Monday, January 01, 2007

SDARS Merger Chatter

January 1, 2007

The subject of a SDARS merger has again become a main topic of the sector. In a perfect world, the Boards of companies, who have a fiduciary responsibility to shareholders would give anything ample consideration where it appears that shareholders would benefit.

In my opinion, a satellite radio merger has massive potential, particularly if all of the spectrum is allowed to be kept. Certain synergies can not be denied. A merged company would be better able to negotiate content contracts, shelf space at retailers and space in circulars would be cut in half, marketing costs could be reduced dramatically, fees to RIAA and other rights owners would be minimized, OEM contracts could be renegotiated, and the decision for OEM's to install could be streamlined and adoption would be much faster. Costs of overhead could be reduced, and the company could concentrate on delivering the highest quality programming to its subscribers rather than worrying about the direct competition.

Satellite radio is a great concept, but the more these companies beat each other up, the easier it becomes for I-Pods, MP3 players, cell phone carriers, etc. to enter the landscape. A satellite radio merger could produce synergies so profound that the stock price would be forced to react in a very positive manner.

At this point in time, the boards of these companies should not be debating whether or not a merger makes sense…..They should only be debating about how the pie is divided amongst the respective shareholders when they do merge.

The following is commentary from an SSG contributor. Personally, I do not speak for all SSG writers and contributors, and thus you may see varied opinions on this and other subjects. I am for a merger, as is this contributor.

We see some speculating on whether Sirius or XM is the surviving company, and by extension, which set of subscribers have to exchange their receivers for the surviving company’s receiver. The likely answer is neither and both. Assuming a merger and assuming the FCC still permits both licenses to remain intact, its likely that initially, once the merger is approved, unique/exclusive content will be broadcast to both sets of subscribers, along with common programming – both sets of existing subs get all the content (overlay modulation should provide enough bandwidth to accommodate the additional channels on both services).

But as soon as the merger is announced it’s a safe bet that the existing plans to build commercially viable interoperable receivers for both the aftermarket and the OEMs will be quickly implemented. The merged company provides the answer to "who's going to pay for it". With both companies now on 4th and 5th generation chips, the costs should not be significantly different that a single chipset receiver. How much does it cost to put an XM chip in a cell phone? It shouldn’t be any more to put that same chip in a Sirius receiver or vice versa.

The availability of the full bandwidth of both licenses for more unique services opens up tremendous opportunities for additional revenue. For example – what about one set of commercial free music channels (along with other entertainment, sports, etc.) at a subscription price similar to today's, and a separately branded service with 40 or so commercial-based music/other channels at a nominal sub price. It makes putting satellite radio into a car as standard much more attractive to the OEMs. It means that instead of a 50% take rate, or lower as some suggest will happen as more become standard, almost everyone can take advantage of the 2 services – those that like to pay for commercial free will continue to do so. Those that don’t can listen to the commercial-based channels as an attractive alternative to terrestrial. The additional advertising revenue available to the merged company could be significant.

But what happens to the OEM agreements with a merged company? It’s likely they could and would be renegotiated at much more favorably terms. We understand that the major agreements call for a renegotiation with an interoperable receiver, which could bring forward the negotiations from the scheduled expiration's.

There are many more opportunities beyond these, including reduced infrastructure costs, overhead, marketing (more focused marketing should also result in more subscribers), reduced content cost (more leverage when renegotiating contracts) and other revenue opportunities. Full implementation will of course take some time, but the wait literally should pay dividends.

Surely people with vision can see that a merger is good for both sets of shareholders. The only issue that the Boards of these companies should be concerning themselves with respect to a merger is how their set of shareholders should share the wealth – and making sure both sets of management teams do everything they can to get approval, rather than resisting and irresponsibly trying to protect their own turf. These companies exist to benefit their shareholders and their customers* – both would benefit with a merger. They do not exist to provide employment to respective sets of managers – let the best of them run the merged company.

*Customers benefit from additional services and a more complete set of services. For those afraid that service quality may deteriorate and/or prices rise to unaffordable levels, remember that satellite radio still has to compete with terrestrial radio, internet radio, MP3/Ipods, etc.

Labels: merger, sirius, xm