The merger of Sirius Satellite Radio (NASD:SIRI) and XM Satellite Radio (NASD:XMSR) was supposed to solve a number of the cost, marketing and programming cost issues at the two companies. Rumors about the merger had been in the market for months, but the Monday of President's Day weekend the deal was announced.
Both stocks jumped sharply, but the champagne was barely out of the celebratory bottles when the shares in the companies began to move down. Both stocks have dropped about 10% since January 1.
No one knows for certain what happened, but there are two possible explanations. One is that the concern over FCC and Congressional objections are so severe that the merger will not get done. Both companies will spend millions of dollars and countless hours working on the deal, and it will fall through. Neither company can afford much distraction. It is not as if the stock market has been pushing either company's shares up over the last two years.
The other reason is based on the theory that satellite radio is yesterday's medium. It may have been a good business when the two company's started commercial distribution a few years ago, but new technology has superseded a strong demand for coast-to-coast radio service. To some extent, the is what the companies are arguing to support the merger. They want the federal government to buy the argument that satellite radio is a small island in a large sea that includes everything from the iPod to terrestrial radio.
Unfortunately, the logic behind satellite radio being a small player is probably true, and this makes it the most probable reason for the sell-off in the stocks. Commercial radio is still a profitable business. It is, in essence, self-supporting and tens of millions of people listen to the radio everyday. Even Google (NASD:GOOG) has decided to get into the business of brokering radio time, so there must be something to it.
Other forms of listening to music in cars and on portable devices are doing much better that XMSR and SIRI. The iPod is clearly profitable, and its sales are still growing. WiMax networks from companies like Sprint (NYSE:S) and Clearwire (NASD:CLWR) will give consumers access to wireless broadband and multimedia.
Under the circumstances, it is possible that the satellite radio stocks could fall further. The business model may be that bad.
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Reader Comments (Page 1 of 1)
4-03-2007 @ 4:55PM
Joel said...
Douglas McIntyre, do you have any interest or connections to terrestrial radio? I believe that there are two reasons why Sirius stocks are going down. One reason is that people with interests to terrestrial radio are lying in order to try to save themselves. The other reason is when people who have not listened to Sirius write about it through ignorance, or if they have listened to Sirius, they don't like Howard Stern, and will lie to try to destroy him. You say "Commercial radio is still a profitable business", yet all of the stations that used to carry Howard Stern have lost a major share of their listeners and profit. You say "Other forms of listening to music in cars and on portable devices are doing much better that XMSR and SIRI." The truth is that music on terrestrial radio is so boring and politically correct, and sanitized for children and do gooders, that it's down right horrible. If you've listened to Sirius, you would know what I'm talking about, there is simply no comparison. you say "WiMax networks from companies like Sprint (NYSE:S) and Clearwire (NASD:CLWR) will give consumers access to wireless broadband and multimedia." I have never listened to a cell phone call while driving that didn't get dropped, or fade, or just sound bad. I have never been able to get very good sound even at my home with different brands of cell phones. With Sirius, I get excellent sound at home, in my car (anywhere I drive -- except in a tunnel), and anywhere in a boat. WiFi and cell phones will never be able to match that coverage, and they should be ashamed of their rip off prices. Before Howard Stern announced he would go to Sirius, they had 600,000 subscribers, now they have over six million and growing. Do you know that when the FCC split the frequencies of satellite radio between the two companies, and the potential of its technology was reduced? Satellite is capable of streaming video, and is the beginning of the end of terrestrial radio.