More Static for Sirius-XM Deal

The FCC is under pressure to force stiffer restrictions on the satellite radio providers but Sirius and XM have very little leeway

The Las Vegas Convention Center during the 2007 International Consumer Electronics Show
Ethan Miller/Getty Images

by Olga Kharif

Sirius Satellite Radio (SIRI) Chief Executive Mel Karmazin is willing to play ball with the government on possible conditions placed on his planned merger with XM Satellite Radio (XMSR). He has said he'll hold prices steady, for example, to allay concerns the deal would hurt consumers in the pocketbook.

But Karmazin may cry foul over a slew of other restrictions that the Federal Communications Commission is under growing pressure to impose before it gives a green light to the proposed combination.

Costly Wait?

Legislators want the FCC to force XM and Sirius to allow their satellite radio service on all manner of consumer electronics—not just the devices made by manufacturers that have exclusive licensing agreements. The upshot would be devices that carry satellite radio alongside HD radio, Internet stations, and other competing sources of music. FCC officials are also being lobbied to require XM and Sirius to give up some of their channels for use by public radio or minority-owned broadcasters.

The tougher the restrictions imposed by the government, the harder it will be for the companies to eke out the cost savings and revenue increases of as much as $6 billion that analysts estimate the deal will provide. "The conditions could limit the synergies," says Standard & Poor's analyst Tuna Amobi.

Worse, the longer XM and Sirius are forced to wait for a government green light, the less leeway they have in whether to accept FCC conditions. Already, the planned transaction has been up in the air for almost 15 months, one of the longest limbo periods on record, according to Thomson Reuters (TRI). The deal was supposed to close by the end of 2007 but may not receive approval till June, if not later, says Stifel Nicolaus & Co. analyst Blair Levin, a former FCC chief of staff. Proponents had hoped the deal would come up for discussion at a May 14 FCC meeting, but that's looking increasingly unlikely.

Ripples from Auto Sales Slump

Meantime, the loss-making companies are having to put off key operational decisions at a time when industry prospects dim and merger-related costs delay breakeven. Sirius cut sales and marketing in the fourth& quarter, the most recent period for which figures are available, to $53.1 million, from $73.1 million a year earlier. XM's brand recognition has declined this year compared with late 2007, according to surveys conducted by consultancies Edison Media Research and Arbitron. "They've not done much advertising" says Edison President and Co-founder Larry Rosin. "They are in a holding pattern while they are waiting for their merger to be approved."

XM and Sirius get most of their new subscribers through sales of autos that have satellite radios preinstalled. But sales for such key partners as General Motors (GM) and Ford Motor (F) are slumping. "If there's no merger, it's going to be a lot more difficult for either of them to survive on their own, especially XM," says Amobi at Standard & Poor's, which like BusinessWeek.com, is owned by The McGraw-Hill Companies (MHP). Amobi has a "strong sell" on XM in part because of its reliance on auto sales.

Neither Sirius nor XM responded to requests for comment. An FCC representative didn't respond to a request for comment on possible conditions.