Sirius-XM merger clears major hurdle

The nation’s two satellite radio providers moved one big step closer Monday to officially changing their tunes.

The Justice Department approved the proposed $4.6-billion merger of Sirius Satellite Radio Inc. and XM Satellite Radio Holdings Inc., determining the new company wouldn’t monopolize the market because iPods and other gadgets are giving people more options for listening to music and other programming in their cars.

The long-awaited decision, which considered the audio market broadly in light of fast-changing technology, could make it easier for other media companies to get merger approval, analysts predicted.

“The rule about who is your competitor will change dramatically,” said James McQuivey, an analyst with Forrester Research. “This applies to any medium that’s subject to digitization, which all media are. . . . Eventually, even cable companies will be able to argue that they are competing with satellite, Internet and, to an extent, mobile television.”

Sirius and XM, which each have lost billions of dollars in the race for customers and high-priced programming such as Howard Stern and Major League Baseball, proposed the merger in February 2007 to cut costs. Analysts said the merged company could turn a profit sooner, possibly within two years, than either would as separate entities battling each other. New York-based Sirius, launched in 2002, has 8.3 million subscribers and Washington-based XM, launched in 2001, has 9 million.

“It will be good for the companies because they’ve been in this kind of death battle for years in which nobody wins,” said Anthony Valencia, a media and entertainment analyst with Trust Co. of the West.

Sirius and XM have touted the merger as a win for satellite radio listeners, who no longer would have to choose between the companies’ lineups of exclusive programming. After the merger, customers would get the best of both services, said Sirius Chief Executive Mel Karmazin, who would head the new company.

But Sirius and XM ran up against strong opposition from traditional radio broadcasters and intense scrutiny from antitrust officials.

When the Federal Communications Commission created rules for satellite radio in 1997, it granted two licenses and prohibited any merger to ensure “sufficient continuing competition.” The FCC still must approve the merger but rarely rules against the Justice Department.

FCC Chairman Kevin J. Martin has said that Sirius and XM faced a high hurdle because of the 1997 rules. He told reporters last week that his staff was drafting various options but that, “I haven’t figured out what I think we should do on it yet.”

Analysts expect the FCC to approve the deal with some conditions on pricing and the ability of listeners to choose their own channels. Karmazin promised some of those last year, such as an a la carte option that would allow subscribers to choose 50 channels for $6.99 a month. The two companies now charge $12.95 for a standard package.

The National Assn. of Broadcasters, which opposes the deal because it would improve satellite radio’s ability to compete with traditional radio for listeners, said it was “astonished” by the ruling. And some Democratic lawmakers blasted the Justice Department decision, which came without any conditions.

“This merger will eliminate all competition in satellite radio, and it’s the American consumer that will pay the price,” said Sen. Byron L. Dorgan (D-N.D.).

The Justice Department disagreed. After a lengthy review, it determined that the merger would not “substantially lessen competition and . . . therefore is unlikely to harm consumers.”

Thomas O. Barnett, assistant attorney general for the antitrust division, said that because Sirius and XM used different technologies and the radios were not compatible, there was little competition now for existing customers. As a result, customers have to buy new equipment to switch services, and “people just don’t do that,” he said.

Exclusive long-term contracts with automakers have eliminated competition there as well, he said. Plus, some people sign up to hear certain exclusive programs, such as NFL broadcasts, so Sirius and XM don’t compete for those customers either. And with technology producing more options to hear music, Barnett said consumers wouldn’t be harmed by the merger.

Sirius shares rose 8.6% to $3.15 on the news, while XM shares jumped 15.5% to $13.79.

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