XM, Sirius agree to merge

Karmazin named chief exec of new co.

Howard Stern, meet Oprah Winfrey.

Sirius Satellite Radio and XM Satellite Radio have agreed to a $13 billion merger, the companies said Monday, meaning that subscribers may soon be able to tune in both personalities on their radios.

The two rivals plan to cull their competing program offerings and offer one service for both platforms. If and when the merger closes, programming from both sat services would be immediately available.

Sirius CEO Mel Karmazin would become chief executive of the combined company, and XM chairman Gary Parsons would remain as chairman. XM chief exec Hugh Panero will remain in that position until the merger is completed, then ankle.

Plan represents a victory of sorts for Scott Greenstein, the key dealmaker behind the signing of Stern– an agreement that while costly is credited with accelerating subscriber growth at Sirius.

Proposed merger is an acknowledgment that the satcasters don’t compete against each other so much as they do against terrestrial radio, iPods, cell phones, HD Radio, Internet radio and any number of other entertainment services that have burgeoned since the first satellite radio licenses were granted a decade ago.

Indeed, with 14 million subscribers between them — XM finished 2006 with 7.63 million subscribers, up 29% from 2005, while Sirius finished the year with 6 million, up 82% from the year before — satellite radio subscribers are a small fraction of that market; more than 21 million iPods Apple were sold in the first quarter of 2007 alone.

In an interview, Karmazin said the key to survival is not targeting one another but persuading the 95% of the market not subscribing to pay $12.95 a month for radio.

“The fact is these companies are competing, and the consumers are not beneficiaries,” Karmazin told Daily Variety. “If we got all (XM’s) subscribers, that would not make our company profitable because of the nature of the fixed costs. We need to get more subscribers into satellite radio.”

The companies expect the merger to be complete by the end of 2007 if it passes a hard look from the Federal Communications Commission, which imposed tough restrictions on both companies at the behest of the terrestrial radio industry. FCC chairman Kevin Martin said the two companies face a significant burden to prove the deal benefits consumers.

The hurdle here “would be high, as the commission originally prohibited one company from holding the only two satellite radio licenses,” said Martin. “The companies would need to demonstrate that consumers would clearly be better off with both more choice and affordable prices.”

As CEO of Viacom when it owned Infinity Broadcasting, Karmazin said he recognized the competitive threat of satellite radio and lobbied hard for the FCC’s restrictions. But he said the world has changed, and he feels confident that the agency will undo a restriction against one company holding all satellite radio licenses.

“There is a standard, and it’s a public-interest standard, and we believe this combination meets it,” he said. “We will be able to give people a great deal of choice. The ability to combine will allow great value creation for shareholders.”

The deal represents a comeback of sorts for Karmazin, whose career as a media dealmaker stalled when Viacom’s Sumner Redstone ousted him. Almost immediately after joining Sirius in 2004, Karmazin repeatedly said a merger could be the best outcome for both services.

A union of the two companies would bring together a coterie of high-priced talent and sports rights, the price of which was driven up by competition between the two satcasters.

The most expensive of all is Sirius’ five-year $500 million deal for Howard Stern, inked in 2004. The company just awarded Stern another 22 million shares for helping the company meet subscriber targets that were part of his deal.

XM has paid handsomely for sports rights, such as its $250 million Major League Baseball deal. Last year it signed Oprah Winfrey to create a channel stocked with her many “friends” who have built a following on her daytime show.

Plan quickly drew opposition from the National Assn. of Broadcasters, which issued a statement asking the FCC to block the merger, just as it refused permission for TV satcasters DirecTV and Dish to unite a few years back.

“When the FCC authorized satellite radio, it specifically found that the public would be served best by two competitive nationwide systems. Now, with their stock prices at rock bottom and their business model in disarray because of profligate spending practices, they seek a government bail-out to avoid competing in the marketplace,” said NAB exec veep Dennis Wharton in a statement.

“Policymakers will have to weigh whether an industry that makes Howard Stern its poster child should be rewarded with a monopoly platform for offensive programming. We’re hopeful that this anticonsumer proposal will be rejected.”

When the FCC first granted licenses for satellite radio in 1997, it specified that the holders of those licenses could not provide video and could not provide local news and information — a restriction that protects local radio stations.

Both companies have pushed the boundaries by offering local traffic and weather in major markets and pursuing a limited video offering targeted at children in the back seats of cars.

Both XM and Sirius will argue that business conditions have changed since 1997, a fact recently acknowledged by former FCC chairman Reed Hundt.

“You can buy an iPod and download music and then plug it into your car. How is that different from satellite radio?” Hunt recently told the New York Times. “I think we did the right thing to begin with. You wouldn’t want to change it if it weren’t for the fact that it is so obvious that you can get content in so many different ways. That wasn’t really true then.”

If approved, the combined company will winnow its entertainment offerings, merging redundant music and content channels. Subscribers will immediately get a broad selection of both operator’s marquee hosts and sports from NASCAR to the NFL.

The company said content from both companies would be offered on an a la carte basis, allowing consumers to pick the channels they want.

The companies are far from deciding what a merged lineup would look like or even what the name of the company would be. Company would be based in New York but would retain a significant presence in D.C., where it owns its building.

The merger presents technical hurdles as the two satcasters use different technology to beam radio from their respective satellites.

With millions of both radios installed in high-end cars, Karmazin said the combined company would commit to supporting both technologies for years to come.

The key to survival of both companies has long been persuading the automakers to factory-install the radios, as well as convince car buyers to activate them. The combined company would have representatives of both GM and Honda represented on the board.

XM has the edge in its automaker deals, claiming 60% of the market with GM, Honda, Nissan and Hyundai. Sirius has Ford, Toyota, Chrysler, Mercedes-Benz and Volkswagen.

Under the terms of the deal, each XM shareholder would get 4.6 shares of Sirius. Shares of Washington, D.C.-based XM closed at $13.98 on Friday, while New York-based Sirius finished trading at $3.70.

News that the two were close to a deal, first reported in the New York Post on Sunday, sent shares of both companies higher on the Nasdaq in Germany. Sirius rose 27¢ to $4.01 and XM rose 47¢ to $14.59. U.S. markets were closed Monday in observance of Presidents Day.

Variety and Sirius are partners in an entertainment channel currently available through the satcaster.

(William Triplett in Washington, D.C., contributed to this report.)

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