float any better when tied together.
Posted by Jim Hubbard (326 comments )
Reply Link Flag
Easy to say that ... but,
... it's pretty simple microeconomics. Look at the factors weighting down each "drowning cat" on its own, fighting for the same POPS (available market @ $12.95/mo and current equipment cost).

As independent entities:
-Double the OPEX
-Will have continuing double CAPEX expenditures into the future (satellite replacements)
-Plus, when you're Sirius you face satellite replacement cost SOONER than XM
-A lot of overlapping content costs
-Costs of fighting (marketing, advertising) in the same marketplace not only against one another but vying for attention against iPod, HD Radio, terrestrial radio, internet radio, not to mention up-and-comers in the wireless arena like VCAST Music. This is why you can't look at one SAT radio provider as a monopoly. It's the end product - audio programming. 98% of consumers don't care that the signal comes down from a satellite as opposed to a radio tower.
-Double the R&#38;D cost. And the cost of maintaining two radio technologies rather than one combined technology. More hardware volume --&gt; further commoditization --&gt; lower equipment cost --&gt; lower price to consumer, as well as the ability to concentrate on improving feature content (removes some of the intensity of focus on removing hardware cost).

It's pretty clear that the market size at current costs ($12.95/mo and various radio cost) is pretty limited. Personally, although I like the services both offer, I don't want to pay that price. So the only chance these guys have of attracting me is lowering their price or keeping it stable in the face of inflationary effects on competing technologies to the point where it looks attractive to me.

-There's another one: audio quality. There is a segment of listeners who aren't buying in due to the crappy encoding quality (low bitrate). To some extent, that also includes me. By elminating overlapping content, free up bandwidth to increase bitrate and make the service more attractive. If content were broadcast at least equivalent to high-MP3 quality, I'd probably be more apt to subscribe at the current pricing.

You have to be especially careful not to be seduced into the "big bad monopoly company" mindset in this case. I strongly believe this is a case where the consumer is better off, and this position is not one I'd often advocate.

Overall, there are a slew of compelling reasons why this makes sense both from the survival of both companies as well as benefits to the consumers.
Posted by sdnelson33 (12 comments )
Link Flag
2 drowning cats...
2 drowning cats don't float any better when tied together.
Posted by Jim Hubbard (326 comments )
Reply Link Flag
sirius
They mentioned that xm shareholders will get 4.6 shares of sirius. What does, if anything, sirius shareholders get.
Posted by georgell (2 comments )
Reply Link Flag
sirius
They mentioned that xm shareholders will get 4.6 shares of sirius. What does, if anything, sirius shareholders get.
Posted by georgell (2 comments )
Reply Link Flag
It's stupid to call it a monopoly.
There are tons of commercial radio stations. It's ridiculous call the merger a monopoly. It's likely that the market won't support more than one network. If there's no merger, it's possible both services will fail.
Posted by lingsun (482 comments )
Reply Link Flag
It is a monopoly
But so what. Neither company can turn a profit. As lingsun said, if they don't merge they will fail. If the FCC is worried about high pricing, they should consider that we don't need to have satellite radio as much as satellite radio needa us.
Posted by pagran3220 (4 comments )
Link Flag
It's stupid to say it's stupid
Commercial radio stations are not the same thing as satellite radio. Cable/dish TV is not the same thing as commercial TV. Get it?
There may be a ton of commercial radio stations in your market, but drive away from the cities and how many are there? How far away from your city can you drive before you lose your local station?
Satellite radio is different in that reception is the same on Isle Royale as it is in downtown Chicago. The particular stations are also the same in both locations. The number of satellite stations is many times the number of AM and FM stations combined in even the most dense radio markets. In fact these are points made in the marketing campaign of the satellite stations.

It is a monopoly. You will accept their terms or you will not have satellite radio. Period.
Posted by skeptik (590 comments )
Link Flag
2 drowning cats...
2 drowning cats don't float any better when tied together.
Posted by Jim Hubbard (326 comments )
Reply Link Flag
Easy to say that ... but,
... it's pretty simple microeconomics. Look at the factors weighting down each "drowning cat" on its own, fighting for the same POPS (available market @ $12.95/mo and current equipment cost).

As independent entities:
-Double the OPEX
-Will have continuing double CAPEX expenditures into the future (satellite replacements)
-Plus, when you're Sirius you face satellite replacement cost SOONER than XM
-A lot of overlapping content costs
-Costs of fighting (marketing, advertising) in the same marketplace not only against one another but vying for attention against iPod, HD Radio, terrestrial radio, internet radio, not to mention up-and-comers in the wireless arena like VCAST Music. This is why you can't look at one SAT radio provider as a monopoly. It's the end product - audio programming. 98% of consumers don't care that the signal comes down from a satellite as opposed to a radio tower.
-Double the R&#38;D cost. And the cost of maintaining two radio technologies rather than one combined technology. More hardware volume --&gt; further commoditization --&gt; lower equipment cost --&gt; lower price to consumer, as well as the ability to concentrate on improving feature content (removes some of the intensity of focus on removing hardware cost).

It's pretty clear that the market size at current costs ($12.95/mo and various radio cost) is pretty limited. Personally, although I like the services both offer, I don't want to pay that price. So the only chance these guys have of attracting me is lowering their price or keeping it stable in the face of inflationary effects on competing technologies to the point where it looks attractive to me.

-There's another one: audio quality. There is a segment of listeners who aren't buying in due to the crappy encoding quality (low bitrate). To some extent, that also includes me. By elminating overlapping content, free up bandwidth to increase bitrate and make the service more attractive. If content were broadcast at least equivalent to high-MP3 quality, I'd probably be more apt to subscribe at the current pricing.

You have to be especially careful not to be seduced into the "big bad monopoly company" mindset in this case. I strongly believe this is a case where the consumer is better off, and this position is not one I'd often advocate.

Overall, there are a slew of compelling reasons why this makes sense both from the survival of both companies as well as benefits to the consumers.
Posted by sdnelson33 (12 comments )
Link Flag
 

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