FCC Approves XM-Sirius Merger - Broadcasting & Cable

FCC Approves XM-Sirius Merger

Commissioner Deborah Taylor Tate casts decisive vote to approve satellite-radio merger, ending 16-month wait.
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The Federal Communications Commission voted 3-2 to approve the XM Satellite Radio-Sirius Satellite Radio merger, with commissioner Deborah Taylor Tate casting the swing vote.

The approval brings to a close a protracted debate over that lasted for 16 months.

Tate agreed to approve the merger on the condition that the enforcement actions against the two companies were approved.

"The merger is in the public interest and will provide consumers with greater flexibility and choices," FCC chairman Kevin Martin said in a statement. "Consumers will enjoy a variety of programming at reduced prices and more diversified programming choices. It will also spur innovation and advance the development and use of interoperable radios, bringing more flexible programming options to all subscribers."

The merger was pronounced all but consummated Thursday, but by late Friday afternoon, there was no deal and most FCC staffers had gone home.

The 3-2 vote late Friday came after more than one year of vetting the deal and after some last-minute hold-ups over how to dock the companies for past transgressions -- a decision that the swing vote, Tate, indicated had to come before she would agree to the meld.

Tate broke a 2-2 tie in a vote that ultimately broke along party lines, with the two Democrats, Michael Copps and Jonathan Adelstein, voting against and Tate joining Martin and commissioner Robert McDowell in supporting the merger.

That vote came after 412 days of FCC consideration and after the companies agreed to pay about $20 million to the government and take other steps to settle an FCC investigation into their unauthorized placement of transmission equipment and the use of some radios with power levels that violated FCC rules.

The terms of the merger were not immediately available, but they almost certainly include various conditions already agreed to by the companies.

According to a source familiar with the negotiations between Tate and Martin, the conditions include a three-year price freeze, but one that would still allow the companies to pass through programming costs; a la carte and family-friendly programming offerings; a commitment to interoperable radios and outside receivers; and an 8% set-aside (24 channels) for noncommercial and commercial independent programmers.

Two proposed changes from the XM-Sirius proposal should please groups like Media Access Project and others concerned about open access.

According to an aide to one of the commissioners, at Tate's urging, the deadline for making the receiver specifications available for outside suppliers has been moved up to "immediately," and interoperable radios will be available within nine months rather than one year. XM and Sirius are said to be OK with moving up the dates.

A source said there were some last-minute edits to the proposal, but nothing that changed the basics. But the delay over approval of the enforcement action harkened back to earlier supposedly imminent FCC decisions that were delayed or scuttled amid 11th-hour negotiations.

The National Association of Broadcasters, which strongly opposed the merger, said it was "considering all options," which included going to court to try to block the deal.

One noncommercial radio executive was not happy with the decision. Dennis Haarsager, interim CEO of National Public Radio, said the merger undermines public radio and was not in the public interest.

"While NPR, other public radio producers and public radio stations have had long and mutually beneficial relationships with both companies, this new monopoly -- wielding unprecedented control over spectrum and without the mitigating conditions we sought -- will limit the public-service mission of public radio and dilute the significant investment our community, our audience and Congress have made in HD-radio technology," he said.

Public Knowledge, the fair-use-advocacy group that called for conditions on the merger, was more sanguine about the deal but was waiting to see the fine print.

“It appears as if the commission has adopted in some form all four of the conditions we have been seeking for the XM-Sirius merger," Public Knowledge president Gigi Sohn said in a statement. "We had originally said that there should be some form of a la carte choice in programming, a three-year price freeze, a set-aside for noncommercial programming and an open-device requirement so that any manufacturer could build a device to receive programming from the combined company. Consumers will be better off than had the merger been granted without any conditions. At the same time, we eagerly await the details of the commission's order to see more closely the degree to which the conditions will serve the public interest.”

Sirius and XM got stockholder approval of the deal in November 2007, and the Justice Department signed off on it in March, saying that it raised no antitrust red flags that required conditions to be put on the merger. But Justice's decision raised lots of flags with congressional Democrats. Under pressure from the Hill not to follow suit, Martin offered the proposal with conditions volunteered by the companies.

Those congressional Democrats, led by House Telecommunicatins & Internet Subcommittee chairman Ed Markey (D-Mass.), wanted tougher conditions than those imposed by Martin -- a longer moratorium on price hikes, for example, and more than double the number of channels carved out for noncommercial and independent programmers.

Adelstein proposed those and other conditions after Martin two weeks ago called on the other commissioners to vote or counter his proposal. Adelstein even said he was willing to compromise on his, but it turned out that his vote was not needed.

XM and Sirius have been delaying deadlines and making financial moves with asterisks as they awaited the FCC. Almost nine months ago, Sirius CEO Mel Karmazin threatened to sue the commission if it did not act on the merger, which he billed as a "no-brainer" combination that would result in lower prices and more choice. He even offered to deliver a la carte service, knowing that model is near and deal to the chairman's heart.

But broadcasters may not be able to live with the decision. They pushed hard against the deal, calling it a merger to monopoly and a government bail-out for companies that overpaid for programming, particularly citing Howard Stern's nine-figure deal with Sirius.

Jerome Boros, an attorney with Bryan Cave, suggested that broadcasters will likely file suit to block the merger and delay it until a new administration and new FCC arrives that might overturn the decision. In that case, it would be broadcasters, ironically, relying on the reregulatory bent of an Obama administration.

XM and Sirius announced in February 2007 that they wanted to merge. They argued at the time that their "enhanced programming lineup with improved technology, distribution and financial [would] better position satellite radio to compete for consumers' attention and entertainment dollars against a host of products and services in the highly competitive and rapidly evolving audio-entertainment marketplace."

That was a central battleground in the merger fight, with broadcasters arguing that it would be a merger to monopoly, with XM-Sirius controlling a national delivery system with which local stations could not compete, while XM and Sirius said they were part of an audio marketplace that included cable radio, Internet radio and iPods. The Justice Department paved the way for the FCC decision by concluding that XM-Sirius' view of the marketplace was the correct one.

Sounding optimistic, Sirius three weeks ago released guidance on what the financial upside for the merger wouldbe in 2009 "assuming completion of the merger" by the third quarter.

According to Sirius, combining the companies would mean cost savings of $400 million in 2009, achieving "positive free cash flow" and showing net income of $300 million before investment income, interest, depreciation and amortization.

Sirius pointed out that neither it nor XM have had positive net earnings or cash flow as separate companies. Sirius will be the surviving parent company after the merger, headed by Karmazin.

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