Tuesday, March 20, 2007

Breaking News: XM and Sirius File Application for Transfer of Control

Today, XM and Sirius both filed applications with the FCC for transfer of control. Four applications have been filed so far: two by XM, one by Satellite CD Radio, and one by Sirius. First glance indicates that everything is being transferred to Sirius, but XM is the surviving entity.

The four applications all reference the same consolidated application. In addition, there are a couple of exhibits that really don't add that much to the merger discussion.

Having read the application, we are nonplussed by it. We learned very little from it. The proposed merger goes as follows:

"The Applicants have entered into a merger agreement under which a wholly owned subsidiary of Sirius, Vernon Merger Corporation, will be merged with and into XM, with XM being the surviving entity of this subsidiary merger."

There is some good news in the a la carte subscription prices in that not only will one be able to block channels but will also receive credit for those blocked channels. That will likely appeal to Chairman Martin:

"After the merger, customers may elect to receive fewer channels at a monthly price lower than $12.95; substantially similar programming at the existing $12.95 price; or more channels, including some of the “best of both” networks, at a modest premium to the cost of one service, and considerably less than the cost of subscribing to both services. Consumers will also be able to block adult-themed channels and receive a price credit for those channels. Subscribers could continue to use their existing radios or eventually purchase new radios capable of receiving all of the content of both services when they become available."

As shareholders, we are very disappointed on the savings front. That gave little detail, instead referencing analyst projections of saving in the order of $200-400 million initially, adding up to billions in the long term. We consider the lack of details as meaning the savings are speculative:

"Analysts predict that these and other combined synergies will save the merged company $200-400 million per year in the near term, and several billion dollars over the long term. As noted above, significant portions of these savings will be shared with customers immediately and in the long-term through lower prices and improved service offerings."

The following statement demonstrates that the savings we expected just are there. Sure, there are significant savings there, just not, as shareholders, on the order that we expected to see. If this is the best they can do, why merge:

"Third, one of the largest expense items for each company is the ongoing marketing and subscriber acquisition costs associated with gaining new customers, growing the subscriber base, and increasing brand awareness. The merged company will enjoy the efficiencies of combined advertising and marketing campaigns as well as a unified set of product offerings with lower per
unit manufacturing costs due to larger scale production that should ultimately result in lower product prices for end consumers. In addition, the merged company will be able to focus marketing dollars not simply to drive brand awareness, but also to reduce consumer confusion over what satellite radio offers and to more effectively distinguish satellite radio from other
competitive audio entertainment services."

On the competition front, they use NAB's own words against them:

'As the National Association of Broadcasters (“NAB”) explained to the Commission just two months ago, “there can be no reasonable doubt that the current media marketplace is robustly competitive, and indeed exploding at the seams with consumer choices for both delivery mechanisms and content.”'

Similarly, they use Clear Channel's words against them:

"Similarly, Clear Channel Communications, one of the largest owners of radio stations in the nation, has stated: Today’s media marketplace is accurately characterized as bearing “abundance” and “multiplicity”—not “dominance” or ”scarcity,” let alone “monopoly.” Within this vast and constantly-expanding media marketplace, terrestrial radio broadcasters are subject to fresh and ever-growing competition from a vast array of new technologies and services that deliver music, entertainment, and news."

The Slacker announcement couldn't have been better timed. Slacker is referenced several times in the application:

"For example, Slacker recently introduced an Internet and satellite radio-based service. The service will be received by consumers through a device designed and distributed by Slacker. The Slacker will come with 4-inch color display, will support MP3, WMA, WMV, and MPEG-4 files, and will come with built-in WiFi and satellite reception capabilities. See Introducing Slacker, a new kind of Satellite Radio company, ORBITCAST, Mar. 14, 2007, at
http://www.orbitcast.com/archives/introducing-slacker-a-new-kind-of-satellite-radiocompany. html (last visited Mar. 15, 2007); see also J.D. Biersdorfer, Now, A Radio Station for
(Your Name Here), NEW YORK TIMES, Mar. 15, 2007, at C8."

"Slacker, a service unveiled just last week, allows users not only to customize their music channels but also to listen to them on portable devices, including in their cars; the service
includes a free, advertising-based version as well as a subscription option."

"The Slacker service described above, which uses both Internet and satellite technology, illustrates the way in which innovation is continually yielding new audio entertainment options."

They also talk about potential competition from the WCS license holders:

"In addition, other types of spectrum are available that are capable of supporting services comparable to satellite radio. Audio entertainment services similar to satellite can be deployed
using the frequencies allocated to the Wireless Communications Service (“WCS”). This spectrum is immediately adjacent to the band in which satellite radio already operates—indeed, it originally had been identified for satellite radio but was reallocated to WCS pursuant to
congressional mandate. The Commission already has authorized satellite radio in this spectrum, having stated that WCS licensees were permitted “to provide a variety or combination of services,” specifically including satellite radio."

They also address the ruling that says one entity can't hold both licenses:

"While the Commission stated in the same order that “one licensee will not be permitted to acquire control of the other remaining satellite DARS license,” this language was not codified
in the Code of Federal Regulations and thus is not a binding FCC regulation. To the contrary, it is merely a policy statement reflecting the Commission’s view, based on the evidence available
in 1997, that two satellite radio licensees were needed to have enough competition in the audio entertainment market. That statement does not preclude today’s Commission, recognizing a
radically altered competitive environment, from finding that the proposed transaction serves the public interest."

There are a few other tidbits in the application, such as the following:

"Sirius has entered into an agreement with Space Systems/Loral, Inc. to design and construct a new geostationary satellite that will complement its existing in-orbit satellites. When launched, the resulting constellation configuration is expected to provide enhanced coverage and performance."

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