FCC Approves XM and Sirius Merger (Jul 26, 2008)

The FCC has formally approved the merger of XM and Sirius radio, allowing them to combine into the sole satellite radio provider.

Sirius Satellite Radio Inc.'s $3.3 billion buyout of rival XM Satellite Radio Holdings Inc. will mean 18 million-plus subscribers will be able to receive programming from both services. Though it will mean that the combined subscriber count will be close to 20 million by the time the deal is closed, it remains to be seen whether it will lead to a first-ever profit for the fledgling industry.

The Federal Communications Commission voted 3-2 to approve the buyout, with the tiebreaker coming Friday night from Republican commissioner Deborah Taylor Tate.

Tate demanded to XM and Sirius to pay $19.7 million to the U.S. Treasury for violations related to radio receivers and ground-based signal repeaters before she would say yes to the deal and break the 2-2 tie.

FCC Chairman Kevin Martin confirmed the final vote Friday night.

According to the companies, subscribers will not have to buy new radios to receive a mix of programming from both services. If they want to pursue a special pay-per-channel a la carte option, however, they will need a new radio set.

The radio industry, consumer groups, various members of Congress, and others argued that a satellite radio merger would hurt consumers by raising the prices of the services.

Jonathan Adelstein voted against the buyout as did fellow Democrat Michael Copps. Joining Martin and Tate in approving the deal was Republican commissioner Robert McDowell.

The Sirius-XM deal would create cost savings in hundreds of millions of dollars and lead to more pricing options and more choices in programming.

My 2003 XM SkyFi receiver is capable of receiving some 256 channels, and it leads me to wonder how they are going to squeeze some 300 channels into a 256 channel receiver. Surely, duplicate channels and unpopular stations would have to be dropped.

As for the requirement to include an HD Radio chip in its newer radios, it was not included as the broadcasters demanded.

XM and Sirius first applied for permission to combine their businesses in March of 2007. A year later, the Justice Department approved the deal without conditions.

The satellite radio companies battle with terrestrial radio, Internet radio, mp3 players, and CD players.

To get FCC approval, the companies faced a steeper climb because they were prohibited from combining under terms of their licenses.

The companies agreed with the FCC on a set of conditions, among which were a cap on the pricing for three years, setting aside eight percent of full-time channels (24 of them) for public interest and minority programming, an "open radio" standard, and a limited "a la carte" offering that would be available within three months of the close of the deal and allow listeners to pay only for the channels they want to receive.

24 public interest channels? That's eight percent of how many channels? 300 channels? I may need a new receiver. My old SkyFi may not be able to reach that high.

On the flip side are the high costs of rights fees to many properties that XM and Sirius paid for to help them gain subscribers. Financial problems for the soon to be new combined Sirius XM company will lead to cutbacks in fees or the elimination of some of the properties.

For instance, Howard Stern was just reeling from the loss of six affillates owned and operated by Clear Channel for the CBS-TV Janet Jackson breast exposure during that big football game whose name we cannot mention here. Though he rebounded when CBS/Infinity's radio stations in the affected markets picked up his show in mid 2004, Stern announced months later that Sirius made a deal with him to move his show to that satellite radio service for some $500 million and has since pocketed anouther $200 million in Sirius stock for meeting subscriber growth targets in his five-year contract, which expires at the end of 2010.

But the days of high paying radio jocks may soon be a thing of the past as the new combined company seeks ways to cut costs so that it can finally start making money, refinance XM's massive debt, cutting duplicate and unpopular channels, and renegotiating deals with the costly sports properties after their current contracts run out.

With no more competetion, sports properties like NASCAR, NCAA, NFL, MLB, NBA, NHL, and others will have to either accept whatever the amount of rights the Sirius-XM company offers them or take a hike and try their luck selling their subscriptions through pay Internet radio.

Sirius pays NFL $220 million for a seven-year deal, and $107.5 million for NASCAR's five-year deal. XM has a $650 million deal with the MLB for 11 years.

When you add up all of the total programming costs, the biggest single expense for the two companies, it comes to a whopping $475.4 million as of last year, and that's 23 percent of the revenue.

Stern, earning $80 million a year on satellite radio, will never reach that kind of level ever again after his contract expires, and nobody else after him will ever match the amount of money Stern earned in the deal with Sirius.

Compare that with terrestrial radio where Stern and his team took in some $30 million a year while employed by Infinity Broadcasting, now known as CBS Radio. A rights deal war between terrestrial radio and Sirius-XM, however, could still be on the horizon for Stern, but forget ever going beyond $50 million a year from either competetor. Not even the newly privitized Clear Channel could afford that kind of money for a national talent.