The XM-Sirius Satellite Radio Merger: Should It Be Allowed?

I am going to go off the beaten path a bit but I wanted to pose a question about one of the larger stories going around in the investment world as of late. Earlier this year Sirius Satellite Radio announced that it wanted to acquire rival XM Radio. This initially grabbed my attention because not only do I have multiple Sirius radio subscriptions, but I’m also a shareholder. So the outcome will likely have a few impacts. But, this merger has many hurdles to overcome if it even has a chance.

Would This Really Create a Monopoly?

The main argument against this merger is that the only two satellite radio providers can’t combine because that would create a monopoly. But, would it really? On the surface it would appear that having only one company providing satellite radio would indeed monopolize that market, but a lot of things have changed in the last 10 years.

When the FCC originally granted licenses to both Sirius and XM they were issued with an underlying condition that the two companies could not be able to combine in order to maintain a competitive marketplace. When this was grated in 1997 clearly this was a very new technology and at the time consumers had very little choice. They either could listen to broadcast radio for free or soon be able to purchase a satellite radio. In this context it would seem appropriate to disallow any sort of combination. But fast-forward ten years and the music and radio industry has changed tremendously.

What Has Changed?

Over the course of the last decade the radio industry has undergone many changes. Now consumers have even more options available to them such as internet radio, portable music devices such as iPods, traditional terrestrial radio and increasing in popularity, HD radio. It has even come to a point where people can obtain music (and television) right from their cell phones. With so many options available would it really make a difference if there was only satellite radio provider?

What Do I Think?

Ultimately, I don’t think having only one satellite radio provider would be such a bad thing. From a consumer’s point of view I have many options. If I want free radio I wouldn’t even consider satellite anyway. If I didn’t want commercials then I would load up my portable device and listen to all of the music I wanted with no interruption. If I wanted premium content for a fee then I would consider satellite radio.

The only thing different between the two companies right now is really content (aside from how some of the underlying technology works). So if the two services were to combine I would bet that most of the premium draws for each company would be available, such as Howard Stern, Oprah, various sporting venues, etc. Ultimately that is the only thing that is driving consumers to one provider or the other unless they get a free subscription when they purchase a new vehicle.

The only thing that concerns me as a consumer would be potential pricing. When you have only one provider then there is nothing to compare the price to and in the end that could hurt consumers. They have already addressed this concern with some pricing guidelines. The one thing I have heard that could be an added bonus is a new a la cart form of pricing where consumers could pick and choose what programming they want. As it stands now you basically buy the whole package and you get everything even if you don’t listen to it. This is one thing I really dislike is that I don’t listen to the sports stations so if a sports package was something additional I could purchase and my base package would be cheaper, that would be ideal.

The HBO of Radio

The way I see satellite radio is simply like that of a premium television service. If people want, they don’t have to pay anything to watch TV. Granted their choices are limited and they have to put up with commercials, but it doesn’t cost anything. Users can also get HDTV that can be free as well, all they need is hardware capable of displaying it, just like listening to HD radio. Then, if people simply want to watch certain things whenever they want without interruption they can simply view DVDs or view video available online. This is not really any different than listening to music on a portable device.

And then ultimately if I see a value in paying for cable or satellite service because I want some premium content available on channels such as HBO, that is my choice. It isn’t a technology that everyone needs nor everyone wants, so whether or not there is one provider or two doesn’t really make much of a difference. For example if I saw the need to listen to Howard Stern I would have to pay for that privilege. But guess what, only one provider provides that content anyway so I already don’t have a choice. Sirius already has a monopoly over that content. Same goes for the Sopranos on HBO. If I really wanted to I would have to fork over money to HBO as there are no alternative providers.

Final Thoughts

To sum everything up I think overall the merger would be a good thing. Both of these companies are bleeding money and it is conceivable that one of them may fail. What happens then? We’d still be stuck with only one provider. If they can come together to provide premium content that is worth the subscription fee then people will pay for it.

The market is efficient and if they get carried away with what they charge for what is provided then they will lose subscribers. Nobody needs satellite radio, so if the cost outweighs the benefits people will simply move to cheaper or free services. This will keep the prices in check even if there is only one real provider. Plus, since both companies are struggling I think the combination of technology and assets will actually help the companies provide better content at an even more affordable price with more pricing options which is good for consumers.

So with that, what are your thoughts?

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Filed Under: Business

About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.

10 comments
Mike
Mike

I think it would be good for the consumer. With the technology/satelites consolidated into one company, they would be able to offer their services at a cheaper rate. They are still competing with CD's, terrestrial radio, HD radio, Ipods, and now cell phones.

That being said, I think traditional media companies (Time Warner, Clear Channel, etc.) have enough lobbying power in congress to keep it from happening.

dong
dong

Great topic. I would probably be OK with the merger because of the technology argument. Sattelite radio doesn't just compete with sattelite. Other mobile service and regular radio are as competitive. That said I don't necessarily think this is good for the consumer in the short run. The combined Sirius/XM company will have amount of control over it's customers to extreme degree. I mean we all hate cable companies, but they are still kept in check with regulation in terms of their prices. Ultimately competition is what's best for consumers, but it's still early in the game to know that satellite truly has enough of it.

Jeremy
Jeremy

Clyde, I do think it would be cheaper. With a merger the costs would be lower so I don't think they would have any need to raise base prices. So for example a music only package, which is what I would need would have no talk stations, no sports, etc.

I would bet that they would offer this basic package at a slight discount in order to attract more subscribers who are also just looking for music. As it stands now they can't afford to do that and the only option is an all or none type of deal.

I think they will continue to offer a comprehensive package for very similar to the cost now, possibly slightly higher, but the main selling point (at least if it were up to me) would be to group the radio into 3 separate modules. Music, Talk and Sports. With a comprehensive package including everything or the ability to mix and match your own where each module costs less, but expensive enough that buying the comprehensive package comes across as the best "deal" to lure more people to that.

Clyde
Clyde

"...I don't listen to the sports stations so if a sports package was something additional I could purchase and my base package would be cheaper..."

Do you really think the base pkg will be cheaper? Right now the sports fans are getting those stations for free, but when they make them premium, they will be extra, w/o lowering the base pkg, so you will be no better off, as far as pricing is concerned. just my 2 cents...

SiriusBuzz
SiriusBuzz

How exactly will they handle equipment? I am not sure but, I do know this, if they do merge you will have one company consisting of only the best research and development engineers from both companies.

I think they have done a pretty darn good job on their own, considering how new the technology is. With the best and brightest on the same team it can only get better.

Jeremy
Jeremy

I agree that Sirius is better than XM so it does worry me a bit how they plan on implementing the XM content. Clearly with so many overlapping stations I wonder how they will determine whether the classic rock station from xm or sirius will be the one that is used for example. And I agree that sirius customer service is top notch so I'd hate to see that slack as well.

And I have no idea how the technology transition would work. The concepts are similar but as you mentioned they are still significantly different. Only time will tell I suppose.

Q at $1 Million to My Name
Q at $1 Million to My Name

How are they going to handle the equipment issues (both customer equipment and their satellites)? To realize the savings, wouldn't they have to streamline here? This is fascinating to think about - how the heck are they going to do this? You have XM with two satellites in a parallel geostationary orbit, while Sirius uses three satellites in an elliptical pattern, ensuring that at least one satellite is always over the U.S. They even have a 4th satellite that they haven't launched yet (can you return that if you have a gift receipt?).

Q at $1 Million to My Name
Q at $1 Million to My Name

Please, no! I love Sirius and don't want to see it get screwed up.

Sirius > XM

As far as competition, I don't see the merger being a problem. These companies are fighting regular radio, HD radio, and MP3 players. The fact is that if they merge and their offerings and customer service falters, their subscriber base will abandon them.

Jeremy
Jeremy

I hear you about the technology. That has always been a concern of mine about buying a vehicle that would only provide the other provider's radio. Granted I haven't had to purchase a new vehicle and faced with that decision but I don't like that either.

I would like to think that if a merger was completed that existing radios of each provider would then have access to the same content. I don't know the logistics behind that but it would be unacceptable to expect people to have to upgrade to a new receiver immediately in order to have the benefits. Clearly this would phase out over time and all new radios could access both satellites together, but that is a concern I see at least initially.

And I agree with the cable providers. In my location we only have one option, Comcast. I don't have the luxury of picking and choosing a provider. You could argue I could switch to satellite instead but that is completely different technology and with the only high-speed internet available to us through cable it would make switching to satellite very expensive, not to mention a hassle of signal loss we would have with our poor weather in this location.

BeyondtheConsumer
BeyondtheConsumer

I like the idea of the merger. What I don't like is having 2 separate technologies for this and incompatibility between their receivers. If you enjoy your Sirius radio selection, you can't sell your Chrysler and buy a GM and keep it, you have to switch to XM. Imagine if one brand of car offered radios that could only receive FM, and another only AM.

A monopoly? Is this any different than my local cable provider? That's a tiger of the same stripes right there, since my choices are either broadcast or satellite. My choices with radio are then broadcast or physical media (CDs). How is one a monopoly but the other is not?

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