Satellite Radio Merger Approved
FCC Finally Backs Union of XM, Sirius

By Kim Hart
Washington Post Staff Writer
Saturday, July 26, 2008

The government has approved the long-delayed merger of the nation's only satellite radio companies, combining Sirius and XM into a single entity with 18 million subscribers.

The decision last night came almost a year and a half after the companies first proposed joining. Based on yesterday's closing share prices, the deal is valued at $3.3 billion, not including debt.

Dozens of lawmakers, consumer groups and broadcasters had long opposed the merger, saying that the union would create a satellite radio monopoly. But three of the five members of the Federal Communications Commission agreed that the marketplace has changed since the two companies formed, with Internet radio, iPods and other technological advances competing for consumers.

The merger passed, but with several conditions.

The companies must cap prices for three years after joining and allow consumers to choose the channels they want and pay less for packages of channels. Radios that allow a la carte channel selections will eventually be available for car dashboards -- the largest area of growth. The companies said they would introduce radios that receive both XM and Sirius channels.

On Thursday, XM, of the District, agreed to pay $17.5 million in fines and Sirius, based in New York, agreed to pay $2.2 million to resolve complaints that some of their radio receivers sold to consumers and signal-boosting radio towers violated FCC technical rules. Both companies said they would bring their equipment into compliance.

The agreement appeared to bring an end to a contentious and drawn-out bid to join the companies. But a last-minute stalemate between two Republican commissioners delayed a final vote.

Commissioner Deborah Taylor Tate withheld her tie-breaking vote to approve the merger until FCC Chairman Kevin J. Martin cast his deciding vote to penalize the companies for violating rules, according to sources familiar with the negotiations who spoke on condition of anonymity. The hold-up was resolved when Tate formally voted in favor of the deal.

Democratic commissioners Michael J. Copps and Jonathan S. Adelstein voted against the merger. Robert M. McDowell, a Republican, voted in favor of it.

"Consumers will get to enjoy the best of the programming on both services," Martin said in an interview. "They'll also be able to pick and choose channels at a lower price."

The FCC's approval means that XM and Sirius have passed the final regulatory hurdle associated with the merger. The deal passed antitrust scrutiny by the Justice Department in March.

Not everyone was pleased with the decision. Critics have argued that the FCC's approval would be a dramatic reversal of rules set in 1997, when the companies were given satellite radio licenses with the condition that they never merge.

"We continue to believe that consumers are best served by competition rather than monopolies," said Dennis Wharton, executive vice president of the National Association of Broadcasters.

Gigi Sohn, president of the consumer group Public Knowledge, said "consumers will be better off than had the merger been granted without any conditions" but lamented that some of the conditions did not go far enough.

The combined company has agreed to offer more educational and minority programming. It will allow any radio-device manufacturer to build and sell transmitters, giving consumers more choice.

Further details about the merger order will be released Monday by the FCC.

XM began in the basement of a Dupont Circle office building and was incorporated in 1992. In 2000, the company moved to a 150,000-square-foot building on New York Avenue NE. The combined company's headquarters will be in New York, but it is expected to maintain operations in Washington.

The merger's completion is a relief to shareholders who have expressed frustration with the prolonged approval process. XM and Sirius have struggled financially and have said that joining forces is the only way that they can survive. Music-enabled cellphones, iPods, music Web sites and traditional radio stations all provide increased competition.

The merger will allow the companies to eliminate overlapping transmission towers and programming, both of which have been areas of heavy investment.

"Together, they are not only lessening the competition between the two but they can potentially improve the cost structure and have the opportunity to move toward profitability," said Stanford Group analyst Frederick Moran.

But the financial rebound will not be immediate, he added. Although the new pricing packages may appeal to current subscribers, who would like to receive their fix of Howard Stern, Oprah Winfrey and Major League Baseball from the same source, the options may not be enough to persuade new customers to buy radios from retail stores such as Best Buy and Circuit City.

Auto manufacturers, Moran said, will probably continue to be the core driver of subscriber growth for the combined company.

"When you are gifted the radio unit with the car, there's a strong chance you'll become a subscriber," he said. "Consumers going to Best Buy probably have other products higher on their list," especially in tight economic times.

Separately, a majority of FCC commissioners voted last night to penalize Comcast for interfering with subscribers' Internet traffic. The nation's largest cable service provider was accused of violating agency principles regarding network management.

The decision will not be final until all commissioners vote. The FCC will act on the issue Friday.

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