The FCC Approves the XM-Sirius Merger

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Tuna Amobi, an analyst at Standard & Poor's, which, like BusinessWeek, is owned by The McGraw-Hill Companies (MHP), is also concerned about the company's ability to wring cost savings, which some analysts say will total as much as $4 billion over five years. Cutting expenses won't be easy as the company implements merger conditions, pays compensation to employees whose jobs are made redundant by the merger, and issues debt to fund operations and restructuring costs. Neither company is profitable on its own.

A Survival Move

The companies are combining against the backdrop of an economy in decline. The slowdown is being felt especially hard in the auto industry, which makes up the lion's share of new satellite radio subscribers. General Motors (GM) expects the number of cars sold in the U.S. to drop to 14 million this year from 16.1 million in 2007. "We need to see success from the auto channels and synergies for [the markets to continue] to support the stocks," says Stanford Group analyst Fred Moran.

Worst of all, there are plenty of competing ways for consumers to get their music—be it HD radio, Apple (AAPL) iPods and other digital music players, or music-enabled cell phones. Since the merger was announced, Web radio has enjoyed a resurgence. Apple's iPhone and other devices able to sample Web radio via wireless connections, and store thousands of songs, have taken the world by storm. According to JupiterResearch's June survey of 2,000 U.S. Internet users, 23% now listen to audio on the Web, and 26% own an iPod. "The prospects [for satellite radio] are likely to already own an iPod," says Jupiter analyst Barry Parr.

And now that the FCC will allow for satellite radios to be integrated into any device, such as an iPod or a terrestrial radio, that could raise competition for XM-Sirius another notch. Goldman Sachs (GS) analyst Mark Wienkes wrote in a June report (BusinessWeek.com, 6/24/08) that it's "unlikely that the industry can generate returns sufficient to justify the current valuation" and raised questions whether satellite radio would survive without the merger.

Approval from the FCC goes a long way to ensuring survival of the industry, but there's no guarantee satellite radio will thrive. The more likely scenario, says Jupiter's Parr, is that it ends up being a "niche product." Now out of limbo and free to combine, XM-Sirius has the unenviable challenge of trying to prove him wrong.

Business Exchange related topics:
FCC
Sirius XM
Satellite Networks
Radio Broadcasting

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