By Stan Berenshteyn  | August 14, 2007 

When I first heard that the Sirius (SIRI) / XM (XMSR) Merger won't go through, I must admit, I was a bit surprised. The crushing blow to the merger left many investors surprised as well. The result was a drag on the two stocks, both which are now trading below what they were priced at pre-announcement of a potential merger. In light of the initial ruling against the merger, three questions still remain: Who will ultimately stand to benefit from the merger? Is the merger between Sirius and XM anti-competitive? And, will the merger ultimately go through?

One of the most vocal opponents of the Sirius/XM merger is the National Association of Broadcasters (NAB), which represents terrestrial broadcasters. The NAB's most recent attack was directed towards the A La Carte proposal by Sirius CEO Mel Karmazin. The NAB hit back with their own A La Carte study, acrimoniously subtitled, "A La Sham for Consumers." Why the NAB is malicious in its attack is obvious -- it is precisely because of the threat satellite radio poses to its terrestrial counterparts that the NAB is fighting tooth-and-nail to defeat this merger. Yet, in a twist of logic, and in light of the competitive threat to its core business, the NAB is claiming that the Sirius/XM merger is a monopoly.

But how can that be? After all, a monopoly is defined as an "exclusive control of a commodity or service in a particular market, or a control that makes possible the manipulation of prices."

As a consumer of both terrestrial, and more recently, satellite radio, I can state from first-hand experience that there is no exclusive control of a service. The reason I decided to upgrade to a paying radio service from something that is free was not coercion, but an option of gaining more music variety that was commercial-free. The added value is obviously there for me, as it currently is for about 15 million other satellite radio subscribers, which is why I chose to pay for it. Moreover, the consequence of my switching to Sirius' service was having one less person listening to terrestrial radio. It is precisely because of that switch that satellite radio is not a monopoly; they are competing for the same listeners with terrestrial radio.

Since the NAB has a hard time proving that satellite radio is not an alternative to any other service, when in fact it is, their study was used to demonstrate monopolistic 'manipulation of prices' that would be a byproduct of the merger. According to the NAB, a basic a la carte option would cost $6.99 for 50 channels. For XM users, who currently have 170 channels at their disposal, a move to the basic $6.99 package would result in subscribers paying 75 percent more per channel than under the currently available monthly option. Sirius users, who have 130 channels and a slightly higher subscription rate than XM, would still end up paying 40% more per channel under the basic package offer. The NAB also added that in order to take advantage of the a la carte offer, consumers would have to purchase new receivers that can tune to both Sirius and XM signals. Thus a la carte pricing, the NAB concludes, is a 'sham' for consumers.

Let's take a look why the NAB's latest argument doesn't hold water:

1) A La Carte pricing is already being used by other companies -- successfully. You need look no further than Apple's (AAPL) iTunes. You can purchase an album at a lump sum, or you can choose an a la carte option of buying the songs individually. Enrique Iglesias' new album 'Insomniac,' for instance, can be had for a lump sum of $9.99. Assuming you buy that album, which holds 16 tracks, you will be paying $0.62/song. Or, you can choose the a la carte option of buying the songs you like individually, or even buy songs that have nothing to do with Enrique, in which case you will pay a $0.99/song. In other words, you will be paying almost 60% premium for each song if you go with the a la carte option instead of an album 'bundle.'

 

The reason this type of pricing has worked for Apple, and will work for Sirius/XM, is because people are willing to pay more money for songs they like, instead of being 'forced' into paying less for bundles (‘forced’ because people end up buying songs they don’t like because it’s the only way they can get the songs they do like).

 

2) If the a la carte pricing scheme is a service that listeners don't want to partake in, they have the option to stick with their current subscription setup.

3) Under the basic a la carte package, listeners would end up saving 46% over the current monthly option.

4) A la carte packaging increases choices for Sirius/XM listeners by doubling the amount of channels available to 300+.

5) While it is true that a la carte would require a new receiver, it is a moot point, since the NAB neglects to mention that listeners who opt to upgrade to HD-radio would also have to purchase a new receiver.

6) As a subscriber to Sirius' radio, I listen to a fraction of the channels offered -- about 40 out of 130 available. Even so, I find the $12.95/month worth the cost of 40 stations -- though without an a la carte option, I end up paying for 90 channels that I don't listen to.

To answer the questions I posed above, I offer you a three-part conclusion:

Is the merger between Sirius and XM anti-competitive?
Although the NAB is trying to protect its interests in the name of capitalism under the guise of consumer interest, and the illusory claims of a monopoly, the stark truth is that the NAB is threatened by satellite radio because the satellite radio business model threatens to take away terrestrial radio’s listeners.

Who will ultimately stand to benefit from the merger?
The merger, along with the new a la carte option, will provide a more compelling service for the consumers of the satellite radio providers, as well as help Sirius/XM to continue to gain market share and profitability for its investors.

Will the merger ultimately go through?
I don't know. The merger certainly should go through. After all, the merger will enhance services for listeners and make the company more cost-effective. If the NAB really is sympathetic toward consumer interests, then they will back the merger that will give more options to satellite radio listeners. The FCC should realize that the marketplace for radio waves is indeed competitive (the financial status of XM and Sirius elucidates that point, as does NAB’s position), and that a merger between Sirius and XM is a logical byproduct of competition.