Friday, April 06, 2007

Carmel Group Response to SSG

April 6, 2007

Carmel Group Follow-Up

Before getting into the issues regarding the Carmel Report, and the list of questions I posed to them, I would like to make a few statements:

Jimmy Schaeffler is indeed a Stand-Up guy. He was kind enough to speak to me the first time I called, Kind enough to agree to discuss the Report, and kind enough to discuss the questions I posed to him. This to me represents someone who has the courage to stand up and discuss things in a reasonable way.

He was passionate about his opinion, but also receptive to hearing the other side of the debate, and he fully recognizes that there will be opinions that differ.

He does not hate satellite radio……quite to the contrary loves the medium.

That being said, I can report that while he did not go through my list of questions point by point, he was very willing to discuss the report, the merger, and where the competitive landscape rests. I spent over half an hour on the phone with him, and the conversation was enlightening, and intriguing. He expressed that since the report has been issued, he has been very busy, and that while he would love to answer the SSG questions point by point, that he simply can not do that at this time, but was eager to express his answers on a general basis. I found that to be quite fair.

IS IT A BIASED REPORT?

Jimmy pulls no punches here. He states that it is indeed a biased report, in the sense that it presents a particular position . He states that the cover page of the report is indicative of that fact, and his report took a stance of being against the merger. Jimmy was not making an effort to write a report that considered each and every side of the debate. His report was not offered as a "balanced" report. It was an report outlining why he felt the merger should not be allowed.

Some in the world of the internet have accused that the report is bought and paid for by the NAB, and thus Carmel report should be discounted as a paid report. I will say, that the man has passion, and I believe, based on my interactions with him that he truly feels the things that he issued in his report. At one point he stated, “Do I sound like I am biased in my heart, I am pointing out that I believe competition is a good thing. I am not anti satellite radio, I love the service. I want the competition between these companies to remain.”

MEREGE OR NO MERGE

Jimmy believes that the competition in satellite radio is healthy. He cited that cash on hand was nearly a billion dollars. I did not debate this issue with him. While there is substantial cash on hand, there are also substantial costs. People who follow this sector know full well how much money these companies are spending.

Jimmy, points out that it is his opinion that the proposed merger is happening to early. It is his opinion that the competitive landscape is not established enough at this point to be seen as true competition. Again, he recognized that I disagreed with that, but stood by his position offering the argument about penetration of I-pod, cells, and internet radios in cars. I did speak to him about the fact that satellite radios installed in cars is subsidized, and that there are costs that go into getting into that platform. He accepted that point, but remained of the opinion that the penetration of some forms of audio entertainment simply are not yet well developed in a car. In my opinion, there are many aftermarket solutions to integrate I-Pods, MP3, etc. into the cars. From a business standpoint, how realistic is it for Toshiba to subsidize an installation across vehicle platforms? It is less expensive, and better to simply allow the aftermarket companies to do that work.

CONFLICTING REPORTS

We did discuss the issue regarding what many are calling conflicting opinions between the current report, and a report issued earlier.

Jimmy states that he was consistent in his opinions in both papers, and points out two key elements that illustrate this:

1) satellite radio is different (and thus its wonder)

2) satellite radio is not yet a substitutable competitive product (vs. the other digital audio services and devices Sirius and XM are noting).

What he is indicating, and in particular in the automotive aspect of the competitive landscape, is that there is enough separation between the various hardware and content offerings that satellite radio has a uniqueness. Secondly, it is his opinion that most of the other competitors are not yet ready fro “prime-time” yet, and until that time, they are not viable substitutes.

Again, he is taking a specific position, but is well aware that there is another side to the debate.

CONTENT

Jimmy feels very strongly that a merged company would create problems for content and content providers. He cited a niche channel such as XM’s Dylan in an example. Dylan had the option of negotiating with two companies. XM and Sirius. There is nothing like that type of program on terrestrial radio. I did point that content on terrestrial radio is syndicated all the time, but he feels that a program such as dylans is to specialized to be viable in that medium. We will have to agree to disagree. His point was that content providers, such as Dylan, Stern, etc. would in effect lose one company to negotiate with, and thus will not be able to obtain the best deal.

Realistically, this boils down to business models. If Dylan is a screaming success on satellite, there is no reason it couldn’t be replicated and succeed on terrestrial. It is a matter of programming stations to meet consumer demand.

In summary, Jimmy Schaeffler is someone who is not anti satellite. Contrary to what some may feel, he wants to see these companies succeed as individual companies. He feels that the consumer will get the short end of the stick, and that this merger is about shareholder value rather than consumer value. He feels that the FCC and DOJ do not want to b e in the business of being merger police, and that in the end, pricing controls are not likely to work. I pointed out the pricing concessions proposed by Sirius and XM, and he acknowledged that.

In my opinion what we have is a report that outlines a specific side of an issue, written by a man that fully recognizes that there is another side to the debate, and further is willing to discuss the full spectrum of the issues.

In the end, it is clear that there are simply aspects that we simply agree to disagree about.

The charge of the DOJ and FCC is to consider all sides of these issues. These entities will see the Carmel report as well as many others. They will not consider these reports in a vacuum, but rather as opinions taking differing sides of the issue. In the end, these government agencies will weigh out the various opinions and arrive at a conclusion.

Is Jimmy Schaeffler anti satellite radio. NO

Does he have an opinion about the merger. YES

Does he recognize that there is another side to the story? YES

Some readers will agree with the Carmel Report……Others will disagree. One thing we know is that it is one opinion, along with many others, that will be included in the hearings and considered. Investors in this sector need to try to look, as objectively as possible, at information such as this, and consider not whether or not you agree with the Carmel report, but whether you think that those making the decisions will agree.

I fully recommend that SSG readers let their own opinions be known to the FCC and DOJ. Give these entities as much information to consider as possible.

The report from Carmel can be referred to HERE

In closing, while some readers were critical of me terming Jimmy Schaeffler as a Stand-Up guy, I would like to reiterate that he is indeed a Stand-Up guy. He has an opinion, he expressed it, he offered what he feels is a compelling argument to support his position. Similarly, I have an opinion, I expressed it, and readers can see throughout SSG compelling arguments for my stance. It is my hope that readers find value in this article.

Labels: carmel report, jimmy schaeffler, merger, sirius, xm

4/06/2007 02:45:00 PM

SSG Has Merged. You Can Read All Of The Latest SSG Content By Clicking Here

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SSG is not a Financial Advisor. Read Disclosure: HERE

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Wednesday, April 04, 2007

Carmel Report - The Questions We Have

April 4, 2007

The Carmel Report has now gotten quite a bit of attention. We here at SSG were critical of many points in the report. The reports author, Jimmy Schaeffler, did return our call, and spoke of a willingness to go over the report details. We have put together a list of deeper questions, and have forwarded those to the Carmel Group. When the answers come, we will publish them. The following are the questions that SSG will be asking regarding the report:

1. The Report is Titled, “Higher Prices, Less Content, and a Monopoly: Good For The Consumer?”

A) Do you recognize that Sirius and XM have already promised lower pricing as well as tiered pricing?

B) Do you recognize that subscribers will have access to more content than they previously had?

C) Can you state a monopoly will exist without seeking out and identifying all aspects of the competitive landscape currently and two years from now?

2. The Report’s front page states, “The Proposed Sirius-XM Merger. It’s Harmful Impact On The Consumer, Content Providers And Performing Artists.”

A) Did you look into the benefits to consumers?

B) Did you look into the benefits to content providers?

C) Did you look into benefits to performing artists?

3. You state that presently there is a duopoly in satellite radio and that they are attempting to merge into a monopoly.

A) The statement may be true, but like everything in life it is not that simple. By narrowly defined parameters may consider Sirius and XM a duopoly, and even a monopoly if the merger is approved, but in reality aren’t there many companies in the business of delivering audio content to consumers?

4. You state that if the merger were to be approved that every subscriber would be beholden to one satellite radio company.

A) Every subscriber has plenty of choice. They can obtain audio entertainment from various sources, and many of them do not require a fee. In fact, looking at the take rate in the OEM channel, roughly half of the consumers decide to NOT CONTINUE the service. Aren’t these consumers exercising their choice?

5. You state that if this merger were allowed that it would result in less service.

A) How do you come to this conclusion?

B) Do you recognize that a current subscriber to one service would now have access to programming from the other service?

6. You state that if the merger were approved that there would be less affordability.

A) Do you recognize that Sirius and XM have promised a lower priced package?

B) Do you recognize that they have spoken of a price freeze?

C) Do you recognize that the costs would be less than if a consumer had to subscribe to both services?

7. You state that if the merger were approved that there would be less diversity.

A) How do you arrive at this conclusion?

B) Does it not stand to reason that with the removal of duplicitous programming that there would be room to increase channel diversity?

8. You state that if the merger were approved that consumers would have less choice in content.

A) Again, with the removal of duplicitous programming, would it not stand to reason that there will be more variety?

9. You state that if the merger were approved that there would be less choice in hardware.

A) Is there anything to substantiate that opinion?

B) Do you recognize that there are many companies that deliver hardware that is capable of delivering audio entertainment?

C) I-Pods control a massive chunk of the MP3 market. Do they stop developing hardware?

10. You state that overall opposition to the merger is significant and growing.

A) Do you offer any data to support this statement?

B) What is your definition of significant?

11. You state that the idea that AM, FM, HD, I-Pods, Cell phones, and internet radio are competition for satellite radio is ludicrous and could not be further from the truth.

A) In previous reports issued by you, you stated that these were all indeed forms of competition for satellite radio. How do you defend being on both sides of this issue?

B) Does AM Radio compete for advertising dollars with satellite radio?

C) Does FM radio compete for advertising dollars with satellite radio? Does HD Radio compete for advertising dollars with satellite radio?

D) Does terrestrial radio carry ads from identical sponsors that are heard on satellite radio?

E) Does terrestrial radio compete for the ears of consumers?

F) Do cell phone companies compete for the ears of consumers?

G) Does Internet radio compete for the ears of consumers?

H) Do I-Pods and MP3 Players compete for the ears of consumers?

12. You state that AM and FM Broadcasters do not compete in a national market against national satellite radio broadcasters.

A) Were you aware that AM and FM radio broadcast their content on the internet, and that this content is not limited to a local area, but is in fact not only national, but global?

B) Do AM and FM radio compete for the same advertising dollars as satellite radio?

C) Do you recognize that AM and FM station owners syndicate programming for distribution on a wide scale that covers many markets?

D) Do you recognize that shows such as Michael savage, and Sean Hannity are national talent that terrestrial radio broadcasts in many markets?

13. You state that true measure of competition must look at services that can substitute for satellite radio as of March 2007.

A) If satellite radio were to not exist, do you think that subscribers would not listen to audio content?

B) Do you recognize that roughly half of the OEM consumers do not elect to keep satellite radio after they receive a free trial of the service? Is this not a clear and demonstrated fact that shows that consumers do feel they have an adequate substitute?

14. You state that I-Pods and MP3 Players are not substitutes for satellite radio.

A) Consumers that use I-Pods and MP3 players seek out the content they want to hear, and organize it in such a way that they desire. Was not JACK FM a concept that advertised that it “was like your I-Pod on shuffle”? Does not Sirius have a channel called “Super Shuffle”?

B) Do you recognize that if someone is listening to an I-Pod that they are not at the same time listening to satellite radio or terrestrial radio, or internet radio?

C) Do you recognize that many AM and FM radio stations offer podcasts to their listeners via the internet, and that consumers can down-load this content to their device? Please pull up some terrestrial radio station websites and see for yourself.

D) Do you recognize that both Sirius and XM sell products that are capable of storing, organizing, and playing content in much the same way that an I-Pod or MP3 player functions?

E) Do you recognize that these devices from Sirius and XM allow you to mark a song that you hear for later download?

15. You state that ell phones and internet radio are rarely offered in vehicles and therefore are not a substitute.

A) This may sound foolish, but don’t you bring your cell phone with you in your car?

B) Most people spend more time in their home and office than they do in their car. Internet radio is a viable medium in those locations. In fact, terrestrial radio as well as satellite radio, offer internet feeds of their content. Do you recognize this?

16. You state that Sirius and XM have not acted in a competitive manner towards Cell phones, Internet Radio, or MP3 players.

A) Do you recognize that the portable devices offered by Sirius and XM do indeed compete with MP3 Players?

B) Do you recognize that Sirius and XM have tried to work with cell carriers to deliver content, and that many carriers develop other deals instead of satellite radio?

C) Do you recognize that Sirius and XM offer service on the internet in an effort to compete in that sector, as do terrestrial radio?

D) Would you argue that terrestrial radio owners do not use internet listener-ship as a factor when selling advertising? I called a few stations, and indeed they offer that their service is on internet radio as a selling point. Do you think that Sirius and XM are not doing the same?

17. You state that Sirius and XM have big installations in the OEM market.

A) If Sirius and XM have big installations, are the installations of AM and FM radios Gigantimungous? What about CD installations?

B) Do you recognize that OEM’s are increasingly installing Aux Inputs? Do you recognize that these inputs are often termed as I-Pod ready?

C) Do you recognize that satellite radio is paying for these installations whereas AM and FM do not?

18. Your report contained an Action-Reaction chart to illustrate competition. Did you consider expanding that Action-Reaction chart into the other markets?

NAB reaction to the introduction of the cell phone was to oppose it being used in cars.

NAB reaction to satellite radio was to oppose the service

NAB reaction to the use of repeaters was to oppose them

NAB reaction to satellite radio was to oppose them providing local content

NAB reaction to satellite offering traffic and weather was to oppose it

FM radios reaction to I-Pod was to create JACK FM

FM radios reaction to Stern leaving was to create FREE FM, and in fact, they spoke directly about the fact that it was free.

NAB is at this point arguing before the FCC to make ownership requirements less restrictive allowing consolidation within their ranks.

NAB is at this point lobbying against Low Power FM

The success of the Inno and Stiletto has led directly to Slacker developing a product that they term as satellite radio. It will launch this summer.

NAB reaction to commercial free music is to cut the number of ads

Google “NAB and Opposition” and you will be amazed at how many hits there are.

Terrestrial radios reaction to satellite HD Radio. They are now being installed in cars, and wal mart is now selling them.

Cell carriers now offer 1 year unlimited downloads with Napster.

The competition is fierce, and comes from many directions. These companies compete for listeners and advertising dollars. Some entities in this group (NAB membership) have the benefit of not having to pay for music royalties as well as a lock on “local” content.

The Carmel report was published, and it got a lot of press. These are compelling questions that arise when the issues are explored more deeply. Thank you for taking the time to return my call, and for agreeing to discuss the report. I look forward to seeing your reply.

SSG

Labels: carmel report, merger, nab, sirius, xm