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Weird-Mart: Tales of the Bizarre from the Walmart AislesWhat is the chance that regulators will permit Sirius Satellite Radio, Inc. (NASDAQ: SIRI) and XM Satellite Radio Holdings, Inc. (NASDAQ: XMSR) to combine? According to the New York Times' DealBook, probability estimates range from "less than 50%" to 50%. Thus investors should calculate the value of SIRI and XMSR under at least two scenarios: one where the deal does not go through and the other where it does.
SIRI and XMSR are the only two satellite radio companies out there now. If they merged, the new company would have a monopoly -- which would enable it to raise prices to subscribers and advertisers without the check of competition. Preventing such abuse of monopoly power is one of the reasons that antitrust laws were established. Furthermore, the Federal Communications Commission (FCC) has a rule prohibiting XMSR and SIRI from ever owning each other's licenses.
SIRI CEO Mel Karmazin is arguing that satellite radio is not the relevant market. Rather, he suggests that satellite radio faces competition from free 'over-the-air' AM and FM radio, iPods, mobile phone streaming, HD Radio, internet radio and next generation wireless technologies. Under this definition of the relevant market, SIRI and XMSR would hold a tiny combined market share and therefore not represent a monopoly.
As the New York Times [registration required] reports this morning, the SIRI/XMSR deal will need to do better than the proposed merger between DirecTV Group (NYSE: DTV) and EchoStar Communications (NASDAQ: DISH) satellite TV companies which failed to pass regulatory muster when they used this same argument four years ago. This could be difficult because when the FCC issued separate spectrum licenses to SIRI and XMSR, it defined free-to-air radio as a separate market, to be tightly regulated as distinct from the unfettered satellite segment -- which airs Howard Stern unbleeped.
Given their high debt loads, low cash position, and high cash burn rates these companies need to plan for survival in the event that the merger does not go through. So do investors.
Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm, He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in DirecTV, EchoStar, Sirius or XM.
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Reader Comments (Page 1 of 1)
2-22-2007 @ 7:45PM
Alex said...
THIS DEAL IS GOING THROUGH NO MATTER WHAT. THE FCC ONLY CARES ABOUT THE CONSUMER AND IF XM AND SIRIUS CONTENT COMBINE... IT WILL BE CHEAPER FOR PEOPLE WHO BEFORE WANTED BOTH HOWARD AND OPRAH THUS ALSO PRODUCING MORE SELECTION. IT WILL TAKE A WHILE BUT IN THE END THE COMPANIES WILL MAKE SOME "MAD" MONEY SO LISTEN TO JIM, HE KNOWS WHAT HE IS SAYING. DON'T LISTEN TO "PETER COHAN" WHO HAS HEARD OF HIM? RIGHT!