More M&A fun

Earlier I wrote about why the XM/Sirius merger made sense in a lot of ways. I was reading Mark Evans’ opinion on the merger and I left a comment disagreeing. I tried to sum up my position using some actual numbers. Digging into “My Documents” I found a final exam from last year on the satellite radio industry. It was a pretty thorough (strategy, finance, marketing, communications, etc.) look at the industry and Sirius in particular (and I did well on it). I’ve copied the text of the comment and added some links:

Mark,

I took your advice and dug into the subscriber numbers. In fact, I recently took a B-school final exam on the satellite radio industry, SIRI in particular. First, the business model has heavy fixed costs, meaning scale is the key to profitability. Second, adoption has been faster than any previous consumer tech trends. Third, per subscriber acquisition costs are dropping (2004: $177 from $491; XM 2004 = $62). Fourth, average revenue per customer is rising (2002-04: $7.47 to $10.02). Fifth, XM reports trial subscriber retention rates of 50% (via OrbitCast). Sixth, in 2007 27% of new vehicles will have satellite radio; OEMs will grow this to 55% by 2010. Seventh, economies of scale due to the merger will help spread out fixed costs over a larger subscriber base. Eighth, they have a large amount of cash on hand and relatively low debt.

In my opinion, this merger makes sense. You say, “But just because you build something, doesn’t mean people will come” but I’m going to go with the Field of Dreams mentality on this one. The content and the technology are valuable to many consumers, valuable enough for a low monthly fee (compared to cell phone and cable bills). It’s not satellite radio, it’s entertainment. Americans spend a lot of time in their cars, they want to be entertained.

On a side note, SIRI is up 6.76% and XMSR is up 13.09% at the moment–someone must agree with me…

Update: One last point. Doc Searls made several claims that irked me. I take issue with his comment about “monoculture” and homogeneous content. It may seem like an odd parallel to draw, but think about the beer industry. The big guys like Budweiser produce a mass market beer. It’s not particularly exciting but it appeals to a lot of people. Then take a beer like Pilsner Urquell. Many consider it one of the top beers in the world. It has a very distinct flavor but it doesn’t appeal to the majority of beer drinkers. If I gave my sister a Pilsner Urquell, she’d probably take one sip and grimace. My point is, satellite radio is a mass market product. The content they produce is homogeneous for a reason. It’s meant to appeal to the masses of listeners out there who demand it. People who demand other diverse content aren’t necessarily the target of the content. Hope that made sense…

Another update: I’d like to respond to Doc Searls’ other points. First, antitrust. I think the merger will get approved because XM and Sirius will prove that they are not in the satellite radio industry. They’re in the radio industry and, more generally, the entertainment industry. They compete against other forms of entertainment (e.g. HD radio, iPods, CDs) consumers demand in their autos. Second, program quality. If anything, the merger will create better program quality. As a combined entity, XM/Sirius will be able to focus more effort on improving programming to compete against Clear Channel and other radio operators. The merger will not remove the economic incentive to create better content. Third and fourth, monoculture and obsolescence. I responded to monoculture above and the same argument applies to obsolescence. Satellite radio is a mass market product that demands mass market content. Right now, I have 200 channels of TV programming through Comcast, that’s more than enough to last me (and my roommates and I watch at least several hours of TV per person, per day, every day). Same story with satellite radio. It works because it isn’t a niche offering. Fifth and sixth, costs and revenues. I agree that there is inherent risk in businesses with high fixed costs (read: satellite failure). But the merger helps to create the scale necessary to achieve profitability. I’m sure satellite radio will have a lot more competition in a few decades from other wireless entertainment products. But for now, the business model is viable and sustainable. See above for more on specific numbers.