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Analyst Weighs Impact of Sirius, XM Satellite Radio Merger

February 20, 2007 at 6:15 PM EDT
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TRANSCRIPT

GWEN IFILL: They were rivals, pioneers of a new technology that promised to give consumers an entirely new way to listen to the radio. But now Sirius and XM, the nation’s two satellite radio providers, want to get out of the ring and combine forces instead.

The proposed $13 billion deal would combine their separate slates of music, sports and entertainment channels. Subscribers now pay $12.95 a month to get a diet of shock jocks, talk show hosts, and targeted music programming, much of the time built into new cars.

XM and Sirius have a combined subscriber base of 13 million, but together have lost about $6 billion as subscriber growth has slowed. But each has spent eye-popping amounts of money to hire stars like Howard Stern and Oprah Winfrey.

HOWARD STERN, RADIO HOST: And let me tell you what’s been happening since the last show.

GWEN IFILL: Stern brought his raunchy variety show to Sirius two years ago, enticed by a cash-, stock- and incentive-laden package worth nearly $800 million. Sirius also paid the National Football League $230 million over seven years for radio rights to its games.

Similarly, XM has agreed to pay Winfrey $55 million over three years for her services and shelled out $650 million over 11 years to carry Major League Baseball.

The merger must first win approval from both the Justice Department antitrust regulators and the Federal Communications Commission. Meanwhile, some consumer groups and broadcasters have already said they will oppose the deal.

It should be noted that the NewsHour is also carried on XM Radio.

Pros and cons of the deal

Josh Bernoff
Forrester Research
[F]or the companies, the upside is pretty simple: They'll be able to get rid of competition.

GWEN IFILL: Here to help explain the merger and its implications for the industry and for consumers is Josh Bernoff, media and technology analyst at Forrester Research, a technology and market research company.

So, Mr. Bernoff, what is the upside and what is the downside of a deal like this?

JOSH BERNOFF, Forrester Research: Well, for the companies, the upside is pretty simple: They'll be able to get rid of competition. They'll be able to move forward with all of the car companies at once and will be able to just pursue reducing costs.

The downside -- there's some downside here for consumers who will have less choices. And, of course, there is an upside for consumers, which is that there's likely to be only one receiver in the future, which will be able to get either/or both services.

GWEN IFILL: You know, one of the things that the companies have been saying who have been advocating this merger is that the universe is different than when satellite radio first began. They are now competing against people in an on-demand world, with iPods and music over your cell phone. Is that part of what changed the business model for satellite radio?

JOSH BERNOFF: Well, I think what's changed here is a lot simpler. It's just a question of, how many people are likely to sign up for a service like this, a subscription service that will cost you $10 bucks or so a month?

Certainly, one way to look at it is -- the most liberal way to look at it is that everything competes with everything else. And for that reason, merging these two similar companies means they'll still have to compete with iPods, and Internet radio, and high-definition terrestrial radio and so on.

But, in general, all of these media forms compete with each other anyway. And that may or may not be what the relevant question is here.

Combining programming

Josh Bernoff
Forrester Research
I think that consumers have found both the high level of sound quality and the number of choices to be fairly similar.

GWEN IFILL: And what about the potential for duplicated programming? For a lot of people, Opie and Anthony, the shock jocks on one satellite radio, is not so different from what you hear with Howard Stern.

JOSH BERNOFF: Well, actually one of the challenges here and one of the benefits for consumers, if this merger goes through, is that you now have to choose. It's as if one cable company carried CBS and the other carried NBC, only, in this case, one company has the NFL on it and the other one has baseball, one has Howard Stern, and the other has Opie and Anthony.

So now those companies are competing on the basis of having different content. I think that consumers have found both the high level of sound quality and the number of choices to be fairly similar. And they may actually be choosing at this point based on either what comes standard with the car or whether there's some specific kind of content, like Howard Stern, that they really want.

GWEN IFILL: Whether you want baseball or football, for instance?

JOSH BERNOFF: Yes.

A poor business model?

Josh Bernoff
Forrester Research
[T]he companies involved have said that, after the merger, they will create a series of tiers so that you'll be able to have a higher- or a lower-priced service.

GWEN IFILL: So if you -- the National Association of Broadcasters, which represents more conventional radio, among other things, have said that this is basically asking for government bailout of a poor business model, that they've paid too much for it, a lot of these -- the people they've put on the air, that they have been losing money, that, in fact, as you pointed out, the subscriber base is kind of soft. Is there anything to that?

JOSH BERNOFF: I think there's definitely an argument to be made along those lines. I mean, in a start-up situation like this, where you're starting a few years ago with zero subscribers, you have to get a lot of attention. And in fact, if you look at the costs that these companies bear, really the major costs are, number one, the amount of money that they paid for people like Howard Stern, which it's hard to make a profit when you put that much money in.

And, second, the enormous amount of energy that they spend and money they have to spend winning over each subscriber. So if these businesses continue along the lines of how they've been going, they're not going to make a profit.

So I think the terrestrial broadcasters are saying, "Look, if they really want to run a business here, then they have to run the business in such a way that they're not spending so much for content and they're not spending so much to win subscribers over," as opposed to just saying, "Look, we've spent ourselves into a corner. Now let's let the two companies merge, even though we told the FCC we wouldn't do that."

GWEN IFILL: For a lot of consumers who grew up not paying for radio, $12.95 a month seems like a lot anyway. The question is whether a merger like this is now going to drive that cost up even more.

JOSH BERNOFF: Well, the companies involved have said that, after the merger, they will create a series of tiers so that you'll be able to have a higher- or a lower-priced service. But, you know, that's an interesting question about why they couldn't do that now if they had that as an idea.

I think the challenge here -- the real challenge is that, when we do consumer surveys, about 13 percent of consumers that don't have satellite radio already say that they're potentially interested in it. So there is a market there, but this is not like cable television that reaches a vast majority of consumers.

There are only a certain number of people who are willing to pay this money. Certainly, if there's the possibility -- if the competition is removed, there's the possibility of price increases. And, in any case, it doesn't look like it's going to become the kind of service that everyone gets, the way that they get, say, cable television service.

Getting the merger approved

Josh Bernoff
Forrester Research
[I]f the merger doesn't go through, then these companies will have to make some adjustments as far as the amount of money that they pay for content and the way that they sign up subscribers.

GWEN IFILL: The chairman of the Federal Communications Commission, Kevin Martin, has already said there's a high hurdle that must be gotten over in order for this to be approved. Is this something which they have already started to consider, what the regulatory environment is for a change like this? Has the FCC ever acted on these kinds of cases before?

JOSH BERNOFF: Well, this kind of a case actually did come up in the television world. Dish Network, which is the service of EchoStar, EchoStar said that it would acquire DirecTV, the other major satellite service.

And what happened is that, after about a year of going back and forth about whether that would actually be in the best interests of consumers, whether it would reduce choices and so on, they had to abandon that merger because they weren't able to get regulatory approval.

Given that this is yet another paid satellite service in a similar kind of market, I think that there has to be a lot of scrutiny given to this, on the basis that we already turned this down in television. Why does it make sense to approve this kind of a merger in radio?

GWEN IFILL: This merger has been rumored for at least a year. If for some reason after this has -- assuming that perhaps they have signaled, each company has signaled some weakness in seeking this merger, what happens if it doesn't come through? If you're a stockholder, do you think maybe this isn't such a good bet after all?

JOSH BERNOFF: Well, we should say, first of all, in case there are any satellite radio subscribers listening, that regardless of whether the merger goes through or not, and regardless of whatever else might happen, that the services will continue. You're not going to have your radio service suddenly stop working as a result of this.

But if the merger doesn't go through, then these companies will have to make some adjustments as far as the amount of money that they pay for content and the way that they sign up subscribers. So I think you might see some readjustments made in the amounts that they're -- the fees that they're paying for things like baseball and basketball, just because you can't continue to spend at that level if you're not going to end up getting large numbers of subscribers.

GWEN IFILL: Josh Bernoff, thank you very much.

JOSH BERNOFF: Thanks.