XM and Sirius Satellite Radio Talking Merger & Commercials

The smoke-filled, backroom negotiating tables of the two huge satellite radio companies have been buzzing about this for nearly two years now, but it is starting to look like it may become a reality sooner than expected.

Journalist Peter B. de Selding, reporting for SPACE News in Paris, France has stated that the two big U.S. satellite-radio companies, XM and Sirius are coming to the belief that a merger would result in substantial cost savings, might be the only thing that can save both of their fledgling companies, and might even be okay with U.S. regulators. The two companies were well represented at last week’s Citigroup-organized investors’ conference in Las Vegas as part of the Consumer Electronics Show where the statements were made.

By moving to a non-commercial-free invironment, both satellite giants are expecting about a 6 to 10 percent increase in advertising revenues for 2007 and beyond with Sirius claiming it will reach $1 billion in sales (mostly due to Howard Stern’s presence on the air), while XM is projecting a slightly higher figure for its profit margin.

“We won’t make a radical shift now,” Gary Parsons (XM Satellite Radio Chairman) said of shifting from the advertising-free format. “But I can see where today’s 4-5 percent gets to 10 percent or so in the next several years.”

While Sirius doubled its customer base in 2006, to more than 6 million, XM saw its published subscriber lead shrink (mostly due to a forced modification in hardware and non-compliance with FCC license requirements - two matters that have been resolved). The company nonetheless added nearly 1.7 million customers in 2006, ending the year with a total of 7.6 million.

Parsons said he would not wish XM’s 2006 troubles “on a dog. It was a tough year for the company.”

Even though the FCC is currently cold on the idea of a merger citing it would be anti-competive, Wall Street is pushing for it, expecting the merger to save enormous amounts of capital expenditure by combining sales forces and moving toward a single satellite fleet.

Mel Karmazin, chief executive of Sirius Satellite Radio, said he accepts the logic behind a solid merger. “We are responsible for acting in shareholders’ interest, and creating value,” he said. “One of the ways you create that value is through consolidation – particularly in a fragmented industry like the radio industry.”

“Merger proponents say today’s audio-media market — with iPod ports in automobiles, high-definition radio channels increasingly available and ever-more downloading of music – is broad enough so that a combined XM and Sirius would not significantly reduce competition in the market,” reported de Selding.

Parsons agrees with de Selding’s assessment, saying that both Sirius and XM sales increasingly will be dominated by OEM, or original equipment manufacturers, such as the automobile manufacturers who sell vehicles with XM or Sirius already installed.

“Would we be a buyer or a seller? Neither,” Parsons said of how a merger might be structured. “It more likely would be a merger with a ‘Best Of’ combination. The Department of Justice would conclude that there is a broader, addressable market – a large number of audio entertainment opportunities. It would not be a piece of cake, but if you did something like that would have a favorable regulatory market in which to approach it. But all these are hypothetical.”