Sirius-XM Merger: Costly Static

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Stern Factor

Sirius offers less detail on its incremental expenses. But XM's increase over the first six months of the year works out to a total of $33.8 million, or $186,000 a day. That's roughly equivalent to a team of 47 lawyers and lobbyists working full-time at $500 an hour. If XM keeps up the same pace of expenditures, it may boost its spending by nearly $70 million as it tries to close its deal with Sirius, in addition to Sirius' own expenses. No wonder Karmazin isn't laughing about his legal bills.

The reason the two companies are pushing so hard for their deal to be approved is the potential benefits of a combination. While each company can save a few million bucks individually by cutting back on advertising or the like, together the savings would be of a completely different magnitude. "If you combine the two companies, there are billions of dollars—billions with a b—that could be saved," says Karmazin over lunch. "It's speculated that it could be as much as 50% of the market cap of the combined companies is potentially available in synergies." Parsons adds, "You don't find that very often."

The costs of failure could be high, too. The two companies would certainly take longer to become profitable, if they were able to make it at all. Moreover, they may not be able to stand on their own, and could face an outright acquisition by a satellite television company such as DirecTV (DTV) or a cable provider such as Comcast (CMCSA). There's also been speculation that shock-jock Howard Stern could bolt Sirius if the merger doesn't go through, since he would be stuck with a relatively small audience. But Karmazin bats away such questions. "Howard will never go back," he says, citing the freedom Stern enjoys without regulations from the Federal Communications Commission.

Sharp Words

In the wide-ranging discussion, the two executives discussed many issues in the media industry. Karmazin, the former chief of CBS (CBS), was asked for his thoughts on how to fix the once legendary but now flagging CBS Evening News. "What would I do with the CBS Evening News? I challenged everybody when I was there. I said, 'Let's eliminate it.' You know, I mean who cares?" he says. "The issue was that that became impractical because if you're a network, you've got to have a news organization."

His real answer is no less provocative. "What I would have done, I tried to do, and that was buy CNN," he says. "Time Warner (TWX) should own Cablevision (CVC). And if, in fact, they were to buy Cablevision, they would have needed some money. And I don't think CNN is a core asset for Time Warner. CNN could have been a cheap way of doing the evening news. I would say certainly one of my biggest disappointments was not being able to buy CNN."

For now, Karmazin and Parsons have more immediate challenges. The NAB is making the argument that satellite radio is a distinct market from traditional radio so that merging the only two satellite companies would create an unjustifiable monopoly. XM and Sirius say government regulators should view traditional and satellite radio as competitors to each other, so by their calculation the two companies have a mere 3% to 4% of the whole market. Dennis Wharton, executive vice-president of media relations at the NAB, scoffs at that notion. "In Mel Karmazin's world, elevator music is competition to satellite radio," he says. "Get real. It doesn't pass the laugh test."

Karmazin has plenty of sharp words himself, though they tend to be delivered with as much humor as vitriol. "The NAB has made an argument that is sort of unique," he says. "They have said that we compete with them, but [that] they don't compete with us."

See BusinessWeek's slide show for a look at the star-laden lineups of Sirius and XM.

Elstrom is news director at BusinessWeek.com.