XM-Sirius Merger One Vote Away From Approval

But Don't Expect Surge of Advertising Unless Service Goes Free

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A correction has been made in this story. See below for details.

NEW YORK (AdAge.com) -- After spending the better part of the past 17 months in approval limbo, the XM-Sirius satellite radio merger is one step away from becoming a reality. FCC Commissioner Deborah Taylor Tate is expected to vote in favor of the proposed merger by week's end, according to a Wall Street Journal report.
FCC Commissioner Deborah Taylor Tate
FCC Commissioner Deborah Taylor Tate Credit: Jae C Wong

But even with long-awaited approval by the Federal Communications Commission of the $4.2 billion merger, a newly combined XM-Sirius is not likely to make major waves in the radio marketplace in the near future. Natalie Swed Stone, director-national radio investment for Omnicom Group media buyer OMD, said two major issues still linger with the merger. For one, advertisers need to reach a broader audience, even after combining XM's 9.6 million and Sirius' 8.6 million subscribers. "We buy both anyway, so it wouldn't change anything. It would have to be one and one makes three," she said.

Needs a bigger audience
Doing away with its subscription model, at least in part, is one major way to build audience. Ms. Swed Stone suggested taking a cue from the AOL model. "Make it free, then aggregate the audience; make it a huge audience, then the advertisers will follow suit."

Ad inventory for both XM and Sirius is fairly limited, as many of the companies' most popular shows are ad-free, so sponsors can't even go near them (though Sirius' Howard Stern, Martha Stewart Living and NFL channels, among others, do take ads). Still, the companies saw a spike in ad sales last year. Sirius grew ad revenue year-over-year, from $31 million to $34.2 million in 2007, while XM grew from $35.3 million to $39.1 million.

With XM and Sirius combining assets and audiences for advertisers, buyers have mixed thoughts on how making deals with the satellite conglomerate will shake out. Matt Feinberg, executive group director-national broadcast for Publicis Groupe's Zenith Media, said, "They have a valid rationale to lower prices because of the consolidation of their infrastructure. They might cut some overhead and pass savings on to advertisers, or maybe they might not do that. I do believe they'll be very open about how they're doing things. I don't think it's going to be a major disruption of business."

But Ms. Swed Stone suggested that a merged XM-Sirius will try to raise ad pricing "immediately, because they're not competing with each other any more."

Wall Street is similarly cautiously bullish on XM-Sirius' prospects. In a report on the merger issued last month, Citi analyst Tony Wible cited exposure to economy, auto sales and consumer spending as chief risk factors against the merger's long-term growth, particularly as satellite radio is currently in an arms race with HD radio for automotive carriage contracts. Nevertheless, he valued XM stock at $13.30 per share, should the deal go through, and Sirius at $9.70.

Critics of the deal
But even with federal approval just moments away, the merger still faces some major detractors. The National Association of Broadcasters, which represents the terrestrial radio industry and has long been one of the merger's biggest opponents, issued a statement from NAB Exec VP Dennis Wharton yesterday, calling the merger a "sweetheart deal for Wall Street speculators ... premised on a premise that a monopoly will provide consumers with lower prices, better service and more programming formats. Only members of the Flat Earth Society would buy into such specious nonsense."

Mr. Wharton cited the FCC's refusal to approve the Echostar-DirecTV satellite TV merger in a 5-0 vote in 2002 as a sign that XM and Sirius have had "more luck flaunting the FCC's own rules than creating a successful business model."

FCC Commissioner Jonathan Adelstein, who voted against the merger yesterday, said in a statement, "I was hoping to forge a bipartisan solution that would offer consumers more diversity in programming, better price protection, greater choices among innovative devices and real competition with digital radio. Instead, it appears they're going to get a monopoly with window dressing. We missed a great opportunity to reach a bipartisan agreement that would have benefited the American people."

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CORRECTION: An earlier version of this story incorrectly stated subscriber numbers for XM and Sirius.
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