Media Curmudgeon

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February 20, 2007

The XM/ Sirius Merger

My wife, Julia, and I went to see the new play last week, "Talk Radio," starring Liev Schreiber, and I loved it. Schreiber is brilliant and real in his portrayal of Barry Champlain, a troubled, popular talk show host in 1987. I urge my ex-radio friends to go see it; you'll appreciate Liev Scheiber's performance because he nails with deep understanding the complex, ego-centered, self-loathing, talented talk-show host. Schreiber understands talent--the kind anyone who ever ran a radio station had to deal with.

Written by Eric Bogosian, the play was evocative of the kind of talk radio that was popular in the 1970s and 80s and was also, for me, nostalgic. In the 1970s and 80s radio was fun, popular, and if programmed properly, quite profitable. I was general manager of several radio stations in the 70s, so I could relate to the characters and problems the play presented.

That sense of nostalgia was amplified this week when XM and Sirius satellite radio channels announced that they planned to merge. The move has been rumored for months and was hailed by Wall Street as the best solution to stop the massive bleeding of cash at both companies. A merged company would be able to shed a large number of employees in redundant back-office and sales jobs. Sirius’s CEO, Mel Karmazin, has been pushing the merger as a way to create value for his stockholders (and, of course, himself, a large stockholder).

But the merger would not close until 2008, if it is approved by the Justice Department and the FCC, which seems quite problematic, especially after a statement released by FCC Chairman Kevin Martin saying that the two companies will face a “high” hurdle. In 1997 the FCC passed a rule indicating that there must be two satellite services, which would nix the deal if the FCC holds firm.

The two companies want to merge because they are losing tons of money and whine that the media landscape has changed dramatically since the there-must-be-two FCC rule was passed a decade ago. Competition from iPods, Internet radio, downloaded music, YouTube, and MySpace has increased dramatically in the ensuing decade and the two satellite radio companies have lost a total of around $6 billion as they overspent in marketing costs and talent acquisition, escalating costs as they each tried to beat the other’s brains out.

I subscribed to XM radio several years ago because a good friend who was a senior executive at XM gave a friends-of-XM discounted deal. I listened to a few jazz channels occasionally and tried some talk channels and the comedy channel, but I cancelled it two months ago because I didn’t think it was worth $12.95 a month. I listened less and less over the months and found my own mix of iPod tunes, podcasts, several online radio stations, and the New York NPR station satisfied my music and information needs.

I suspect I’m not alone, which is probably why subscription growth for both services has slowed in recent months and which, in turn, probably made a merger and cost cutting more urgent. Mel Karmazin said in a joint news conference announcing the deal that, “The benefits to the subscribers are awesome.” And later he said, “There’s going to be more consumer choice.”

Sure, Mel. Consumers will have a choice of fewer channels that will eventually carry commercials of some kind, maybe underwriting like NPR stations. But you can bet your first born that Mel will find a way to squeeze in more commercial messages into combined satellite radio channels just as the CBS Television Network did, the CBS Television Stations did (remember the illegal digital machine that speeded up commercials so they could fit in more spots), and as the Infinity Radio stations did under his stewardship. Karmazin has never reduced commercial loads, so he won’t in the future, thus eventually limiting the appeal of satellite radio just as over-commercialization has hurt over-the-air radio.

Ahh, for the good old days of radio.

I asked my pal Bill Grimes if he thought the FCC would approve the merger and here’s what he wrote:

“If the companies can show that competition between the two cannot produce profitability, which will be tough to demonstrate, and that the consumers/customers of the two services would then be deprived of receiving a satellite radio service, then getting approval will be a bit easier. The problem for current shareholders is that a Federal judge or the FCC may well rule that both companies should continue on the route they are headed-- bankruptcy. In such a circumstances the equity holders would lose all their value (Paul Allen, Karmazin, and some other wealthy investors) and the debt would be eliminated (banks would get equity in return for the debt a company failed to pay). Then, either one or both companies would emerge from bankruptcy as a going venture with a good chance to succeed.

I think the latter has a better chance of providing consumers with more choice, i.e. two companies emerging from bankruptcy instead of one merged one. But in a Republican FCC, which might favor large investors, it might decide that both companies after bankruptcy still might not make a profit and really disappear and, thus, approve a merger (I find that unlikely though).

Answer: I don't know. But better law would be to prevent the merger, force bankruptcy, and emerge subsequent to bankruptcy with two companies neither with debt.”

Neither the Wall Street Journal nor the New York Times nor any of the other online news stories I read about the merger mentioned the effect of NPR Radio has had on commercial radio listening in the U.S.A. I think NPR has significantly hurt listening among up-scale adults over 25 to commercial, over-the-air radio, which is another reason that the powerful National Association of Broadcasters lobby will fight hard against the Sirius/XM merger. Commercial radio stations are reeling from the same competition that is hurting satellite radio (including NPR) and they don’t want a stronger competitor.

The good old days of radio, the radio of the play “Talk Radio,” are gone forever, which makes me a little sad, but not sad enough to stop me from listening to some enlightening podcasts that I download FREE onto my iPod from the iTunes Store, the Podcasts section, and the Education category, where you can get lectures from Harvard, Yale, and Princeton. My favorite this week is a podcast from a lecture at Yale by Barry Nalebuff titled “Why Not” (from his excellent book of the same title). Come to think of it, we need satellite radio and commercial radio now about as much as we need buggy whips.

Posted by Charles Warner at February 20, 2007 11:27 PM

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DVD at February 21, 2007 06:33 PM writes:

Rabh17 at February 21, 2007 03:27 PM writes:

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