Joe Duck

The huge wait over approval for the Sirius XM Satellite radio merger is almost over as FCC staff has recommended approval of this action making approval very likely.

In my view the merger will have a positive effect on the profitability of the combined companies because it will effectively increase the reach of the advertising offerings dramatically while eliminating upper and some mid-level management positions.   Unlike small terrestrial stations (which are quickly falling under national networks anyway), satellite radio is very capital intensive but relatively labor NONintensive.  e.g once established the satellite network can scale to millions more subscribers without a lot of extra labor or infrastructure costs.    The XM Sirius merger is the logical extension of those technological and labor efficiencies in a market where technology forces are a lot more determinative than normal market forces.

To the extent the merger helps the combined company by increasing their share of the radio advertising market it is likely to have some negative impact on terrestrial radio stations, though I think most of this damage has already been done.  Also, I see the key negative pressure on radio advertising as coming from the growth in online advertising and the merger is unlikely to have much affect on the online advertising market.

Following are notes from the XM / Sirius press release describing the advantages of this merger.

PR info is in italics, [my comments are bolded and bracketed]:

The combination creates a nationwide audio entertainment provider with combined 2006 revenues of approximately $1.5 billion based on analysts’ consensus estimates. Today the companies have approximately 14 million combined subscribers. Together, SIRIUS and XM will create a stronger platform for future innovation within the audio entertainment industry [skeptical - this is a profit move not an innovative one] and will provide significant benefits to all constituencies, including:

* Greater Programming and Content Choices — The combined company is
committed to consumer choice, including offering consumers the ability
to pick and choose the channels and content they want on a more a la
carte basis. The combined company will also provide consumers with a
broader selection of content, including a wide range of commercial-free
music channels, exclusive and non-exclusive sports coverage, news,
talk, and entertainment programming. Together, XM and SIRIUS will be
able to improve on products such as real-time traffic and rear-seat
video and introduce new ones such as advanced data services including
enhanced traffic, weather and infotainment offerings. [theoretically reasonable statements, though I'm skeptical they'll work hard to innovate, choosing instead to reap the increased profits from the merger efficiencies]

* Accelerated Technological Innovation — The merger will enable the
combined company to develop and introduce a wider range of lower cost,
easy-to-use, and multi-functional devices through efficiencies in chip
set and radio design and procurement. Such innovation is essential to
remaining competitive in the consumer electronics-driven world of audio
entertainment. [Again in theory true, but the radios are already subsidized so I see prices stable or higher after merger.  Innovation will happen as necessary to maintain market]

* Benefits to OEM and Retail Partners — The combined company will offer
automakers and retailers the opportunity to provide a broader content
offering to their customers. Consumer electronics retailers, including
Best Buy, Circuit City, RadioShack, Wal-Mart and others, will benefit
from enhanced product offerings that should allow satellite radio to
compete more effectively. [Auto space - lots of potential as drivers expect more amenities and are willing to pay for them and these partnerships are a very natural win-win for autos and XM Radio.   Retail - skeptical of more than current levels of subscriber increases via this market.]

* Enhanced Financial Performance — This transaction will enhance the
long-term financial success of satellite radio by allowing the combined
company to better manage its costs through sales and marketing and
subscriber acquisition efficiencies, satellite fleet synergies, combined
R&D and other benefits from economies of scale. Wall Street equity
analysts have published estimates of the present value of cost synergies
ranging from $3 billion to $7 billion. [Absolutely yes, though my gut doubts the 7 billion number without having done any financial research.  If this 7 billion efficiency is realistic this appears to be a good stock buy as it could catapult the bottom line of the combined companies, which now have a combined market cap of only about 7 billion]

* More Competitive Audio Entertainment Provider — The combination of an
enhanced programming lineup with improved technology, distribution and
financials will better position satellite radio to compete for
consumers’ attention and entertainment dollars against a host of
products and services in the highly competitive and rapidly evolving
audio entertainment marketplace. In addition to existing competition
from free “over-the-air” AM and FM radio as well as iPods and mobile
phone streaming, satellite radio will face new challenges from the rapid
growth of HD Radio, Internet radio and next generation wireless
technologies. [Maybe, but I think for at least the first few years the focus will be on more efficient delivery of the existing niche networking, news, shock and political talk shows, and other existing products.   I do not see XM and Sirius as major content innovators.   Rather they have been innovative in the distribution space.]

Summary:

Look for the merger to be approved, to bring cost efficiencies, and to breath life into the stock of the combined company.     Do not expect significant other impacts in the radio or other sectors.   Merger = more of the same, more cost-effectively delivered by the combined company.

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