For XM, Fewer Losses And More Subscribers

By Cecilia Kang
Washington Post Staff Writer
Friday, February 29, 2008

XM Satellite Radio said yesterday that it trimmed its loss while adding more subscribers in the fourth quarter, and its executives said they remain hopeful that its merger with Sirius Satellite Radio will be approved. But as the wait for the regulatory go-ahead drags on, the company also tried to reassure investors that it's prepared for a future without Sirius.

XM executives cast the sales increase in sunny light. But analysts said remaining independent would cloud both companies' futures.

Both face a slower overall economy and sluggish new-car sales, which drive most revenue growth from built-in devices. Both have drastically cut marketing costs and bear the high payroll costs for talent such as Martha Stewart, Oprah Winfrey and Howard Stern, who makes an average of $100 million a year. Meanwhile, both say iPods and Internet radio continue to cut into their potential audience.

"Both companies are still losing over $100 million a quarter and not making dramatic improvement in lowering losses," said Frederick Moran, an analyst at Stanford Group. "With subscriber growth moderating a bit and costs kicking up with increased royalties, profitability seems elusive absent a merger."

The $4.6 billion deal, announced more than a year ago, would create a monopoly in the $2 billion-a-year satellite-radio market. The mergers of AT&T and BellSouth, Google and DoubleClick were approved by U.S. regulators in less time.

"More and more time that goes by looks negative," David Kestenbaum, an analyst at Morgan Joseph, said of the companies' prospects of getting the green light from the Justice Department and the Federal Communications Commission.

Combined, the companies would have 17 million subscribers and scale that would allow them to reduce costs by 16 percent a year, as much as $4.1 billion over six years, Janco Partners analyst April Horace wrote in a recent report. The companies could share programming, for example, and direct retail sales, she wrote.

But both companies also cater to a niche market of commuters mostly in their 30s and 40s willing to pay $12.95 a month to listen to "The Howard Stern Show" or sports fare, Moran said.

Without the certainty of reaping such benefits, share prices for both companies have fallen. XM's stock price is down 13 percent and Sirius's is down 20 percent since the beginning of the year. According to the merger contract, both companies could walk away from the deal tomorrow with no penalty.

Regulators are stalled, industry watchers say, because they are trying to define the market in which the companies compete. XM and Sirius argue that, although they would form a satellite-radio monopoly, they already face stiff competition from such audio-entertainment sources as MP3 players and terrestrial radio.

The merger's most vocal critic argues otherwise. The National Association of Broadcasters said the merger would create a single, national player that would unfairly compete with traditional radio broadcasters that only have regional reach. Smaller radio-equipment makers, meanwhile, say having a single, powerful buyer would squeeze their market.

FCC Chairman Kevin J. Martin said the commission typically waits for a Justice Department decision before taking action. "I would guess the commission will be trying to address it in the first quarter of this year," he recently said of his agency's review.

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