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Sirius Satellite Radio (SIRI)
Can Sirius and XM Deliver the Music to Shareholders?
So it looks like it's finally going to happen. Over two years after the idea was initially floated and about 13 months after the intent to merge was officially announced, the Justice Department gave its blessing to the Sirius Satellite and XM Radio merger yesterday and did so without imposing any conditions - quite a coup for the two companies and their public relations efforts given the fact that gaining approval was considered to be quite a long shot when the deal was announced last year. The FCC will review the merger next and after the DOJ's approval, most now expect the government agency to give the green light too, though it might impose some conditions. Wall Street was enthused with the news resulting in a spike in both stocks but the question is that enthusiasm justified or is satellite radio just too tough a business to make work?
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Once the FCC approves the merger too, and that is expected to happen within the next few weeks, Sirius CEO Mel Karmazin can take a moment and congratulate himself for not only convincing the bigger XM Radio to merge with Sirius (technically, Sirius is buying XM as each XM shareholder will receive 4.6 shares of Sirius making the deal worth about $4.5 billion) but also convincing the government that the combined company will not be a monopoly even though it will be the only one with a license to broadcast satellite radio. He also got it done in the nick of time - because the consensus opinion is that if a Democrat wins the White House this fall, the deal would be close to doomed as a Democratic administration would not have given approval.
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However, once the two companies start merging their operations, the road gets even harder. It is akin to what happens once a politician takes office after heavy campaigning. Can the numerous promises that were made during those countless public appearances be kept? Sirius and XM laid out a bunch of reasons as to why they think merger makes sense. Those include reduced marketing costs (e.g. the companies won't have to fight with each other to decide who gets the privilege to pay Howard Stern $500 million), a combination of technical expertise and streamlined back office and administrative operations. Plus technical equipment (which in this case includes satellites and launchers etc.) can be combined too. So on paper, the deal makes sense which is why Wall Street was on board from day one, in fact one can make the case that the investment community literally prodded the two companies to start cohabitating.
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But mergers, especially the tech heavy ones are always a tricky thing. The AOL-Time Warner thing didn't work out and the Sprint-Nextel deal (which is probably a more apropos example) is a massive failure. The latter looked good on paper too before they realized how hard it would be to merge their two networks and spent all their time trying to figure out how to do that instead of taking care of customers. Sirius and XM have promised that subscribers will be able to use their existing hardware to listen to the programming from the combined company but as the Wall Street Journal puts it, this will require some 'creative engineering' because currently Sirius receivers are incompatible with XM's service and vice-versa. There will also be technical challenges associated with delivering on one of the other big promises - à la carte programming or giving consumers the ability to pay for and listen to only selected channels of their choice instead of paying the higher standard fee (currently $12.99) for access to all channels.
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Having said all this, let's for a minute assume that Sirius and XM can pull off the merger fairly seamlessly and deliver on their promised benefits and cost-saving measures. Even if they do that, they still have to prove one key point that is so far a question mark, namely does the business model work now and will it work in the future? One can make a case that the answer to both those questions is in the negative by pointing to the fact that neither of these companies has turned a profit in its existence (though Sirius has recently started generating a positive cash flow) and that there has to be a cheaper way to deliver content with the benefits of satellite radio (i.e. high sound quality, no commercial interruption, no censorship) without the expense of launching and maintaining satellites and one such way may just be broadband internet-based radio which is still in its infancy but is more cost-effective. Plus, an internet enabled music device would be a lot more multi-functional than a satellite radio receiver lowering the bar for mass adoption.
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