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XM-Sirius Merger Hinges on FCC Ownership Rule
Climate Still Competitive, Satellite Radio Firms Say

By Charles Babington and Jeffrey H. Birnbaum
Washington Post Staff Writers
Wednesday, February 21, 2007

Winning approval for a proposed merger of the nation's two satellite radio companies turns on whether regulators buy their argument that iPods, Internet radio and other new technologies have expanded so dramatically that a monopoly would not harm consumers' choices or purses.

It may be a difficult argument to win, but XM Satellite Holdings and Sirius Satellite Radio's officers say it's worth the gamble and have assembled an expensive and experienced team of lobbyists to aid them in the fight. Alone, the companies have suffered heavy losses and spent heavily on recruiting personalities such as Howard Stern and Oprah Winfrey and on marketing to compete against each other.

Now, New York-based Sirius and XM of the District are lining up some of the best-known and highest-paid lawyers and lobbyists, while competitors and consumer groups vow to fight back. The biggest potential roadblock for the merger is a 1997 Federal Communications Commission declaration that a single owner may not control the subscriber-only satellite radio business.

But the advance of technologies such as iPods and other MP3 players, music-playing cellphones and land-based radio stations with digital broadcasts offer so much music, news and talk that the competitive climate is radically different and the FCC should waive the 1997 rule, Sirius chief executive Mel Karmazin said in a conference call yesterday. "Consumers today have a significantly broader range of audio entertainment options from which to choose," he said.

All those new devices, however, are not directly analogous to satellite radio, and Karmazin's plea is a tough sell, said Chad Bartley, an analyst for Pacific Crest Securities. XM and Sirius provide "the only paid-radio service out there," he said, and regulators may be loath to turn them into a monopoly. He rated the chances for merger approval at "less than 50-50."

"The regulatory process will be quite onerous," said William Kidd, an analyst for Wedbush Morgan, an investment firm in Los Angeles. Regulators will be reluctant to create a single satellite radio company, particularly because they have recruited a total of 14 million paying customers in five years as separate companies, he said.

The challenges do not end there. XM and Sirius said they hope the deal will close by the end of the year, but some analysts say the costly lobbying battle might stretch into next year. Meanwhile, the two companies must continue to deliver multiple channels of music, talk and sports to their customers, and right the business models that have never generated a sustained profit nor impressed investors in recent years.

The companies assured customers by e-mail yesterday that services will not change during the merger proceedings.

Karmazin said a merger would lead to savings by eliminating duplications in programming and operations. But it would impose new costs as well. Karmazin said the companies plan to design equipment to let customers receive signals from both companies, which use different satellite technologies. They also hope to sell more advertising, he said, even though the promise of largely commercial-free broadcasts has traditionally been a key appeal of satellite radio.

The National Association of Broadcasters and groups such as the Consumer Federation of America and Common Cause plan to oppose the merger. They want to make sure that consumers are not stuck with outdated equipment and contracts that are not honored. The groups also will probably seek to have the merged entity provide nonprofit, public channels.

"We will take the position that this merger is suspect," said Mark N. Cooper, research director of the Consumer Federation of America. "We will insist that if the government determines to let the merger go forward, it needs to condition it." Several analysts agreed that accepting conditions -- such as limits on increasing the cost of subscriptions, now $12.95 a month for both companies -- might be XM's and Sirius's best hope for approval from the FCC and the Justice Department.

Both companies have a potent roster of contract-lobbying companies at their disposal. XM has worked with the Palmetto Group, Patton Boggs, Wexler & Walker Public Policy Associates and Monument Policy Group. Sirius has Wiley Rein, the Paul Laxalt Group and Ricchetti Inc., according to lobbying disclosure records.

XM shares rose $1.43, to $15.41 yesterday. Sirius shares rose 22 cents, to $3.92.

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