XM and Sirius: Meant to Be Together?

Satellite-Radio Services May Pair Up to Fend Off New Digital Technologies

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NEW YORK (AdAge.com) -- The rumors of a satellite-radio merger are swirling again as last week Mel Karmazin told investors and venture capitalists at The Deal's Convergence 2.0 conference that "we'd love to buy" XM, before cautioning that price and regulatory issues would be impeding factors.
XM and Sirius are working on a receiver that would pick up both companies' signals and offer time-shifting technology.
XM and Sirius are working on a receiver that would pick up both companies' signals and offer time-shifting technology.

His candidness about his desire to be the only player in the space has fueled speculation for the past year and a half. But lately, as the satellite-radio industry, like the rest of the media world, faces more competition than it may ever have anticipated -- from sophisticated wireless devices, Wi-Fi and premium-online-content offerings -- media veterans are questioning whether there will be a single satellite-radio company five years from now.

Phones get in on the act
Consider an upcoming service from Major League Baseball Advanced Media: audio broadcasts of all its games streamed live to mobile devices for a $5.99 monthly fee. Now consider that XM Satellite Radio spent $650 million for the rights to offer audio broadcasts of every MLB game from 2005 to 2016 (not to mention millions more advertising its $12.95-a-month service on national TV and outfield walls).

"Everybody in the audio space has more competition than ever before, and it has happened faster than anybody envisioned. Who knew about podcasting two years ago?" said Laura Behrens, principal research analyst at Gartner. Ms. Behrens believes -- at least in the near term -- there's room for both XM and Sirius because the new technologies challenging them aren't yet mass-market trends.

XM and Sirius are working on a receiver that would pick up both companies' signals and, they hope, eliminate one thing keeping consumers from subscribing to satellite: having to commit to a single service. And both have worked to adapt to new technology. The new receivers will offer time-shifting technology, and XM has inked a deal with Napster to allow users to bookmark songs for later download.

But even so, Mike Goodman, senior analyst at Yankee Group, thinks iPods and other digital audio players remain the biggest threat to satellite radio, more so than other emerging audio technologies such as mobile streaming. "There's an 800-pound gorilla in the room today," he said. "Why worry about one coming down the road?"

The bigger threat
MP3 players may be the 800-pound gorilla, but burgeoning online-radio services -- where listeners have a virtually unlimited selection of stations, many playing commercial-free music -- could end up being the 1,000-pound gorilla sitting in satellite's territory. According to Arbitron and Edison Media Research, while 95% of people listen to terrestrial radio and 20% listen to online radio, only 4% listen to satellite.

"I don't think the satellite companies will have an advantage in the music space," said Natalie Swed Stone, U.S. director-national radio, OMD. "There will be commercial-free or low-clutter music everywhere." She predicts sports and talk deals (those channels carry advertising) will become more important as a result.

In the past two years, Sirius and XM have spent a collective $1.7 billion to bring to the satellite airwaves National Football League games, Major League Baseball games, Nascar races, and talkers Oprah Winfrey and Howard Stern -- all of which, except Mr. Stern, can be found on mainstream free media and increasingly on emerging channels as well. Already the market treats the companies as though they're the same, often trading them in tandem -- depressing Sirius's stock on account of XM's recent troubles, for example. And removing the competition would keep the two from bidding each other up over both key content and auto-distribution deals.

Best argument for merging
But perhaps the best argument for merging the two players is stock prices. Investors who had $100 in each company's stock on Jan. 1, 2006, now would have about $52 with XM and $69 with Sirius.

To be clear, there are many barriers to a merger, most obviously having to prove to government regulators that material competition from other forms of emerging audio are keeping the two companies from profitability. With both set to turn cash flow positive by 2007, that's a tough order.

And as for competition from cellphones and iPods? Sirius's chief financial officer, David Frear, recently addressed the topic at a Morgan Stanley investor conference: "I think satellite radio feels it has plenty of competition with the $20 billion behemoth of terrestrial that we compete with every day," he said.

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Pros and cons
Reasons to merge:
  • Better efficiency in programming, contracts with auto makers
  • Increased competition from internet radio and wireless streaming devices
  • A much-needed boost to stock prices
Reasons not to:
  • Regulatory hurdles
  • Interoperability costs
  • Company culture clashes
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