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A Competitive Analysis of the Proposed XM-Sirius Satellite Radio Merger
Paul Larkin, Jul 26, 2007
On February 19, 2007, America’s two satellite radio companies – XM, based in Washington, D.C., and Sirius, based in New York City – proposed a merger of the two firms. The union would be accomplished by an exchange of shares that would leave each company’s stockholders owning half of the new firm, which, according to estimates made at the time of the announcement, would be worth approximately $11-13 billion. The parties hope to conclude the merger by the end of 2007, with a March 1, 2008, “drop dead” date, allowing either party to walk away from the deal if it has not been approved by then. The proposal, which had been the subject of speculation for months beforehand, generated immediate controversy within the media industry, on Wall Street, in the legal community, and on Capitol Hill. Proponents of the merger, such as Sirius CEO Mel Karmazin, who is projected to become CEO of the new, as-yet unnamed company, said that the union will enhance efficiency in several ways. For example, the merger will eliminate redundant operating expenses in areas such as marketing, customer care, equipment, and research and development. The merger also will allow the new firm to abandon duplicative content offerings, to offer consumers a more extensive range of new programming options, and to target “underserved communities.” And the merger will allow the remaining firm greater buying power in the market for premium content programs, such as professional sporting events. By contrast, opponents of the merger, such as the National Association of Broadcasters (NAB) and consumer organizations, have argued that the sought-after efficiencies cannot be attained for years, due in part to the presently-incompatible technology used by each company. Critics also maintain that the merger would disserve the public interest by creating a monopoly in the satellite radio industry, in violation of the federal antitrust laws. The NAB in particular has claimed – quite ironically, in fact – that the merger, by eliminating redundant channels and freeing capacity to offer unique programs, would enable the newly-merged firm to compete in the arena for local services, such as local news, which is beyond the licenses granted to XM and Sirius. Different commentators on Wall Street and elsewhere have expressed varying degrees of optimism and pessimism about the likelihood of the proposed merger being consummated. Ultimately, however, the opinions that matter are those of the Antitrust Division of the United States Department of Justice (DOJ) and the Federal Communications Commission (FCC). Both must approve the merger before it can be consummated and a new company created. Those two agencies have different, albeit slightly overlapping, responsibilities in this regard. DOJ must decide whether the proposed merger would violate the federal antitrust laws by creating a monopoly. By contrast, the FCC must decide whether the union of two previously competing communications licensees satisfies the “public interest” requirement of the federal communications laws.