Satellite radio merger will help XM, Sirius compete, experts say

A merger between Canada's two satellite radio players will shift their focus from battling each other to competing with traditional radio and new media platforms, industry observers say. “ is a company that looks like it's doing well enough to try to get a larger part of the market,” Richard J. Paradis, an instructor at the Université de Montréal's communications department and president of consulting firm Groupe CIC, said by phone. “XM Canada is having difficulties, but I think the two companies together are probably an interesting formula because it will allow them to put all of their energies into developing the market and growing their audience rather than fighting each other.” The CRTC is holding a public hearing on a proposed merger between Sirius and Canadian Satellite Radio Inc. (CSR), the parent company of XM Canada. A public hearing is scheduled for March 7. Sirius and XM are the only two licensed satellite radio providers in Canada, but the services have suffered from a lack of profitability since their launch in 2005. “Sirius Canada and CSR together currently have large accumulated deficits and XM Canada continues to see substantial net losses each year,” the companies told the CRTC in a Nov. 29 brief. “Today, more than five years after commencing operations in Canada, CSR has yet to operate on a cash flow positive basis; Sirius Canada only became profitable in the second half of 2010. Both CSR and Sirius Canada continue to carry large cumulative deficits and face growing competitive pressures that can only be helped by the proposed merger.” According to numbers filed with the commission, CSR's profits before interest and taxes for the years 2008 to 2010 were more than $133 million in the red. Sirius' figures were filed confidentiality with the commission. The companies told the CRTC that the merger will help them continue operations in a difficult financial situation. They expect synergies created by the merger to yield about $20 million in 18 months, they said. The companies' optimism about the transaction reflects the results of a 2008 merger between their U.S. affiliates, which ultimately saved the companies from the threat of bankruptcy. The Canadian companies told the commission that they intend to keep their services separate for the next decade but will make their content increasingly similar going forward. The companies said that many of their subscribers were added through agreements with car manufacturers, where satellite radio is pre-installed in new cars. However they noted the retail automotive market suffered during the recession, which has had a negative impact on satellite radio sales. Paradis said the merger will help put the companies in a position to attract new customers. Combined, the two services will have a total subscriber base of 1.7 million. “There is potential. Their challenge is to retain the customers who receive the service for free for a time period after they buy the car,” Paradis said. Iain Grant, a communications industry analyst with the SeaBoard Group, said by phone that the satellite market had a slow start because consumers weren't familiar with paying a start-up cost as well as a monthly subscription fee for radio. “They had to change people's habits,” he said. “That's a steep curve.” But Grant said the market has been improving in part because satellite radios now come pre-installed in many new cars. “The initial hurdle of writing that cheque has disappeared,” he said. “It takes away the sticker shock. It gives you a period to try it, and their thought is you'll find it very addictive and compelling.” Grant added that consumers are starting to become more familiar with satellite radio. One of its selling points, he said, the availability of content not broadcast on traditional radio. Paradis added that the service is also appealing to those living in areas with poor radio reception or limited local choices. As part of its hearing, the CRTC is examining the effects the merger on the radio market. Grant said the merger may impinge on the traditional radio market, but added that the sector has been under competition from new media for several years and continues to be profitable. He agreed that the merger may help Sirius and XM compete with sources other than one other. “They competed against each other for a market that didn't exist before they launched,” he said. “That makes it doubly hard.” Paradis said he does not believe the merger will affect the traditional radio market because satellite services appeal to a different audience segment. But Newcap Inc., which operates radio stations in Alberta, Manitoba, Ontario and Atlantic Canada, told the commission in a submission that, although it does not oppose the merger, it has concerns about competition for revenue. “When the two services were essentially competing with each other for subscribers and for advertising revenue, each was only able to sell its own audience to advertisers,” Newcap wrote. “Now the merging of the two will permit them to sell a combined audience of 1.6 million people to advertisers. This kind of reach would be very attractive to advertisers and should result in an increase of both the rate and number of spots sold. They will essentially be competing with commercial private radio for advertising, rather than competing with each other.” Newcap also pointed out that satellite services can offer advertising below market rates because a part of their revenues is guaranteed from subscription fees. The company suggested that the CRTC review the services' plans for advertising revenues and consider the impacts of reducing the services' permitted advertising minutes per hour from six to four. Steve Jones, Newcap's vice-president of programming, said by phone that satellite radio isn't a principal source of competition for local radio, but its power could grow following the merger. “It is not a potential threat to us in a very big way, but as things change going forward, the possibility exists that they could become a greater threat to terrestrial radio,” he said. Jones said satellite radio is a bigger threat to small, local stations than large, urban ones. “We don't look at them as a huge competitor, but they are out there, and as they look at merging and becoming more of a monopoly in that industry, the threat definitely gets bigger,” he said. The commission will also review whether the companies should contribute tangible benefits as part of the transaction. The companies have argued that because their average profit for the past three years has been negative, they qualify for an exemption under the CRTC's tangible benefits policy, which requires a contribution to the Canadian broadcasting system. Musicaction, a non-profit organization that supports the Canadian independent recording industry, told the commission in its submission that it made two official complaints in 2010 about CSR's failure to meet its obligations to the organization. The group said CSR failed to contribute $718,471 in funding to MusicAction dating back to 2006, and $720,971 to Fonds RadioStar. CSR and Sirius did not comment by deadline, but in correspondence with the commission CSR has acknowledged shortfalls in its contributions in 2009 and 2010. kfournier@thewirereport.ca

Satellite radio merger will help XM, Sirius compete, experts say

Broadcast | February 15, 2011

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