Satellite Static: The XM-Sirius Merger

The announced merger of the two radio companies was greeted with optimism, but analysts caution that hurdles will hamper profitability

by Olga Kharif

The initial response to the planned $13 billion merger of Sirius Satellite Radio and XM Satellite Radio Holdings was characterized by hurrahs and what-took-you-so-longs. Shares of both companies rallied on optimism that the transaction will result in lower costs and put the merged entity on a faster road to profitability. The new company "will be better positioned to compete effectively with the continually expanding array of entertainment alternatives," said XM Chairman Gary Parsons and XM Chief Executive Hugh Panero in a statement.

But a host of analysts say the fanfare may be premature. One big hurdle for Parsons, Panero, and Sirius CEO Mel Karmazin is winning the go-ahead from government regulators at the JusticeDept. and Federal Communications Commission (see BusinessWeek.com, 2/20/07, "The XM-Sirius Deal May Not Fly").

Subscriber Uncertainty

As Sirius (SIRI) and XM (XMSR) focus on gaining regulatory approval, a multitude of rivals—from terrestrial radio stations to consumer electronics and online music vendors such as Apple (AAPL)—will waste no time wooing customers. Researchers at IDC had expected the satellite radio companies to reach a combined 22 million subscribers by the end of 2007, but XM and Sirius may now miss that target, "given the uncertainty around the merger and availability of service on an ongoing basis," says Susan Kevorkian, an analyst with IDC. The companies ended 2006 with 13.6 million subscribers, falling short of the 15.5 million expected by IDC (see BusinessWeek.com, 2/16/07, "Analyst to XM, Sirius: Quick Quibbling").

Why the slowdown? Would-be subscribers are likely to fret that if the merger is approved, former rivals will have less incentive to keep prices low and instead raise subscription fees. The new company could raise prices by 5% to 7% a year, much like the cable industry, says Tuna Amobi, an analyst at Standard & Poor's, which like BusinessWeek, is owned by the McGraw-Hill Cos. (MHP). To be sure, some satellite radio users have said on various online forums that they wouldn't mind paying more for access to a richer lineup of channels. Today, XM offers more than 170 channels, while Sirius carries 130. There's some overlap, and it's not clear which channels will make the final cut. Indeed company executives say they'll trim expenses in part by reducing redundant programming—part of the cost savings aimed at keeping subscription fees low.

But analysts' concerns don't end with subscription fees. Automakers that had been installing satellite radios in cars may hold off installing new XM and Sirius equipment in additional car models until it's clear which company's model of radio receiver prevails—or until a hybrid is developed. Adding to the uncertainty is the possibility that, should the merger fall apart, XM or Sirius would become acquisition targets for one of the satellite television companies, EchoStar Communications (DISH) or DirecTV (DTV). That gives carmakers added leeway to make cars iPod-friendly, rather than satellite radio-equipped, letting users stream downloaded music through a car's speakers.

Eyes Off the Prize

More important, XM and Sirius could see a subscriber slowdown as they put resources into making the merger happen instead of attracting new users. "If both companies are focusing on making the merger happen, it's likely to take attention away from subscriber acquisition," Kevorkian says.

Any loss of focus couldn't come at a worse time, as some of XM's and Sirius' rivals ramp up marketing.