Satellite Static

XM and Sirius are being pressured to merge because of financial troubles and are discovering what others in the sector already know: It's a tough business

by Steve Rosenbush

Investors are agitating for a merger of XM Satellite Radio (XMSR) and Sirius Satellite (SIRI), the two providers of radio via satellites that orbit the earth. Speculation about a deal began last summer and gained momentum in early December, when Sirius cut its subscriber forecast for 2006 from 6.3 million to between 5.9 million and 6.1 million (see BusinessWeek.com, 12/5/06, "Sirius Sings the Holiday Blues"). Over the course of 2006, shares of XM and Sirius plunged 62% and 54% respectively, as investors fretted that the potential market wasn't big enough for two players.

Later in December, stock market pundit Jim Cramer proclaimed, in an interview with BusinessWeek Editor-in-Chief Stephen Adler, that Sirius Chief Executive Mel Karmazin needed to do a deal with his rival. "If Mel Karmazin does not merge with XM, he will not make it. That company cannot stand alone," Cramer said (see BusinessWeek.com, 12/25/06, "But Jim, What Do You Really Think?"). And on Jan. 10, analyst Eileen Furukawa of Citigroup (C) issued a research report saying that top executives at XM seemed more open to a merger, sending shares in both XM and Sirius higher (see BusinessWeek.com, 1/10/07, "Wedding Bells for XM and Sirius?").

Satellite Struggles

Trouble in the satellite business? It's an issue that goes well beyond Sirius and XM. DirecTV (DTV) and rival satellite TV operator EchoStar (DISH) are struggling to survive as independent companies and may merge or be acquired by big telecom companies. These are just the latest in a long series of satellite operations that have discovered the difficulties of pulling profits from the skies by offering telecom services, Internet access, and more. In each case, lofty promises have given way to wrenching restructurings, and in some cases bankruptcy.

Satellite businesses have long looked easier than they actually are. "Terrestrial networks can build a little and add some customers and build a little more," says Matthew Desch, CEO of mobile satellite phone operation Iridium. "Satellite is different because you have to pay for the rockets and the satellites all at once."

He should know. The original Iridium, the predecessor to the company Desch now runs, was one of the most notorious flameouts in satellite history. The company was launched by Motorola (MOT) in the 1990s and began service in 1998 with a phone call by Al Gore, then Vice-President of the U.S. But the company filed for bankruptcy the next year, as service fell short of expectations and demand faltered. Motorola, which took in billions in revenues from supplying the original Iridium with equipment, faced multiple lawsuits, which it later settled out of court.

And it had plenty of company. Teledesic, a satellite communications venture backed by wireless pioneer Craig McCaw and Microsoft (MSFT) founder Bill Gates, never panned out. Neither did Globalstar, a similar company backed by Qualcomm (QCOM).

Critical Mass

While Desch understands the risks of the satellite business, he says there is also plenty of promise.