Technology

XM-Sirius Grilled on the Hill


At the start of Washington hearings, Sirius CEO Mel Karmazin spotlighted consumer benefits and his willingness to make concessions to get the deal done

The bar was set high for Sirius Satellite Radio Chief Executive Mel Karmazin from the start of congressional hearings on the proposed merger of his company with XM Satellite Radio. He was appearing at the first proceedings of the newly formed House Judiciary Committee Anti-Trust Taskforce. Consumer groups and the National Association of Broadcasters accused the companies of trying to limit consumer choice, and Committee Chairman John Conyers (D-Mich.) warned the executive, "You've got some high hurdles to overcome."

Karmazin set out to jump them. The executive dropped his scripted opening remarks at the Feb. 28 hearing and went straight to what he considers the merger's benefits to consumers—and outlined concessions he's willing to make to win Uncle Sam's blessing for the $13 billion deal.

"Very Pro-Consumer"

Karmazin said that thanks to merger-related cost cutting, the new company would be able to lower prices, currently at $12.95 a month. He said it would offer smaller bundles of channels—say, sports programming only—for a lower fee. He even said he'd agree to a price freeze for a while and expand his lineup of channels for minorities. "[The merger] should be approved because it's very pro-consumer," Karmazin said.

It won't be clear for some time whether the assurances worked. Karmazin & Co. need to win approval from the Justice Dept. and the Federal Communications Commission. And while Congress doesn't have formal say over the deal, it can certainly sway public opinion. "It's a barometer of the political sentiment," says Harold Furchtgott-Roth, president of consultancy Furchtgott-Roth Economic Enterprises and a former FCC commissioner.

The committee could also make recommendations for conditions to be placed on the merger by other government bodies . More recommendations could be forthcoming on Mar. 7, when the House Energy & Commerce subcommittee on telecommunications and the Internet is set to examine the radio industry. Though scheduled before the merger was announced, the hearing could take a different tone now.

Skeptical Investors

XM (XMSR) shares rose 2.5%, to 14.72, in after-hours trading, while Sirius (SIRI) stock rose 1.1%, to 3.69. Still, XM's shares are trading below the premium Sirius promised to pay for the stock, a sign that investors are unconvinced the deal will go through.

It's clear Karmazin and his counterparts at XM are willing to play ball with the government in exchange for a green light. "We want to get the deal done," he said. "We are prepared to make concessions." Some consumer advocates who testified at the hearing suggested the company should be required to provide à la cart pricing on bundles, give up 5% of its channels for noncommercial and educational use, and agree not to raise rates for three years.

Others have said the merger shouldn't be allowed through at all. "A tsunami of mergers will rip through the digital media space if this merger is allowed," says Mark Cooper, research director for the Consumer Federation of America.

Plenty of Competition

For his part, Karmazin argued that "the world has changed," referring to added competition in radio. Satellite radio is competing not only with terrestrial radio but also with Apple's (AAPL) iPod, Internet radio, and radio broadcast onto mobile phones (see BusinessWeek.com, 2/21/07, "Satellite Static: The XM-Sirius Merger").

Indeed, a new study published Feb. 27 by market researcher Arbitron indicated that only 5.6% of nearly half a million radio listeners surveyed tuned into Sirius or XM channels. Competing with other media, Karmazin argues, satellite companies now need to stick together to succeed. The FCC originally granted the companies two separate licenses under the condition that the outfits couldn't merge (see BusinessWeek.com, 2/28/07, "New Conditions May Ease XM-Sirius Merger").

Better Together

Contrary to some analysts' expectations, Karmazin stopped short of arguing that without the merger, one of the companies would be forced to fold: "We are not making a failing company argument."

It's possible that the strategy could weaken the urgency of the deal in the eyes of the regulators. Still, it comes closer to the truth. While the new company would likely be more financially successful, XM and Sirius separately will be able to achieve profitability. On Feb. 27, Sirius exceeded analysts' revenue estimates and reported its first-ever quarter of positive operating cash flow. And XM may not be doing as badly as its guidance suggests. In his Feb. 28 note, analyst Thomas Watts of Cowen Group (COWN) said XM's Feb. 26 guidance of flat to down earnings before certain charges is overly conservative.

However positive the outlook for the companies without a merger, Karmazin and his counterparts at XM are convinced the companies are better off together. And they'll have to keep jumping over hurdles until they convince regulators.

Kharif is a senior writer for BusinessWeek.com in Portland, Ore.

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