THE BLOG
06/17/2008 10:58 am ET | Updated May 25, 2011

Are You Sirius?

FCC Chairman Kevin Martin issued a statement on Monday that if the two satellite radio competitors, Sirius and XM, agreed to several conditions that he would vote to allow the merger because it would be "in the public interest." Do you seriously believe this, Kevin?

The New York Times reported:

Those conditions include a price freeze for subscribers for the next three years and a tiered pricing system that will give customers some flexibility in deciding which channels that they want. In effect, subscribers can pay less for fewer channels.
The companies have also agreed to set aside up to 8 percent of the channels for noncommercial and minority broadcasters. And they agreed to take steps that will make it possible for more radio manufacturers to sell compatible radios, including equipment that will also play high-definition radio.

In other words, Sirius and XM are so desperate to merge, that they will do anything, no matter how contrary it is to their long-term best interests. Let's look at these promises.

First, a price freeze. OK, a good promise, but the CEO of the merged companies will be Mel Karmazin, who does not have a strong record of keeping his promises to the FCC or to Congress. Second, a tiered system of pricing, also known as a la carte pricing. Such pricing will inevitably lead to less revenue. Who would pay $12.95 a month when they can pay less for a couple of hundred channels they never listen to? Third, open-source radio receivers that will play competitive -- and really boring -- radio channels? This compromise will lead to more fragmentation of the combined service's audience and even lower ratings for the news/talk/sports channels that carry desperately needed revenue-producing advertising.

The conditions XM and Sirius agreed to are similar to a king saying that two of his subjects can get married as long as they agree to let anyone who feels like it sleep with his or her spouse. It certainly doesn't sound like the basis for a happy marriage or a profitable merger.

Furthermore, Karmazin will undoubtedly keep his people on in the combined company (he is loyal to his people), but his old-media people haven't been as effective in producing revenue as the XM people have, so that will not help the new, combined company.
The FCC has five commissioners, and Chairman Martin needs two other commissioners to vote with him for the merger to be approved. The Justice Department has already approved it, which raised the ire and opposition of several powerful Senators and the NAB -- the powerful broadcasters lobby. And Martin has not always received the votes from the other commissioners he needs to get his way, so he may not this time.

However, my guess is that the merger will go through, but that it won't save the two companies from eventual bankruptcy. Satellite radio was a rational concept when it was conceived in 1991, but that was before the Internet rocket took off and before the iPod, the other giant killer, came on the scene. Sirius's Mel Karmazin tried a hail-Mary to save it by throwing an improbable $500 million at potty-mouth Howard Stern, and it almost worked.

But even Howard's dirty vaudeville can't withstand the onslaught of the Web and the iPod's movies. Yes, the merger will save XM and Sirius a ton of money in marketing costs and the costs of bidding up talent such as Oprah and Martha Stewart, but in the long run it won't matter. Even 15 tons of money and the merger won't save XM and Sirius.