February 2007

Sirius-XM: A merger too far?

Sirius-XM: A merger too far?

Sirius-XM: A merger too far?

Without very detailed information, it is difficult to make a firm decision but the evidence in the public domain so far suggests to us that this merger can only be justified if the companies have been misleading the public about their success.

Let us consider the arguments put forward in favour of the merger - the real dominating reason is of course not to do with public interest but with private profit, albeit the two may not be incompatible.

The arguments.

Firstly the companies argue that the monopoly issue can be ignored in this case out because they are competing not only with each other but also as part of an audio entertainment sector that includes not only advertising-funded terrestrial radio but also Internet audio and downloads and audio that can be played on portable players.
This argument in our view misrepresents the situation. Firstly a prime reason for many subscribers to pay for satellite radio is the avoidance of interruption from commercials. Thus, although there is some degree of competition between the two sectors, surveys indicate that - although the availability of terrestrial radio may have a moderating influence on what the satellite companies think they can charge, for most satellite subscribers terrestrial is not really offering an alternative.

Score one against the merger.

Secondly: Other sources. If we assume the reason people subscribers - who after all are the listeners who will be primarily affected by a merger - choose Sirius or XM on the basis of the mixture they provide of services including a variety of news and comment and music without the commercial interruptions, the other sources do not provide a one-stop-shop ate a reasonable rate for these. True by searching the Internet and subscribing to various services it may be possible to put together a reasonably similar package, this is a little like saying that because people could buy parts to put their own receiver together a single supplier could reasonably be allowed a monopoly of manufactured receivers. In terms of the service people have chosen to subscribe to - and many may well use other services as well - may indeed be spurred to buy music by what they hear on their satellite radio - the other sources do not provide a comparable product.

Score two against the merger.

Thirdly that the merger will mean the combined company will provide a wider range of services. This argument might well have been argued in a Stalinist state but in a market economy it seems to us to be alien. If the executives really think the evidence is that this is the likely result of a monopoly in a sector.

Score three against the merger - and bring on the men in white coats and straightjackets to take Karmazin and Parsons for psychiatric evaluation.

Fourthly that the merger is necessary to preserve a viable satellite radio sector in a period of rapid technological development: This argument only stands up if graphs of the progress of satellite radio show that both companies would be fatally weakened were it not to be allowed. This argument is being made at the same time that the companies say they are into a positive cash flow from operations.

We accept that they have each had large losses in the past but they are not relevant. The position in business terms is that if the companies are into operating profit and still growing subscriptions, then any administrator in bankruptcy would find more value in keeping a company going than closing it down and the customers' interest is in the latter. There is no justifiable reason in a market economy for bailing out shareholders who made a bad investment.

If of course this picture is not true, then the accounts provided in companies' most recent quarterly financial reports are inaccurate.

Score four against the merger - unless the companies actually are in dire straits contrary to their published accounts. If the latter is true, reconsider but prosecute the companies, their executives and their auditors and change the white coats to orange suits for Karmazin and Parsons.

So what's left in favour? Well there's profit for investors and big payouts for the executives but nothing substantial for the subscribers.

As regards technological change, if the vaunted advance march of WiFi and successors means wireless Internet will be seamlessly available in automobiles -Do you really think this will apply driving through across America? - then the companies have a profitable content stream to sell to subscribers and they would be able to do away with the expense of renewing their satellites when their life expires.

We suspect that for the foreseeable future the reliability of a continuous satellite audio stream will be marketable in contrast to an unreliable WiFi service but whatever the reality it does not mean that the merger can be justified on these terms.

Our conclusion?

We conclude that that the arguments in favour coming from the companies are spin and hype but the merger would not benefit subscribers or would-be subscribers as much as having two good quality competing services - who have we would note pitched their services as being different and thus presumably have staff whose culture is different.

The merger unless all the points made above can be contradicted with sound arguments -not PR spin - should be rejected and ideally Karmazin should end up looking like an omelette.

The only argument we've seen for the merger that really stands up was the reaction of the National Association of Broadcasters in opposing it. But we're not suggesting ordure on Karmazin- leave that for The NAB- eggs will do for him.


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