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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.
See more CNET content tagged:
XM Satellite Radio, Sirius, merger, Sirius Satellite Radio Inc., satellite radio
- 2 drowning cats...
- by Jim Hubbard May 6, 2008 10:04 AM PDT
- 2 drowning cats don't float any better when tied together.
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- Easy to say that ... but,
- by sdnelson33 February 23, 2007 11:14 AM PST
- ... 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).<br /><br />As independent entities:<br />-Double the OPEX<br />-Will have continuing double CAPEX expenditures into the future (satellite replacements)<br />-Plus, when you're Sirius you face satellite replacement cost SOONER than XM<br />-A lot of overlapping content costs<br />-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.<br />-Double the R&D cost. And the cost of maintaining two radio technologies rather than one combined technology. More hardware volume --> further commoditization --> lower equipment cost --> 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).<br /><br />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.<br /><br />-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.<br /><br />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.<br /><br />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.
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