PARIS – The two big U.S. satellite-radio companies, XM and Sirius, reported sharply contrasting performances in 2006 but agree that a merger would result in substantial cost savings and might even pass muster with U.S. regulators.
In presentations at a Citigroup-organized investors’ conference Jan. 9-10 in Las Vegas on the margins of the Consumer Electronics Show, managers from the two companies also said their next big revenue growth area will come from advertising.
Mel Karmazin, chief executive of Sirius Satellite Radio, said Sirius expects to double its advertising revenues in 2007, reaching $60 million of the company’s planned $1 billion in sales. In 2005, the company sold just $6 million in advertising.
“Ten percent of revenues is the target we’d like to get to,” Karmazin said of the potential of advertising in Sirius’ programs, especially the broadcasts of its star attraction, Howard Stern. “We’ll be more like 6 percent in 2007, but we can incrementally increase.”
XM Satellite Radio Chairman Gary Parsons said XM also expects to generate 10 percent of its revenue from advertising, from the current 4-5 percent. He said as XM generates increased amounts of its own content, and then syndicates it nationally, advertising revenue should rise.
“We won’t make a radical shift now,” Parsons said of shifting from the advertising-free format. “But I can see where today’s 4-5 percent gets to 10 percent or so in the next several years.”
While Sirius doubled its customer base in 2006, to more than 6 million, XM saw its published subscriber lead shrink. The company, nonetheless, added nearly 1.7 million customers in 2006, ending the year with a total of 7.6 million.
XM missteps included a forced modification of hardware to bring it into compliance with the company’s U.S. Federal Communications Commission (FCC) license, missed subscriber-growth targets and a messy resignation of board member Jack Roberts, who publicly criticized the company’s direction in his resignation letter.
Parsons said he would not wish XM’s 2006 “on a dog. It was a tough year for the company.”
Regulators at the U.S. Federal Communications Commission (FCC) in 2006 sought to dampen speculation about an XM-Sirius merger, saying it would be anticompetitive. And in an interview with the newsletter Inside Radio last week, FCC Chairman Kevin Martin said the same arguments that blocked a merger of the two dominant satelite-television companies in 2002 could be used today to block a satellite-radio merger.
But the idea continues to excite Wall Street, which speculates that the merged company could save enormous amounts of capital expenditure by combining sales forces and moving toward a single satellite fleet.
Karmazin said he accepts that logic. “We are responsible for acting in shareholders’ interest, and creating value,” he said. “One of the ways you create that value is through consolidation – particularly in a fragmented industry like the radio industry.”
Merger proponents say today’s audio-media market – with iPod ports in automobiles, high-definition radio channels increasingly available and ever-more downloading of music – is broad enough so that a combined XM and Sirius would not significantly reduce competition in the market.
Parsons agreed, saying that both Sirius and XM sales increasingly will be dominated by OEM, or original equipment manufacturers, such as the automobile manufacturers who sell vehicles with XM or Sirius already installed.
Few car buyers, Parsons said, will take the trouble to retrofit a vehicle simply to change from one satellite radio provider to another. The competition is with standard radio or another alternative outside satellite radio. Much of the future growth of XM and Sirius, he said, will depend on which car manufacturers do better in the marketplace – an argument that should weigh in favor of regulators’ acceptance of a merger.
“Would we be a buyer or a seller? Neither,” Parsons said of how a merger might be structured. “It more likely would be a merger with a ‘Best Of’ combination. The Department of Justice would conclude that there is a broader, addressable market – a large number of audio entertainment opportunities. It would not be a piece of cake, but if you did, something like that would have a favorable regulatory market in which to approach it. But all these are hypothetical.”