Manufacturers, Retailers Weigh Sirius-XM Merger

“I expect that Sirius and XM sales will stall or slow as people wait to see exactly what is going to happen,” said Neil Riffer, Abt Electronics mobile audio mgr.: “There’s a lot stuff that still needs to be ironed out.”

Many dealers were told by Sirius reps not to expect the deal to close before year-end and many issues remain including how the merger will fare with the FCC and the Justice Dept. Also unresolved is how the companies’ 14 million total subscribers would receive combined programming and how long separate services would have to be maintained. The merger would require tying together satellite fleets that operate very differently. XM uses 2 Boeing 702 satellites operating in geostationary orbit at 85 degrees W. and 115 degrees W., launched in 2001, to deliver more than 100 channels, including 73 for music and 21 for regional traffic and weather. In contrast, Sirius has 3 SS/L 1300 satellites that operate in an inclined elliptical satellite constellation, so at least one satellite is over the U.S. delivering 135 channels at any time. Sirius receivers use Agere Systems chipsets, while XM models have ICs from STMicroelectronics.

“We're going to have to wait & see how it all plays out from a technology standpoint with the compatibility issues,” said Bill Hadam, Samsung senior digital audio mgr.: “They certainly are 2 very different technologies in terms of satellite placement… They're very different in a lot respects.”

The proposed combination didn’t surprise dealers. Many we polled questioned whether there was enough business to support 2 entrants in light of the bidding wars programming talent. Sirius signed Stern to a 5-year, $500 million deal in 2004. XM countered with a 3-agreement with Oprah Winfrey in Feb. 2006. XM also has a broadcast pact with Major League Baseball. Sirius landed agreements with the NFL and NASCAR. Combining the satellites would also free transponder space for additional and expanded programming including traffic, weather and video, industry officials said. Sirius and XM want to stem $7 billion in losses stemming from the costs of attracting programming and talent, industry officials said.

“It makes all the sense in the world because there is a lot of duplication in what they're doing right now,” said David Workman, exec. dir. at Pro Group, a retail buying organization. “But if it does go through and they have a monopoly, the first thing a retailer is going to be concerned with is does that make them less competitive… XM has prioritized future subscriber growth through the auto manufacturers and that doesn’t help the retail community with product.”

The consolidation of satellite hardware suppliers has already begun, retailers said. Directed Electronics is Sirius’s master distributor, including models sold under the company’s Stiletto and Sportster brands. Audiovox, which once sold receivers under both banners, is shifting its focus to XM, a spokesman said.

“We are pleased to hear about this long rumored merger and think it has the potential to bring many benefits to both customers and shareholders of both XM and Sirius,” said Directed CEO Jim Minirak: “As it pertains to our Sirius business… we look forward to working with them and their new partners at XM.” Other vendors declined to comment, including Audiovox, Blaupunkt, JVC, RCA and Sony. And at our deadline, Kenwood, Pioneer and Tivoli Audio hadn’t replied to our queries.

Some CE companies began reassessing their position in the market even before the proposed merger was announced Mon. Samsung is discontinuing its Helix, Nexus 25 and 50 XM portable headphones stereos and has no immediate plans to introduce new products, Hadam said. Instead, it will ship 4 XM-ready home theater-in-a-box devices in the spring, he said. The systems will add $30-$50 at retail for XM compatibility, which includes the cost of the chipset and a display to show the station names, he said. Samsung’s decision to drop the portable models was prompted by a slowing of sales and the copyright infringement lawsuit the RIAA lawsuit filed against Pioneer and XM last year. The suit seeks $150,000 damages for every song copied to a Pioneer Inno portable device. Samsung’s Helix had features similar to the Inno.

“There were a lot of issues we had with the products we had in terms of recording capabilities and a lot of court rulings,” Hadam said. “From our standpoint it was best to take a step back and give it a wait to see how things panned out before we moved forward again. We certainly think there’s viability and there’s an interest in it as a potential feature being added to a digital audio player. It almost seemed like we were ahead of our time.”

In addition to retail issues, XM and Sirius also will have to sort out their relationships with auto manufacturers as well as DirecTV and EchoStar. Sirius, founded as CD Radio in 1990, recently extended its agreement with Ford through 2011. Ford committed to adding Sirius to 50 vehicles including cars, trucks and SUVs starting with the 2006 model year. Sirius also a pact with DaimlerChrysler. XM signed a 12-year agreement with General Motors in 1999 and added American Honda a year later. XM displaced Music Choice on DirecTV; Sirius is the music provider for EchoStar. Sirius has 614 employees. XM, founded in 1988 as American Mobile Radio Corp., has 710.

The companies will need to convince federal regulators that their combination will result in more choice for consumers and that they face competition from cellphones, HD Radio and other services (see separate report in this issue), analysts said. JVC recently slashed the price of its KD-HDR1 HD Radio car CD receiver to $199 from $299, and Kenwood dropped the retail of its HD Radio tuner to $199 from $399, retailers said. The Kenwood model requires a consumer also buy a standard head unit with which to connect the tuner. Consumers are typically buying a $200 head unit to go with the tuner, Riffer said.

“If the market is defined to include terrestrial radio, including HD radio, Internet radio and MP3 players, then we believe the deal will be approved,” Credit Suisse analyst Bryan Kraft wrote in a note to investors Tues. “We believe the reality is that satellite radio does compete with these alternatives.”