SKU, Marketing Details Next For Sirius XM

Suppliers fret at deadlines; retailers want answers for customers

By Amy Gilroy -- TWICE, 8/4/2008

NEW YORK — Now that Sirius Satellite Radio and XM Satellite Radio have merged into Sirius XM Radio, with 18.5 million subscribers, a CE industry that waited 17 months for the deal's approval is waiting again for the new company to provide workable details on products and marketing.

Retailers last week hoped one of Sirius XM's first actions would be to increase advertising, which was said to have fallen somewhat since the merger was announced, and even more so in the last quarter, according to analysts and suppliers.

Suppliers questioned their own ability to rework 2009 car stereos — already in development — so the receivers could control new a la carte radios, promised as a result of the merger. (See p. 8.)

Above all, retailers wanted answers to pass on to customers.

Crutchfield mobile merchandise senior director Carl Mathews summed up a common view: "I just want to be able to answer the questions customers will have about anything they perceive as a roadblock to buying the product. The sooner we can get this behind us, the better."

The merger, approved on July 25 with some of the heaviest conditions ever imposed by the Federal Communications Commission (FCC), left analysts and industry members guessing on other issues as well.

Yankee Group senior analyst Josh Martin is concerned that sales of OEM satellite radios could falter as it may be difficult to outfit new cars with a la carte tuners. The auto industry often requires at least 100 weeks to embed new technology in cars, according to iSuppli.

Retailers wondered if they would still get the quarterly spiff programs they have come to rely on now that Sirius and XM don't compete with each other.

Sirius XM did not respond to specific TWICE inquiries but stated that current satellite radios, including those in new cars, will continue to work and will receive many new service plans to be available within three months. Current radios will not be able to receive a la carte service, which has won much attention because it will let consumers pick and choose channels starting at $6.99/month. New a la carte radios are also due within three months.

Even digital TV felt the merger's impact. Jimmy Schaeffler, principal analyst with the Carmel Group, said the merger could rekindle interest in a DirecTV/Dish Network merger. The FCC set a precedent in its satellite radio ruling by agreeing "to operate under the umbrella of merger restrictions and concessions," and this might be used by digital TV companies "to satisfy rural American concerns about choice and control."

The Sirius XM restrictions (see story at right) were not expected to be burdensome to the new satellite radio company. But the long approval process was costly. David Banks of RBC Capital Markets said, "[Sirius and XM] had to back down in marketing to a certain extent — they couldn't work together to build a business plan during that time. Last year, the world changed a lot. Technology changed. The iPhone was introduced [and] there was an increase in traction in Internet radio. While they were waiting in limbo, the world moved on."

Sirius and XM said they spent more than $85 million on the merger and related expenses.

Industry members said they expect a lift in Christmas sales due to new a la carte radios, but not a large increase. Banks noted, "Now you'll see a much bigger push to marketing, and Christmas is the opportunity for that. But, realistically, we just don't see retail and the aftermarket as nearly as big a factor anymore as we do with auto sales. But, internally, at Sirius XM, they are probably more optimistic than I am."

Sirius XM will be headquartered in New York and XM remains in Washington as a wholly owned subsidiary. The company's board of directors is led by Gary Parsons (chairman of the new company), Mel Karmazin (CEO of the new company), Lawrence Gilberti, James Holden, James Mooney, Leon Black, Eddy Hartenstein (former DirecTV vice chairman), Joan Amble, Jack Shaw, Jeffrey Zients, Chester Huber (president of OnStar) and John Mendel.

Five of the directors —Karmazin, Gilberti, Holden, Mooney and Black — served on Sirius' board while the remainder served on XM's board.

Directors of note not included in the board are former Sirius chairman Joe Clayton and XM president and CEO Nate Davis.

The Sirius/XM merger proposal was announced in February 2007 and approved by the Department of Justice in March 2008.

Industry: Conditions Shouldn't Be A Burden

The conditions facing the new Sirius XM, which were imposed by the Federal Communications Commission (FCC), are considered numerous but not onerous, according to suppliers and analysts.

RBC Capital Markets analyst David Bank said, "I think they were as expected … and well worth it to get the deal done."

The conditions include a three-year price cap and stipulate the FCC conduct a review on requiring HD Radio chips to be embedded in satellite radio receivers. (See story at right.)

The Carmel Group principal analyst Jimmy Schaeffler said of the restrictions, "Because of the auto OEM foundation, the new entity will be able to survive, and, like satellite TV, things will improve," but he noted, "Nonetheless, being shackled for three years to a given monthly fee puts that much more stress on using solid subscriber growth to help pay for big new infrastructure costs ahead, such as for new satellites."

Pat Lavelle president/CEO of Audiovox, XM's distributor, said, "A price freeze won't hurt them at all. I didn't see [Sirius XM] raising prices anyway."

On the issue of embedding HD Radio in satellite radio receivers, some industry members estimated this could add $50 to the consumer cost of satellite radio receivers, which sell in the range of $79 to $199. "It would absolutely make the receiver more expensive, and does that reduce the number of people who will want to buy the product? These are issues that people will need to look at," said DEI Holdings president/CEO Jim Minarik.

During the review process, HD Radio developer iBiquity told the FCC it feared a merger "presents an opportunity for the merged satellite company to use its position in the marketplace to slow or block the rollout of HD Radio technology." It would cost $12 to $15 in components to include HD Radio in satellite radio products, it said.

Toyota and General Motors jointly wrote to the FCC, countering that the measure would represent "an unprecedented requirement regulating the choice of entertainment technologies in an automotive environment."

Yankee Group senior analyst Josh Martin said of the merger overall: "It will be good for the consumer. You won't see the $500 million contracts for the talent, so radios won't be as expensive. The other important factor is, really, you get to merge all the sports services — now you don't have to make those choices."

Sirius XM said it expects to save $400 million in 2009 in operational costs. —Additional reporting by Greg Tarr and Steve Smith

Merger Conditions Set By The FCC

WASHINGTON — The Federal Communications Commission (FCC) approved a satellite radio merger on July 25 under conditions including the following terms:

A three-year price freeze exists, with the option of some "cost pass-throughs" after one year. The FCC will seek public comment on whether the cap should continue beyond three years.
Sirius XM must offer a la carte radios within three months of the merger. A la carte radios let consumers pick and choose satellite radio channels at a lower starting fee of $6.99/month, half the price of current satellite radio services. New radios are required to receive a la carte service.
Other service plans must be offered within three months, including "best of" programming that delivers all of XM plus some Sirius or vice versa for $16.99/month. This will be available on existing radios. Also new is mostly music or mostly talk plans with fewer channels for $9.99/month.
Family-friendly versions of the plans will include $1 off per month existing Sirius or XM or $2 off "best of" programming.
Interoperable radios that receive both Sirius and XM service must be marketed in nine months (instead of the earlier-suggested one year).
Thirty days after the merger, the FCC will launch an inquiry into whether satellite radios will be required to include HD Radio chips.
Sirius XM must devote 8 percent of spectrum to educational radio and other "qualified entities."
Sirius XM will refrain from agreements granting the exclusive right to sell satellite radio receivers and make the intellectual property for satellite radio available to all device makers
Sirius XM will provide service to Puerto Rico.