Sirius Satellite Radio

INTRODUCTION

PURPOSE

To analyze, from the prospective of Sirius Satellite Radio, the effects that the “merger of equals” between Sirius Satellite Radio and XM Satellite Radio will have upon current subscribers, overall success and profits of the company, and potential market share.

COMPANY INTRODUCTION

Satellite radio has been changing the way that people listen to music, sports, entertainment and news for nearly a decade. Sirius Satellite Radio offers listeners commercial free programming across the nation. They provide users a way to listen to their favorite programs even up to 200 miles offshore. In areas where traditional antenna radio is not available, satellite radio is.

The FCC introduced satellite radio in 1992. In 1997, the FCC approved the license application to broadcast using satellite radio to two companies, WorldSpace and CD Radio, now known as XM and Sirius, respectively. The official launch date for Sirius Satellite Radio was July 1, 2002. On February 19, 2007, Sirius announced a merger deal with XM Satellite Radio. The merger, announced as a “merger of equals”, will combine the two satellite companies under one name, which is yet to be determined. Also, the CEO of Sirius, Mel Karmazin, will remain CEO of the combined company, while CEO of XM, Hugh Panero, will no longer maintain an executive position. The merger is awaiting approval by the Department of Justice; which rules on anti-trust matters, and the FCC; which looks out for “public interest.”

ANALYSIS OUTLINE

This analysis will explore the proposed future for Sirius Satellite Radio. The strengths and weaknesses of a combined company will be discussed from both a consumer point of view and the company’s view. Also discussed are challenges that Sirius and XM face as they move forward with the proposed merger.

ANALYSIS

STRENGTHS

In general, the objective of a merger is to combine the strengths of two firms in order to produce a stronger company overall. In successful cases, a merger will increase market share, increase opportunities and selection, and decrease costs. This section will discuss the following strengths in more detail: the ability to offer a wider variety for listeners to choose from, a reduction in the fixed costs of doing business, and a larger market share.

Variety

For subscribers, the Sirius and XM merger will offer more variety of music, sports, talk and entertainment. The merger combines radio and television icons such as Howard Stern and Martha Stewart, currently contracted with Sirius; while Oprah Winfrey and Bob Dylan contact with XM. Several subscribers found themselves wanting to subscribe to satellite radio through both of the providers, in order to listen to their favorite shows. Analyst Frederick Moran states that the biggest complaint of satellite radio consumers is lack of choice. Prior to the merger, customers would have to subscribe to both providers, doubling the cost of listening. This, however, was a difficult task because having two receivers, one for each provider, in your vehicle was impractical and nearly impossible. Home subscribers also had to pay to have two different receivers in their homes. Following the merger, customers can purchase a unified receiver, which will receive signals from all of the company’s satellites. Mel Karmazin, the future CEO of the merged company, has also promised that no existing XM or Sirius receiver will become obsolete.

Another example of increased variety is that the merger will allow sports fanatics to listen to all sports, instead of having to pick their favorites. Major League Baseball and the National Hockey League are dedicated to XM, while the National Basketball Association and National Football League are contracted with Sirius. The proposed merger will open up a world of opportunities that will benefit customers that currently subscribe to satellite radio.

Reduction in Cost

Since the beginning of Sirius Satellite Radio in 1999, the company has never reported a net profit, and neither has their only competitor, XM Satellite Radio. Both companies have been operating in the red since the beginning. The combined losses for 2006 are $1.7 billion. The biggest cost, for both companies, is the cost of building and launching satellites, with a price tag of more than $1 billion each. By combining forces, Sirius and XM will not need to keep six or eight receivers in orbit like they do now. They will be able to successfully run four or five satellites at one time and still maintain the same coverage area. Figure 1, shown below, is the current path of the three Sirius satellite receivers. When the company merges, four or five receivers will run the same orbit, and be able to cover twice the area at any given time.

Figure 1

Because of the significant savings in operating costs, Sirius/XM could maintain the same pricing structure and still be able to offer satellite radio to customers at an affordable price.

Another cost that the company will decrease is the licensing costs. Each company has to individually pay to license broadcast material. That cost will now be shared. Furthermore, there is a reduction in the cost of acquiring high profile celebrities to broadcast over satellite radio due to decreased competition. The companies do not need to compete with one another anymore in order to pull down the most popular celebrity. According to S&P’s Tuna Amobi, cost savings are expected to be in the low $3 billion to $7 billion range. Other savings, such as reduction in labor costs, advertising costs, and administrative costs will also be seen.

Bigger Piece of the Market Pie

Although there are only two satellite radio providers, Sirius and XM Satellite Radio are also competing with traditional radio, MP3 players, Apple I-Pods, and other mobile listening devices. A recent study by market researcher Arbitron indicated that only 5.6% of nearly half a million radio listeners tuned to satellite radio providers. In 2006, subscriber growth at Sirius Satellite Radio was up 82% from 2005, a net increase of 2,707,995 subscribers. Meanwhile, XM