New Conditions May Ease XM-Sirius Merger

As the satellite-radio providers seek Congress' approval to wed, competition from iPods—and a few concessions—might boost their case

by Steve Rosenbush

The proposed $13.6 billion merger between satellite radio players XM Radio (XMSR) and Sirius Satellite Radio (SIRI) would seem to violate conditions that government regulators placed on the companies years ago (see BusinessWeek.com, 2/21/07, "Satellite Static: The XM-Sirius Merger"). When the Federal Communications Commission granted the radio licenses to the companies in 1997, the commission's decision specified that they couldn't be owned by the same entity.

The companies claim that their merger agreement will nonetheless win approval of the FCC, a view that's supported by many analysts who follow the industry. George Reed-Dellinger of researcher Washington Analysis says the odds of approval are "60% plus."

The companies argue that the market has changed over the last 10 years. The companies now face competition from MP3 players and Apple's (AAPL) ubiquitous iPod, a product that didn't exist in 1997 (see BusinessWeek.com, 2/21/07, "Satellite Radio Falls on Deaf Ears"). Now carmakers are starting to put jacks for such devices into cars, which is where most satellite radios are used. High-definition terrestrial radio, multimedia wireless phones, and new technologies such as WiMAX wireless Internet access networks compete as well. "We strongly believe that this deal can and will meet the requirements of an antitrust review, and that it will be in consumers' interest, leading to a stronger company providing more choices at attractive prices," XM Chairman Gary Parsons said in an interview.

Times Have Changed. So What?

Regardless of whether the argument is correct, it might not be enough to push the deal through the regulatory process. Lawmakers and regulators are sensitive to how the deal is viewed by the public. Congress is holding hearings on the deal. The House judiciary committee is scheduled to hold a hearing on Feb. 28, where Sirius Chief Executive Mel Karmazin is scheduled to testify. The House telecommunications subcommittee is scheduled to hold a hearing on Mar. 7. The deal doesn't actually need House approval, although it must win approval from the FCC and the Justice Dept.

Given the high level of government scrutiny, analysts such as Reed-Dellinger believe that the companies may have to do more than simply argue that times have changed if they want the deal to survive. He believes that several conditions and other "not so obvious" steps can enhance the odds of approval.

The Justice Dept. tends to approve deals or oppose them outright. Most analysts believe the Justice Dept. is likely to let this deal go through because new players in the audio entertainment market will placate antitrust concerns. The bigger issue is the FCC, which tends to negotiate a settlement to resolve qualms over mergers. In this case, the companies might need to agree to conditions to win approval from the FCC.

Placating Options

For starters, the companies could agree not to carry local radio content such as news, traffic, and weather. That could go a long way toward placating broadcasters, who oppose the deal, according to Reed-Dellinger. The satellite companies could agree to price caps, to ease fears that the deal will lead to monopolistic price gouging. They also could agree to establish a wholesale business, allowing rivals to purchase their service and resell it to consumers under a competing brand. Another option would be to return some of their radio spectrum to the government, which could then sell it to another wireless company or give it to public safety agencies, according to Reed-Dellinger.

Karmazin is believed to be open to cooperating with regulators and doing what needs to be done to get the merger through.