Tuesday, February 20, 2007

Space Junk

You've got to hand it to Sirius and XM - they've got chutzpah. After convincing Wall Street that satellite radio was a market the size of the solar system that could support all comers, and raising hundreds of millions of investor dollars, now they want us to believe that the satellite radio market is just another struggling niche in the entertainment spectrum, and it's not fair that they have to keep beating each other over the head to attract listeners, and that they both should have to pay for duplicate transponders, studios, content and talent.

The FCC and the Justice Department should issue a one word response: tough.

No one put a gun to these company's heads to force them into business. I don't remember reading about any government subsidy to bring Howard Stern to Sirius (although, come to think of it, getting him off the terrestrial spectrum would have been a good use of public funds...). No one is forcing either company to pay $90 to $114 to acquire a subscriber.

Neither Sirius nor XM has made a profit. You can talk about free cash flow all you want, but the operating bills still have to be paid. On a P&L basis, both companies don't look so good, and their stock reflects this reality. One could argue that the programming and talent of either constitute an asset that should be valued highly, but both companies have overpaid so much for talent and programming that no one will buy out any contracts at face value.

Could satellite radio ever be profitable with two competitors? Yes, if both were to sharply pare back their operating expenses. But instead, we are being asked to create a monopoly that is basically a reward for profligate spending by both camps.

Can anyone expect that a merged entity will suddenly become thrifty? Sure, getting rid of all the duplication will reduce the fixed expenses, but both companies have said they'll be running their distribution systems in parallel for the forseeable future. If there is as much competition from iPods and terrestrial radio as XM/Sirius would like us to believe, why should subscriber acquisition costs go way down? Or why should talent cost any less? Will the spending of the merged company be covered by the purported expense savings? If not, do you think there might be pressure to, I don't know, raise the price of the only satellite service in town?

Sirius and XM do compete with other forms of audio entertainment, but justifying a merger on those grounds is like allowing all the cable companies to merge because there are movie theaters. If DOJ and the FCC (purporting to represent the public) are serious about a competitive satellite radio market, they will not approve this merger. If that means that XM or Sirius fails, that's the free market in action. Someone else can take a whack at the ball out of bankruptcy.

My advice to Kevin Martin: offer these companies this deal -- they can either continue to compete in the open market, or, they can merge, but into a regulated utility. Want to bet which choice they'd make?

2 comments:

Dave Lange said...

Lou
Great piece and very well written. But I bet that the FCC and the rest of the Govt. will let this happen. WHY - lots of rich people with money have wasted it here and we have elections fast approaching. Both parties need the money. In many ways this is sort of like going to a casino - lots of lights and flashing bells and lots of ways to part fools with their money and it's all entertaining. Yes Mel and Howard and Oprah will walk away with lots of money. The rest of the investors will die on the vine and really Radio will have outlived another dumb threat that used our airwaves to build itself. If only we'd said - no we don't want your money to try and kill us these guys wouldn't even be around today.

Charmatz said...

The question really is who are they competing against. The the narrowest of views, it's each other. However, the reality is they are competing with any televisual provider. From their inception Sirius and XM always consider video to be their end game. With this fall's official launch of their first combo A/V units we'll begin to see their future.

Both programmers have been stockpiling video from their respectively studio interviews and performances with the vision of adding these elements to their service as a critical mass of A/V units are situated. (Whether or not they've cleared those rights is an important question) Once they do, are they still just a radio service? I don't think so.

They should have easily been able to clear the regulatory hurdle, but they have made two critical mistakes. One, they were supposed to have interoperable chip sets by the end of 2005; later they chose not to. By doing so they would have established themselves as collaborators in the public interest. This could have gone a long way in helping their political argument. The second, which is subsequent and more important, they have made enemies and few friends on The Hill. As the saying goes "you'll attract more flies with honey than vinegar". This is lesson more media companies should learn. It was the key reason the DirecTV/Dish Nwtwork deal didn't pass muster as well as why Liberty Media couldn't close a German Cable deal a few years back.

All in all, the satellite radio business is a tough one. They have paid exorbitantly to secure exclusive rights to programming but needed to do so to attract loyal listeners. The majority of their programmming is redundant. And with HD radio -- there's a confusing consumer proposition -- and two broadcast radio behemoths controlling the majority of the ear drums, it's still a long, uphill battle for both Sirius and XM. The best chance for them as well as for DBS providers to continue to grow and to guarantee consumers entertainment choices is for them to consolidate their platforms; either DBS with DBS, satellite radio with satellite radio, or a DBS provider with a satellite radio provider.