Tuesday, March 25, 2008

Justice Dep't approves XMirius merger

The Justice Department approved the merger of satellite-radio companies Sirius and XM leaving one more major regulatory hurdle -- the FCC -- before a deal that was given little chance of success a year ago can be completed.

It's considered unlikely that FCC would oppose a deal backed by Justice, but hard work is ahead for the two companies as they work to meet high expectations among both subscribers and investors. The combined company will face stiff competition from traditional broadcasters, iPods, cellphones and other emerging ways for consumers to access music and other programming.

Still, the Justice Department's approval marks a big step forward in a long-running saga. The companies proposed their merger in February 2007 as a way to bolster satellite radio's chances of long-term success. Sirius and XM charge subscribers a fee for supplying dozens of channels of programming delivered via satellite to special radios. While the diverse offerings that span music, talk, news and sports have won praise, both companies have posted huge losses as they have tried to persuade consumers to pay for a medium that has always been delivered free.

Despite the companies' problems, the XM-Sirius deal was initially considered a long shot, in part because it was seen as creating a satellite-radio monopoly. Since then, the companies have argued to regulators that the satellite-radio services compete not just with each other but with all kinds of audio entertainment, starting with regular radio stations. At the end of last year, Sirius had 8.3 million subscribers, and XM had nine million.

FCC Chairman Kevin Martin was initially seen as being inclined against the deal. But his reservations appear to have dissipated somewhat over the past year, particularly after the companies agreed to offer a la carte pricing that allows customers to subscribe to individual channels rather than the full lineup of programming -- a service he has long called for in cable TV.

The FCC has the power to impose conditions that might make the controversial merger slightly more palatable to the groups opposed to it. Last week, Martin told reporters he had asked the agency's staff to draft documents on the merger so the FCC could move quickly after the Justice Department acted. He gave no indication how he might vote. A ruling from the FCC is expected in weeks.

At the Justice Department, Thomas O. Barnett, the assistant attorney general for antitrust, told reporters that "after a very thorough and comprehensive investigation" his department concluded that "in several important areas, the [satellite radio companies] simply do not compete today," undercutting opponents' arguments that allowing the merger would undermine competition.

Car manufacturers, which have become a major source of customers, don't provide true competition, because each manufacturer is locked into a long-term contract with either Sirius or XM, Mr. Barnett said. At retail outlets like Best Buy and Circuit City, where consumers can choose one service or the other, he said investigators couldn't determine that customers were limiting their decision to just the two companies and not also choosing among other audio-entertainment options.

The department also considered emerging entertainment alternatives such as Internet radio and, in particular, the effect that mobile wireless broadband would have. "You could stream all the content you get over satellite radio today over an Internet broadband connection," Barnett said.

The ruling could provide ammunition to other companies that believed that merging their businesses would be ruled anticompetitive. In 2002, regulators rejected a proposed merger between DirecTV and EchoStar. But recently, the environment has been more friendly for companies wishing to combine. With the possibility of Democrats retaking the White House later this year, the window for antitrust approval of borderline deals could close soon.

At the FCC, Martin initially said the companies faced a high hurdle to win approval. When the FCC originally issued satellite-radio licenses in 1997, it specifically prohibited the merger of the two companies, but XM and Sirius argued that the environment had changed so much in the ensuing decade that the prohibition no longer makes sense. They also said that because the prohibition was never filed in the Code of Federal Regulations, it was a policy rather than a rule, making it easier to overturn.

The deal has drawn criticism from the FCC's two Democratic commissioners, who complain the US needs less media consolidation, not more. But talks at the agency in recent weeks have been more about what conditions should be attached to the deal than whether to approve it.

FCC officials are considering requiring the combined company to lease some channels to outside groups and to set aside free space for noncommercial channels, such as educational broadcasters. Public interest groups are also asking the combined company to freeze prices for up to three years.

For several months, public-interest groups and radio companies have lobbied the FCC for conditions on the deal, acting on the belief that the Justice Department would approve it without objections. "We wanted to make sure that if the deal got approved, there'd be conditions on the table to consider," said Art Brodsky, spokesman for Public Knowledge, a public-interest nonprofit group.

But some organizations didn't favor the merger under any circumstances, including the National Association of Broadcasters, which lobbied hard against the deal and said it was "astonished" at the approval.

If the FCC signs off, Sirius and XM will have to prove that their merger will lead to all the benefits they outlined. Some will be fairly easy to implement. For example, the companies promised tiered pricing, allowing consumers who listen to just a few channels to pay discounted rates. Currently, each service costs $12.99 a month.

Other promised changes might prove trickier. For example, Sirius and XM said their subscribers would be able to receive programming from either service without having to purchase a new radio receiver. Currently, each service is incompatible with the other company's receiver.

Although a few channels from the other service could be added fairly quickly onto each company's satellites, more than a handful would require some creative engineering solutions. The companies say they have been working on the appropriate technology and expect a full a la carte selection within a year.

Shareholders in both companies also expect a combined satellite-radio service to deliver savings that would improve each company's financial picture. Both companies have posted losses of hundreds of millions of dollars each year as they struggled to build subscriber growth while meeting extraordinarily high fixed costs, such as launching satellites.

As one company, the satellite-radio business could eliminate duplicate channels, such as the similar music channels each offers. It would also be rid of the bidding wars that have led to extraordinary price tags for talent like Howard Stern and Major League Baseball. And back-office staffs could be combined and cut, along with marketing budgets, research budgets and the like.

The Justice Department said those cost cuts played a role in its decision and estimated that the savings likely to be passed on to consumers would be "substantial." However, it also cautioned that the companies appeared to have exaggerated some of the savings.

The proposed merger gives the holder of each XM share 4.6 shares of Sirius, valuing XM at $4.59 billion based on Monday's prices. XM rose 15% to $13.79, and Sirius gained 8.6% to $3.15. (photo & info from The Wall Street Journal)

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