Satellite Radio: Deal or No Deal?

While both XM Satellite Radio and Sirius Satellite Radio have been growing their subscriber bases (almost 8 million for each), Wall Street has remained unimpressed. Both firms ended 2006 with stock prices that were approximately half their 2006 levels (Sirius at $3.54 and XM at $14.45).

Toward the end of 2006, rumors were rife about the two companies merging. Interestingly, these seemed to stem primarily from Sirius, with CEO Mel Karmazin lauding the potential benefits of a merger. David Frear, Sirius' chief financial officer, also thought it was a logical solution, telling the New York Times: "When you have two companies in the same industry, we have a similar cost structure. Clearly, a merger makes sense from an investor’s point of view to reduce costs, and to have a better return."

On January 17, Federal Communications Commission chairman Kevin Martin commented that the two companies could not merge under current regulatory rules. A merger, reported the Times, would require approvals from antitrust regulators in addition to the FCC. So, could it still happen?

Industry analysts are skeptical, although several noted some wiggle-room in Martin's phrase "under current regulatory rules." Bank of America securities analyst Jonathan Jacoby put the possibility "under 50%."

Personally, I always had a hard time believing in the merger rumors, but the whole discussion was illuminating, I thought, in how it revealed the many real problems confronting Sirius and XM.

One is the complete lack of public recognition of either entity. Sirius' acquisition of Howard Stern in 2006 is widely credited with raising its subscription base—and many Stern fans are convinced that he has never been better than he has since being freed from the restraints of terrestrial radio. Yet, most non-fans are not sure whether Stern is on Sirius or rival XM, only that he's on one and not the other.

If you're among the majority of folks who don't have satellite radio, take the simple quiz below.

Identify which service has the following:
Bob Edwards
Oprah Winfrey
Bob Dylan
Depak Chopra
Martha Stewart

Give up? (It's XM, XM, XM, Sirius, Sirius, Sirius, XM, Sirius, XM, and Sirius) And those are satellite radio's superstars—supposedly.

The two channels seemingly mirror one another's programming more than they offer choices. Both ignore, or have eliminated, content that is edgy or out of the mainstream, which, of course, was what they initially claimed would be what distinguished them from terrestrial radio.

Here's an amusing tidbit: In the very NYT article that reported the merger rumor, Erica A. Taub got confused when she was discussing consumer confusion between the two services. Forgetting she was talking about satellite radio, she wrote: "Except for a relatively small handful of viewers looking for particular programs, consumers searching for a satellite service in a retail store often make their decision not on the merits of one over the other, but which one is more convenient to buy."


But consumers and writers aren't the only ones who are confused. Listen to this quote by XM's president, Nate Davis, in the same article, "We did not stimulate the market with new products." He's talking about XM receivers and XM-ready components, not the company's $12.95/month subscription service, which is its real product.

Both XM and Sirius have deals in place with all of the major auto makers, most of whom offer free introductory subscriptions for new car buyers, yet neither company has been consistently successful in convincing most car buyers to continue past the free taste.

That's where, pardon the expression, the rubber meets the road. Satellite radio's real challenge isn't alerting people to what it offers, it's convincing them that it's worth paying for. To the group of people to who actually get to experience it for free, XM and Sirius just aren't closing the sale.