Monday, February 19, 2007

World’s Worst-Kept Secret Revealed!

Satellite-Radio Rivals XMAnd Sirius Agree to Merge

February 19, 2007 3:42 p.m.

To absolutely nobody’s surprise, the satellite radio duopoly is going to become a monopoly, if Sirius Satellite’s Mel Karmazin and XM Satellite’s Gary Parsons have their way.

As today's online Wall Street Journal summed it up,

XM Satellite Radio Holdings and Sirius Satellite Radio Inc. are merging into a single satellite-radio giant, the companies announced Monday.

Mel Karmazin, currently chief executive of Sirius, would be chief executive of the combined company, and Gary Parsons, currently chairman of XM, would be chairman of the new entity. The companies would merge as equals, with both companies getting the same share of the new company. The company would keep offices in both New York, where Sirius is based, and Washington, D.C., home to XM.

Anybody who has ever listened to satellite radio knows this: aside from the fact that Howard is available only on Sirius and Major League Baseball is available only on XM, the two satellite services are virtually indistinguishable.

They each have channels devoted to rock hits arranged by decade; they each have the entire spectrum of talk-radio, from right-wing to left-wing; and they each have so many channels devoted sub-categories of rock, classical, jazz, and country music that, for example, the thrash-metal aficionado does not have to settle for mere heavy-metal music.

If you’re in a car and don’t have CDs or an iPod, satellite radio is indispensable. Five minutes with Clear Channel Corporate So-Called Radio and its three distinct formats—“Easy Listening,” “Classic Rock” and “Mostly Ads”—will leave you driving on sidewalks to get through traffic and out of the car.

(In fact, I think a terrific graduate thesis would be to investigate the statistical correlation between the rise of Clear Channel Corporate So-Called Radio and the proliferation of road rage on our nation’s highways: I’d bet the correlation is almost one-to-one.)

It is precisely the broad overlap in their content that makes the two satellite networks attractive merger partners: why have duplicate satellites beaming near-duplicate content to cars equipped with two different receivers? Why have two sets of broadcasting facilities, customer-acquisition programs, call centers and billing operations?

The savings, as Mel Karmazin himself has said in his quite-public lobbying for a deal, would be enormous.

In fact, today’s press release from the two companies notes that Wall Street’s Finest have estimated a range of savings between $3 billion and $7 billion, enough to turn the two money-losing enterprises into one extremely profitable enterprise.

So why not shmoosh the whole thing together?

The one and only negative answer to that question is this: just last month, Federal Communications Commission Chairman Kevin Martin said such a thing was not possible, as reported thusly in Bloomberg.

``There is a prohibition on one entity owning both of these businesses,’’ Martin said.

Mel Karmazin, however, is nothing if not persuasive, and today’s coverage suggests the two companies see a way to get around the prohibition:

…the two sides are likely to argue that the proliferation of Internet-based radio, digital music players, and new HD-radio formats creates a vigorous competitive market for such media. Indeed, in surveys, consumers rarely can differentiate between the two companies, which have spent hundreds of millions trying to appeal to them.

So the worst-kept secret in corporate deal-making has finally been made public, but now the hard part begins: getting the deal approved by all the relevant regulators.

I can't take credit for knowing this was imminent, but I did suspect something was up just three weeks ago when I saw Mel Karmazin at the Four Seasons Hotel on 57th Street. I was leaving an IPO roadshow lunch and noticed Mel standing along in the hallway outside a room where a Sirius Satellite Radio lunch was in progress.

Mel was talking not on his cell-phone, but on a regular land-line phone, and he looked very very very serious.

I wondered why the CEO of a public satellite radio company would be using something as ancient and outmoded as a land-line for a serious conversation—one urgent enough to disrupt his appearance at a company-sponsored lunch with investors. It seemed obvious the call had to have something to do with the hoped-for merger Mel himself had been pushing in the press for months.

I flirted briefly with the idea of going back and whispering something like, "What does Howard think of the deal?"

But I resisted the temptation. Mel looked like he wanted to hit somebody.

I suspect he'll be a lot cheerier tomorrow on the conference call.

Jeff Matthews
I Am Not Making This Up

© 2007 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.


RichL said...

I don't listen to commercial radio except for traffic updates, but I do listen a lot to WNYC and the other NPR affiliates. NPR has had tremendous growth in listenership nationwide since 2001. On a recent car trip from NY to Florida, I was able to get an NPR station through the entire trip. That wasn't the case 10 years ago. So it's not entirely the Clear Channel desert you portray.

Siggyboss said...

Unless they outlaw the old radios, music TV stations, online radio streaming, etc I don't see a monopoly. Of course, if one shrinks the market to unrealistic levels (those involving satellite radios) you always do. Just like Ford has a monopoly on make Ford cars.

Aaron said...

So Little Mel is at the head of another media merger? Oy vey! I don’t know if investors remember, but Little Mel was the CEO who orchestrated the merger between CBS and Viacom. I only hope everyone who went “long” on either company when the merger was conditionally approved by the FCC back in April of 2000 remembers what happened to their shareholder value as time marched on to Little Mel's resignation from Viacom in June of 2004 – it went down like The Hindenburg (I am not making that up)! I wonder whether Little Mel will work his “shareholder magic” again as he attempts to combine two very different companies with less than a 50% chance of continued subscriber growth but with a better than average chance of continued growth in ad-driven sales revenue? But then, hey, I could be wrong in my opinion.

Lee_D said...

On a technical level, there are enormous compatibility hurdles to overcome to merge the two subscriber bases. The press bumpf has hinted at acknowledging this, but they haven't yet presented a cogent plan of action to overcome this divide. I suppose until the FCC rolls over, they won't really have to.

While I'm waiting for official responses from the relevant hardware manufacturers I work with, one account rep for a Hi-Fi company said, off the record: "Somewhere, somehow, someone is going to get screwed over by this."