XM-Sirius Success Hinges on Concessions
If special interest groups get their way, a joined
XM Satellite Radio
( XMSR) and
Sirius Satellite Radio
(SIRI) - Get Report
may never resemble the satellite juggernaut Wall Street is expecting the merger to create.
It has taken the Federal Communications Commission longer to review the proposed transfer of licenses in the combined company than any merger in history, analysts say. The Justice Department had taken about as long before determining in March that the merger would not be anti-competitive. Nevertheless, analysts say the new wait could mean more stipulations.
XM and Sirius have indicated a willingness to offer a la carte pricing and services as a peace offering to the FCC, which is seen as a sign of weakness -- an indication that they'll do whatever it takes to gain regulatory approval. And a la carte pricing may be the tip of an iceberg. The commission has heard a plethora of concerns and complaints from many interest groups and politicians to review and address, a process that has stretched the FCC's time clock to more than 350 days.
RBC Capital Markets analyst David Bank said that despite mobilization of multiple special interest groups to lobby against the merger, he expects the FCC will ultimately grant approval. However, "it's unclear when
the FCC will rule and what pound of flesh it will extract," he said in a research note.
Bank writes that new stipulations -- possibly including giving up spectrum or mandating the installation of high-definition chips in satellite receivers -- could boost competitive forces and sap some of the strengths created by the merger.
Among those lobbying the FCC for certain impositions, private-equity firm Georgetown Partners has offered support for the XM-Sirius merger on the condition the FCC hand over to them 20% of the combined company's spectrum. That would mean the creation of a new competitor in the satellite radio market using spectrum that has been developed by both XM and Sirius.
While such a move would ease concerns that the merger stifles competition, Sirius and XM said the inclusion of that condition would be a manipulation of the regulatory process for private gain. Sirius and XM have reason to push Georgetown Partners away from their corner. If the merged company were forced to give up or lease 20% of its spectrum, it would mean XM-Sirius wouldn't be able to offer as many channels to consumers as many believe a joined entity would.
Also looking to get in on the action is American Public Media, a producer of public radio content. CEO William Kling has asked the FCC to set aside 20% of the combined parties' spectrum for noncommercial educational use. "Making a commitment to
noncommercial educational programming is even more important when a large portion of radio spectrum is controlled by a single broadcaster," Kling wrote.
The National Hispanic Media Coalition is another advocacy group looking for a chunk of XM-Sirius spectrum if the deal is approved. The NHMC, in a letter to the FCC, asked the commission to set aside 15% of the spectrum for minority and women-owned programmers who are unaffiliated in all respects with XM-Sirius. Additionally, the NHMC asked the FCC to force a combined XM-Sirius make the technical specifications of its devices and network open and available to allow device manufacturers to develop, and consumers to use, any device they choose without interference.
Similarly, iBiquity Digital is hoping the FCC will force XM and Sirius to open up their receivers to other satellite broadcasters and developers. iBiquity is the company behind HD Radio, which also has been fighting to gain traction amid competition from satellite radio, terrestrial radio and MP3 players like
Apple's
(AAPL) - Get Report
iPod.
iBiquity is asking that the FCC condition its approval on the requirement that the combined XM-Sirius include HD Radio technology for digital AM and FM radio in all satellite receivers. iBiquity has proposed that the commission impose this requirement for satellite automobile receivers within three years of the effective date of its approval of the transfer application and, for all other satellite receivers, within one year of the effective date of the approval.
"iBiquity believes there are structural barriers to that competition today and the combination of Sirius and XM will exacerbate those problems," the company said in a letter to the FCC. "iBiquity believes a combined satellite company will have greater economic leverage to impose such barriers throughout the distribution channel for radios to the exclusion of terrestrial digital radio."
Along the same lines, U.S. Electronics, which previously manufactured radios for Sirius, has asked the FCC to address the open device issue. U.S. Electronics said in a letter that it "and many others like it want to be able to make satellite radios in the future. If the combined company is also permitted to say that since it has a proprietary interest in the chip that connects the radio to the satellite network it will only deal with its favorite manufacturer, that would result in a second monopoly."
Of course, the National Association of Broadcasters has been the most outspoken critic of the merger, claiming the satellite industry is distinct from terrestrial radio and that a joined XM-Sirius would create a monopoly. The NAB has consistently called the potential XM-Sirius merger analogous to the failed
EchoStar
(SATS) - Get Report
and
DirecTV
(DTV)
deal.
"When the FCC first licensed a satellite radio service, it made clear that satellite radio was to remain a national service and should not provide localized content," the NAB states on its Web site. "However, since then, the satellite radio industry has largely disregarded the terms of its charter by attempting to move into localized content."
The NAB has asked the FCC to bar satellite from local content and to examine the legality of satellite's more recent move to distribute local content on national channels. The NAB defines local content to be weather, traffic and sports. Additionally, the NAB wants the FCC to clarify that satellite radio companies could not use GPS technology to trigger local content on satellite radio receivers.
If XM and Sirius are forced to make many of these concessions, the new company may have 20% fewer stations. Satellite radio equipment will have been unlocked to other potential satellite radio providers as well as HD Radio. As the devices and technology will no longer be proprietary, other new competitors can use it without licensing the technology or paying royalties.
Shareholders probably won't be very happy with this outcome. Moreover, subscribers might not be able to get local weather, traffic, or sports content through satellite radio, either.
If that happens, so much for looking out for the public's best interests.