Dealers See Post-Merger Sat. Radio Growth

By Amy Gilroy -- TWICE, 4/7/2008

NEW YORK — A satellite radio merger can't close soon enough for retailers hoping to see some life return to aftermarket satellite radio sales, which declined a dizzying 63 percent last year.

The proposed merger of Sirius Satellite Radio and XM Satellite Radio cleared the U.S. Department of Justice (DOJ) late last month and is now expected to pass Federal Communications Commission (FCC) scrutiny during the second quarter. It would end more than 13 months of market uncertainty that may have helped turn off the spigot in new retail subscribers — the market has since shifted to mainly OEM subscribers from new car sales.

Retail satellite radio sales fell to about 698,000 last year, from 1.87 million in 2006, according to Sirius and XM. A final OK on the merger could help renew retail interest, and could provide an even bigger boost 12 months later, when Sirius and XM are expected to implement a $6.99/month a la carte plan, retailers told TWICE.

Industry pundits blame the retail shortfall on Howard Stern's debut on satellite radio in early 2006 — sales peaked so high, it was hard to match those numbers a year later — and on iPod competition and other factors. But retailers believe that format wars tend to confuse customers and the merger only added to that skittishness.

"I think anytime there's confusion, customers will say, 'Which one will I get?' Anytime there's a format choice, there's some confusion. If you simplify things, I definitely think sales will pick up," said Tom Galanis, operations VP for Sixth Avenue Electronics, based in Springfield, N.J.

Added Dave Glassman, purchasing VP for Myer Emco, Gaithersburg, Md., "When we do consumer promotions with XM or Sirius, people walk by and say they'll buy when the merger happens. So we think people sitting on the sidelines will buy a radio. That being said, I don't think it will be a tidal wave."

Sanctioning a deal called an uphill battle from the start, the DOJ ruled in late March that a Sirius/XM merger was not anti-competitive as consumers who buy a satellite radio either in a new car or in a store tend to stick with that service, and therefore competition is minimized. In addition, the DOJ found that satellite radio competes with products such as MP3 players and is expected in coming years to compete with Internet radio.

The merger's staunchest opponent, the National Association of Broadcasters (NAB), reacted by claiming, "We are astonished that the Justice Department would propose granting a monopoly to two companies that systematically broke FCC rules for more than a decade," according to executive VP Dennis Wharton.

One analyst speculated that the NAB might sue if the FCC rules in favor of the merger. The NAB would not comment on future plans.

But most industry members voiced support for the proposed merger. The Consumer Electronics Association said it applauded the DOJ decision and called on the FCC to move rapidly in its ruling.

Directed Electronics, which has been reduced in the past year to negotiating only short-term contracts with Sirius to continue as its distributor due to merger uncertainty, said a merger would produce "a much higher probability of survival of a healthy satellite radio business," according to president and CEO Jim Minarik. He noted a combined company is expected to save $5 billion to $10 billion in costs over time. "If they are able to [cut costs], that certainly means there can and should be a long-term future for the satellite radio business."

Wall Street analysts speculated that while the merger may pass FCC scrutiny, that agency might place restrictions on the deal. These might include a requirement that satellite radios add HD-Radio capability, or that Sirius and XM lease out some of their spectrum to a third party who could create a competing service. Another stipulation would require "open access" radios for Sirius and XM that any supplier could develop, provided it received FCC certification. Recent petitions to the FCC by HD-Radio developer iBiquity, U.S. Electronics and others have each asked for one of these conditions.

Sirius would not comment on the possibility of accepting any of the stipulations.

What Sirius and XM have promised to the FCC is that they will offer a selection of cheaper and diverse service plans if they are permitted to merge. A $6.99 plan, at half the current satellite radio fee, and another $14.99 plan let consumers pick which channels they would like to pay for in an a la carte fashion. These options will require new radios that could be available in a year from the merger's close. At that point, say retailers, sales might begin to spike.

Carl Matthews, mobile merchandising senior director for Crutchfield, Charlottesville, Va., said, "I've seen enough customer comments about the pricing that the closer you can get the pricing to free, the more people you'll get interested. At $13 to $14 after taxes now, creating something at half that will definitely bring some people into the market. And there will be other folks who want the best service and don't care what the price is, and they will step up once the interoperable radios are available."

XM And Sirius Proposed Plans
IF MERGER IS APPROVED

Offering	Description	Monthly Price
Sirius' Current Plan	Approx. 130 channels	$12.95
XM's Current Plan	Approx. 170 channels	$12.95
A la Carte I	Pick your own 50 channels from one provider, either Sirius or XM. Will require a new receiver. Channels may be added at $0.25 each	starts at $6.99
A la Carte II	Pick your own 100 channels from both Sirius and XM. Requires a new receiver.	$14.99
XM Plus Select Sirius	Approx. 180 channels	$16.99
Sirius Plus Select XM	Approx. 140 channels	$16.99
XM Family Friendly Plus	Family-friendly XM plus some Sirius (approx. 170 channels)	$14.99
Sirius Family Friendly Plus	Family-friendly Sirius plus some XM (approx. 130 channels)	$14.99
Family Friendly XM	Approx. 160 channels	$11.95
Family Friendly Sirius	Approx. 120 channels	$11.95
Mostly Music XM	Approx. 65 channels	$9.99
Mostly Music Sirius	Approx. 65 channels	$9.99
News, Sports & Talk XM	Approx. 60 channels	$9.99
News, Sports & Talk Sirius	Approx. 50 channels	$9.99

Satellite Radio Plans

Sirius and XM have made several promises as to what they will offer if their proposed merger passes federal scrutiny. Here's a list of those promises:

Current receivers will work: Sirius and XM products will continue to work as they have in the past and service will not be impaired.
Cheaper plans starting in six months: Within six months of merger approval, consumers would be able to subscribe to four basic additional service plans (from each service) starting at a lower price of $9.99. Users do not need new radios for these plans.
A la carte within a year: Within a year of merger approval, Sirius and XM would offer two additional service plans. These would be "a la carte" plans, where consumers can pick and choose their channels. Both these plans require the consumer buy a new receiver. Receiver prices should be in the price range of existing radios.
A la carte starts at $6.99: One of the a la carte plans would carry a low $6.99 per month rate. It offers 50 channels picked by the subscribers from one service (either XM or Sirius). The other a la carte plan, at $14.99, lets you pick up to 100 channels but from either XM or Sirius. There are some restrictions on which channels subscribers can pick.
Current service plans will continue: Sirius and XM will continue to offer their current $12.95/month plans.