Sirius-XM merger’s approval opens a new batch of questions

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When Johnny Jackson first heard about satellite radio, he was beyond skeptical.

“I thought, ‘Yeah right, like that’s going to fly. Look at its auto entertainment competition: CD players, MP3 players, free radio and cassettes. Like I would add another expense to my long list of expenses.’”

Flash forward a few years. Jackson is one of 18.5 million American consumers who do something they probably didn’t envision a decade ago - they pay up to $13 a month to listen to the radio.

Satellite subscribers say they write those monthly checks for any number of reasons - to listen to favorite celebrities like Howard Stern, Oprah Winfrey or NASCAR driver Tony Stewart; to get away from commercials that often cram “terrestrial radio” channels; to have the music they want, when they want it.

On the eve of its 7th birthday, satellite radio is about to undergo a massive facelift. Sirius and XM, fierce competitors that in the past paid outrageous sums to draw the likes of Stern and home decorating guru Martha Stewart to their networks, merged last month.

By November, Sirius XM Radio will roll out new pricing plans and technology aimed at luring those who stayed on the satellite radio sidelines to sign on. Industry analysts are expecting the merged company to come out swinging during the holiday season.

The company already has unveiled eight new programming packages that will allow subscribers to sign up at rates starting at $6.99 a month.

Completed just last month, the Sirius-XM merger was one of the most protracted in U.S. history.

After the merger’s announcement in February 2007, questions and opposition from consumer groups and traditional radio networks kept consideration bottled up within the Federal Communications Commission for more than a year.

Groups like Consumer Union argued that the merger would lead to higher prices. The National Association of Broadcasters argued that it would result in unfair competition for traditional radio by creating a “government-sanctioned monopoly.”

For their part, competitors XM and Sirius said the merger was necessary for the survival of the satellite radio industry. Neither company had ever turned a profit, the networks argued, and neither was likely to while competing for subscribers.

Deadlocked for months, the FCC approved the merger in late July by a 3-2 vote along party lines, with Republican commissioner Deborah Taylor Tate breaking the tie.

FCC chairman Kevin Martin said the merger met the FCC’s “high hurdle,” noting that the new network had agreed “to offer consumers more choice and flexibility in how they purchase channels.”

It was a contentious decision, strongly rebuked by FCC commissioner Michael Copps.

“The inescapable logic ... is that by 2011, satellite radio subscribers will face monopoly price hikes by a company with the incentive and ability to impose them,” Copps said in a statement.

Sirius XM now is under FCC mandate to freeze prices for three years; offer consumers a la carte programming, giving them the opportunity to pay for only the channels they want; offer family-friendly programming packages at lower rates; and offer a music-only package for under $10 a month.

Industry analysts such as Thilo Koslowski of Gartner see only positives coming from the merger.

“I don’t think there will be any downside for consumers,” Koslowski said.

Another analyst for the industry, Susan Kevorkian of IDC, said a la carte pricing for satellite channels will offer a new alternative to “consumers who may have been interested in the prospect of satellite radio, but were put off with the lack of alternative pricing plans.”

Not everyone is as positive.

“The (satellite radio) industry has a history of promising things and then letting it go by the wayside,” said Bob Williams of Consumers Union.

For their part, subscribers were - and remain - split on the merger.

Many - including some who subscribe to both services - believe it will eventually lead to more programming from a single radio. Others are concerned that they may lose access to current favorites as the newly merged company shifts programming from one satellite network to the other.

Tom Turner of Lee’s Summit, Mo., is among them. He signed on with Sirius three years ago, in part to listen to Auburn University football.

“The information regarding (the merger) is lacking specifics,” Turner said. “The SEC football games are all going to XM, according to the latest information available. Does this mean I must buy a new receiver in order to listen to the games or, with the merger, will my current Sirius receiver still work?”

Sirius XM isn’t fielding any specific questions about programming, said Patrick Reilly, senior vice president for communications. Under the FCC ruling, the company has 90 days to develop its plans.

Behind those plans is Mel Karmazin, a high-profile radio/TV executive credited with the buildup of Infinity Broadcasting and CBS Radio and now chief executive of the merged company.

Karmazin recently bragged to the New York Post that Sirius XM is “going to be the most successful company in radio.”

Satellite radio has been around since 2001, when XM Radio launched two satellites named “Rock” and “Roll” and began offering service nationally.

Sirius launched its own service about eight months later.

The list of channels featured by the two networks has grown dramatically since those early days.

Sirius now offers about 140 channels ranging from pop music to horse racing. XM offers more than 170. In general, all-music channels are commercial-free.

Commercials do air on some music channels and non-music channels provided under contract by companies ranging from Clear Channel to Fox. Advertising, however, still counts for only a fraction of Sirius XM’s revenue.

Generating cash will be Sirius XM’s biggest challenge in the next 18 months.

While the company is projecting that the merger will lead to $400 million in savings, Sirius XM is $3.4 billion in debt. Of that total, more than $1 billion comes due in 2009.

That’s a significant challenge that has Wall Street uneasy. Shares of Sirius have dropped from a tech-bubble high of $59 in early 2000 to $1.40. Shares lost more than 60 percent of their value in the last year while the FCC mulled over merger plans.

Research firm iSupply contends the completed merger will allow vehicle manufacturers to move forward with plans to install digital radios in new cars.

It is projecting that the sale of satellite radios in new cars will increase 13.3 percent this year to 5.2 million units.

The merger “is good news for strategic planners in the automotive business ... that have spent the last 18 months ‘on hold’ pending this merger,” said Richard Robinson, an analyst with iSuppli.

Koslowski, of Gartner, said the merger eventually will allow the company to make better use of its bandwidth, currently spread across two satellite networks.

Consider, Koslowski said, services that go beyond radio, like a navigation service that would help drivers find a parking space in busy urban areas.

But IDC’s Kevorkian said Sirius isn’t a sure winner.

“That Sirius XM will be a slam-dunk success is far from certain, but IDC does believe the merged Sirius XM is in a far stronger position to compete effectively in the U.S. than were two separate satellite radio providers,” Kevorkian said.

In the meantime, Sirius XM has to lure more formerly skeptical customers like Johnny Jackson.

His skepticism ended when his daughter began playing competitive softball.

That translated into a lot of time on the road, including one trip to Johnson City, Tenn.

“That route would involve mountains (and) country music, which I’m not a fan of,” Jackson said. “My CDs would not make it out of Missouri before I would be burned out, so I considered Sirius Radio.”

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THE COST FACTOR

Satellite radios come in a variety of styles, from in-dash car models to boomboxes to small portables. Prices range from under $40 for a plug-and-play satellite receiver that can be added to an existing radio to more than $1,000 for a mega-equipped car in-dash model.

Some models can be self-installed, while others require professional installation. Generally, both Sirius and XM charge a $10 to $15 activation fee, and accounts can be set up online or over the phone. The standard monthly fee is $12.95. Second receivers can be added for $6.95 a month.

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COMING SOON

The first satellite radios capable of allowing consumers to choose their channels a la carte will be available by November.

Radios that can pick up programming from both networks are expected within nine months.

No prices have been announced for either, yet.

In the meantime, the company has unveiled eight new subscription plans that will be rolled out in about three months. Here are the highlights:

For $6.99, consumers can select 50 of 100 available channels from the old Sirius network or 50 of 100 from XM. A new radio will be required.

For $16.99, Sirius or XM customers can receive their current programming plus a “best of” lineup from the other network. Existing radios will work.

For $9.99, subscribers can opt for either an all-music or all-talk news and sports lineup. No new radio is required.

A family-friendly version of existing Sirius or XM programming will be offered for $11.95.