The New York Times Weighs In On Sirius-XM Merger

Talking Business
I Want My Howard Stern and Oprah
By JOE NOCERA, Jan 20, 2007, The New Times

On Wednesday, I was in the middle of a long phone conversation with Craig Moffett, the Wall Street analyst who follows broadcasting for Sanford C. Bernstein & Company. His purview includes the country’s two satellite radio companies, XM and Sirius. Although Mr. Moffett is more positive on XM than Sirius, he sounded a little sheepish when I asked him whether he was bullish on the sector.

“It’s hard to say,” he replied. “It’s a very good product but the stocks have been such dogs.” He continued: “These guys have real challenges.”

For months now, Wall Street has been promoting a seemingly simple solution to the problems facing XM and Sirius, including mounting losses, enormous fixed costs and a slowdown in subscriber growth. (Each charges subscribers $12.95 a month.) The Street would like to see the two companies merge.

Merger speculation has been stoked, in part, by the Sirius chief executive, Mel Karmazin, who has made a number of public comments suggesting that a deal would be good for shareholders. More recently, XM has also seemed to warm up to the idea. Neither company would talk to me about the merger possibility; but just a few weeks ago, a rumor gained currency that XM and Sirius would announce at the Detroit auto show that they were combining. (The rumor was false.)

Just as Mr. Moffett was describing the benefits of an XM-Sirius merger for me, he was interrupted by another call. He put me on hold. When he got back to the phone, he said, “I just heard that Chairman Martin made some negative merger comments.”

That would be Kevin J. Martin, the chairman of the Federal Communications Commission, which will have a lot to say about whether the two companies can merge. In response to a question at the end of an F.C.C. meeting, Mr. Martin pointed out that a commission rule forbade one company from owning both satellite radio licenses.

Almost as soon as the news hit the wire, the stocks of the two companies began tanking.

AS it turns out, Mr. Martin’s comments were not as definitive as the early reports suggested. As a commission spokesman pointed out to me — and as a number of Wall Street analysts wrote to their clients — Mr. Martin was simply answering a straightforward question about whether such a rule existed. But he also said that if the companies tried to merge, the F.C.C. would take a close look at it.

“The commission can and does change its rules,” noted Kenneth Ferree, a former senior commission official now with the law firm of Sheppard, Mullin, Richter & Hampton. Naturally, the stocks of the two companies started to rise again.

It is impossible to know whether the commission would ultimately approve a merger that would allow the satellite radio duopoly to become a monopoly. Normally, any right-thinking person would instinctively be opposed to such a move — don’t we have antitrust laws to prevent mergers that would give companies monopoly power? But the situation with satellite radio raises a question that is becoming more and more important these days: when it comes to new and emerging technologies, what exactly constitutes competition?...

...Reed Hundt, the former F.C.C. chairman back when the commission passed its rule preventing a satellite radio merger, told me that when they were preparing to auction the spectrum for satellite radio in the 1990s, it wasn’t clear that satellite radio would compete with local terrestrial radio. So the commission wanted to be sure that there were two companies that could compete with each other. But now it is quite clear that satellite radio and terrestrial radio do, in fact, compete. One reason Sirius has never raised its rates — and XM has done so only once — is that the competition from free radio keeps prices in check.

And so do other forms of competition, especially iPods. “You can buy an iPod and download music and then plug it into your car,” Mr. Hundt said. “How is that different from satellite radio?” Eventually, cars will come equipped with wireless Internet, which will mean all kinds of options for streaming audio content. Once that happens, it seems to me that satellite radio is going to be just another technology fighting to keep pace with the Internet.

Which is also why, somewhat to my surprise, Mr. Hundt believes that the rule he helped formulate should be repealed. “I think we did the right thing to begin with,” he said. “You wouldn’t want to change it if it weren’t for the fact that it is so obvious that you can get content in so many different ways. That wasn’t really true then.” As Mr. Levin put it, “Circumstances have changed.” ...read more: here

1/20/2007 02:07:00 PM

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