Sirius and XM to merge? We Call Shenanigans
Sirius and XM are, once again, going to merge. This time the source is slightly more credible: The New York Times. As much as Mel Karmazin and David Frear want it, it is very unlikely for many reasons. Some are posted here from the first time Mel started talking it up back in June, and while some has changed, most has remained the same, and there are even another reason or two not to right now. The current list is:
-First off, assuming a minimum price of $18/share for a buyout, it would mean a takeover cost of over $5 billion. Sirius cannot add that level of debt to its balance sheet at this point in time. To do so in the future would likely require a much higher share price since it seems XM’s stock price has bottomed out and is starting to rebound. If XM reaches profitability before Sirius, which is likely, their share price will rise up.
-A second possibility is a buyout with stock. To do that, Sirius would have to at least double the number of their shares out on the market, which many shareholders will not like. If there is a complete merger, with both companies forming a new combined company, you have to satisfy both companies shareholders. XM’s will want an equal 50% stake in the company, while Sirius will want a 55/45 split to be more in line with what each company is currently worth.
-The radios use two different audio codecs, which are as different as CD and a cassette tape; Sirius uses an evolved version of PAC, while XM uses aacPlus, meaning that they would have to roll out new radios in order for people to receive all channels, or keep one codec and lose the other, which bring us to the next point:
-Which company’s radios will be the working ones? They could go with XM’s, due to the lower cost of producing them and the larger number of subscribers out there, but then that will add confusion to 6 million Sirius subscribers, who suddenly have to buy a new radio, making it confusing when it is Sirius buying XM. It would be easy to switch out a Sportster 4 or a Stratus becuase they would just send the sub a new radio to place in the universal dock, but what about people with installed tuner boxes, or OEM radios? There are millions of them out there, and the majority would have no idea how to switch it out, and probably have no idea where it is located either.
-What will the satellite formation be? (See how the satellites move) If one system is turned off, you will have angry home/office subs who can no longer pick up that signal and cannot turn their antenna to get the other system’s. The most logical choice will be keep all the birds up there, at least for now, and scrap Sirius’ 4th satellite they are working on. Instead, turn off the two Sirius satellites that are not at the top of the figure 8 orbit and the XM birds running, but that will mean only a 50% increase in bandwidth because there are three satellites up there plus the repeater signal rather than only two satellites + repeater signal if they went with one system or the other.
-Can the current radios pick up a signal outside of the company’s current spectrum? An XM antenna works with a Sirius radio relatively fine and vice-versa, but right now we do not know if one company’s radio could pick up the frequency the other broadcasts with. If the radios cannot do that, then every radio would have to be replaced in order to maximize the benefits.
-When there is only one company out there, innovation is cut back. When you have a monopoly, doing the latest and greatest with your hardware and programming will take a back seat to simply remaining profitable.
-Will they officially become one service, or stay as two? By staying as two, it would solve the radio question, but then they are competing with themselves. They will either double most of their costs, such as programming, or they will duplicate channels and waste bandwidth. If they eventually replace one service’s radios, they could offer more features such as video on the spectrum, but with only 4.5 Mbps(likely even less) in bandwidth for the video, will they make enough off of the incremental revenue for it to be worthwhile?
-They might have to raise prices too much. IMO, if they go beyond $14.99/month in the near to mid-term, other emerging companies such as WiMax or EV-DO will destroy them. The low price for what you get is a huge draw to most, and many would cancel their subscription if it was $20/month.
-Finally, the biggest reason: How will they get this past the FCC? It is a tough sell, and in 2002 the FCC blocked a merger between Dish Network and DirecTV due to the lack of competition outweighing any benefits. That medium has the cable companies solidly entrenched offering a similar product. What will the FCC say about the only two companies who currently provide a national radio service merging?
In short, if they merge, it will be tough. With XM coming close to being cash flow breakeven either this quarter or next, the stock price could rise, making it more costly. Plus, once one company is profitable, the FCC will say no to it unless the other is in bankruptcy.