Majority Statement

• Daniel K. Inouye

  Senator
  Read statement

  Majority Statement

  Daniel K. Inouye

              This morning the Committee considers issues related to the proposed merger of the two satellite radio operators in the United States, XM and Sirius.

   

              While satellite radio is relatively new, it has grown rapidly.  Today, XM and Sirius provide audio entertainment services to more than 13 million Americans.  These subscribers listen to satellite radio primarily while driving in their cars, but some also listen in their offices, homes, and on portable devices. 

   

              Despite such successes, Sirius and XM now argue they should be permitted to merge into a single satellite radio provider – a result that was explicitly prohibited when the FCC adopted service rules in 1997.

   

  In the eyes of satellite radio operators, such a restriction is out of date given the availability of programming via alternatives like digital over-the-air radio, MP3 players and other means of receiving audio entertainment.

   

              But to merger opponents, these arguments ring hollow.  In their view, satellite radio offers a unique collection of nationwide programming that – as a whole –   cannot be effectively replicated.  As such, these alternatives complement, rather than compete with, satellite radio.  Thus, to merger opponents, a satellite radio monopoly puts at risk the benefits of low prices and high quality services that only accrue from competing service providers.

   

              Today’s hearing presents us with an opportunity to test these claims.  While we welcome this discussion, I believe that the merger proponents, in this case, have a steep hill to climb.  Indeed, given the public interest in promoting competition and maximizing a diversity of media outlets, we should be skeptical of claims that new technologies necessarily “change the equation” and provide competition sufficient to restrain monopoly power.   

   

              With that said, I look forward to hearing from today’s witnesses. 

   

  ###

Minority Statement

• Ted Stevens

  Senator
  Read statement

  Minority Statement

  Ted Stevens

  Thank you for holding this hearing this morning, Mr. Chairman.

  I do think that this proposed merger between XM and Sirius presents a great opportunity for us to learn more about this concept of audio entertainment. 

   

  The Committee has spent a great deal of time establishing the digital transition which will assist public safety and create new broadband opportunities. 

  But there is another digital transition underway for radio.  I am sure you have had some complaints like I have from broadcasters of news, sports and weather and additional programming that they believe could be subject to competition that they can’t survive with regard to this type of paid national satellite radio service. 

   

  Even with the proponents of this merger visiting with me and my staff before this hearing, I still don’t know the answer to this question.  I look forward to trying to understand it better in this hearing.  And we all want to know what this is going to do to the consumers in our state.  I look forward to any comments that will be made about the impact this will have on rural America. 

  Thank you.

Testimony

• Mr. Mel Karmazin

  Chief Executive Officer

  SIRIUS Satelite Radio
  Read statement

  Testimony

  Mr. Mel Karmazin

  Testimony of Mr. Mel Karmazin

  Chief Executive Officer

  Sirius Satellite Radio

   

   

   

  Before the United States Senate Committee on Commerce, Science & Transportation

   

  Regarding the XM-Sirius Merger

   

   

   

   

   

   

   

   

   

   

  April 17, 2007

  
  

  Mr. Chairman,

  Good morning.  Thank you, Chairman Inouye, Vice Chairman Stevens, and members of the Senate Committee on Commerce, Science & Transportation.  I am grateful for the opportunity to talk with you today about how the merger of Sirius Satellite Radio and XM Satellite Radio will provide extensive consumer benefits and continue to promote competition in audio entertainment.  

  I am Mel Karmazin, the Chief Executive Officer of Sirius.  Before I came to Sirius in 2004, I was president of Viacom and, before that, president of CBS.  I have spent almost 40 years in radio, and just about my entire working life in the broadcast industry.

  With me here today is Gary Parsons, the Chairman of XM.  Gary is a veteran of the communications business and a leader in the world of satellite radio.  Gary and I are both looking forward to working together to create an exciting new company.  Gary's leadership and talent are crucial to the future of radio.  Gary, together with XM’s CEO Hugh Panero, built XM into the success it is today.  I should point out that XM has the largest digital radio facility of its kind in the country, and is headquartered right here in Washington, DC, where the combined company will continue to have a significant presence.

  I would like to talk today about some of the important benefits consumers will see as a result of the proposed merger.  I also plan to discuss the extensive competition that satellite radio faces from a range of players in the audio entertainment market.  As I will explain, this intense competition will remain after the merger is consummated.   

  I.                   A Sirius/xm merger will generate concrete and significant benefits for consumers.

  The Combined Company Will Offer Consumers More Choice at Lower Prices:  Today, Sirius and XM each provide consumers one service offering at one price—$12.95 per month.  Consumers have only a limited ability to tailor their service, and those seeking programming from both Sirius and XM must subscribe to both services for a combined payment of $25.90 per month.  The merger of Sirius and XM will enable the combined company to enhance these offerings through:

  ·              Better pricing.  The merger will allow us to lower prices.  Consumers who want fewer channels than currently offered will be able to select one or more packages of channels for less than $12.95 per month.  These packages will include an attractive mix of music, news, informational, sports, children’s, and religious programming.  

   

  ·              More choices.  Sirius and XM customers will be able to access certain popular, previously exclusive programming of the other provider for a modest premium over what they are paying now.  

   

  ·              Still more choices.  When interoperable radios are commercially available, consumers who want to have access to the complete offerings of both companies will be able to do so on a single device for significantly less than the current price of $25.90.

   

  ·        Empowering consumers.  While customers of both companies currently have the option of blocking adult programming, the combined company will provide customers a credit if they choose to do so.
  
  

   

  Despite the speculation to the contrary, the combined company will not raise prices.  After the merger, consumers who want to continue to receive substantially the same channel lineup of either Sirius or XM may continue to do so at the same price—$12.95 per month.  

   

  The Combined Company Will Be Able To Provide Consumers More Diverse Programming:  Sirius and XM currently provide a wide range of commercial-free music channels, exclusive and non-exclusive sports coverage, news, talk, traffic and weather, and entertainment programming.  However, there is significant overlap and redundancy in the channel line-ups of Sirius and XM.  For example, 12 identical channels are available on both Sirius and XM.  A further 75 channels overlap by genre—providing substantially similar programming.  

  In the long-term, the combined company will be able to consolidate certain redundant programming.  The result ultimately will free capacity for more diverse offerings that are not currently available on either company’s system, including expanded non-English language programming, children’s programming, and additional programming aimed at minority and other underserved populations.  Notably, this additional capacity also may allow the combined company to provide additional programming related to public safety and homeland security.  

  The Merger Will Help Accelerate Deployment of Advanced Technology:  The combined company will be able to offer consumers access to advanced technology sooner than would otherwise occur.  In particular, the marriage of the companies’ two engineering organizations will ensure better results from each dollar invested in research and development.  As a consequence, the combined company will be able to improve on products such as real-time traffic and rear-seat video.  In addition, the combined company will be able to introduce new services, such as enhanced traffic, weather, and infotainment offerings; more rapidly and with greater capabilities.    

  The Merged Company Will Be Capable of Commercializing Interoperable Receivers, Providing Greater Customer Choice and Convenience, While Also Protecting All Receivers on the Market Today:  This merger will neither interrupt nor affect customers’ use of their existing radios.  After the merger, current subscribers may choose to continue to receive substantially similar service at the same price over their existing satellite radio.  While no radio will become obsolete as a result of the transaction, we fully expect the merger to stimulate the development of new interoperable, highly portable, low-cost, and user-friendly devices.

  The Merger Will Create Operational Efficiencies and Safeguard the Future of Satellite Radio:  Satellite radio is a highly capital-intensive and expensive business.  Sirius and XM each have invested over $1 billion in their initial in-orbit satellites and over $5 billion each in their businesses overall, and both continue to report significant operating losses.  For the year ended December 31, 2006, Sirius reported a net loss of $1.1 billion while XM reported a net loss of $719 million.  Both companies continue to report enormous operating losses.  The proposed merger will allow Sirius and XM to achieve large-scale operational efficiencies that will help ensure that satellite radio can remain a strong, effective, and innovative audio entertainment provider.  Importantly, significant portions of the savings achieved through the merger will be shared with customers immediately and in the long-term through lower prices and improved service offerings.

  *          *          *

  Each of these important benefits is directly tied to the proposed merger and cannot be realized without it.  I also would like to make clear that these commitments are more than just words offered to appease regulators.  We view each of these benefits as a “win-win” that will make good business sense for Sirius-XM.  At the same time that we will be able to save our customers money and offer them more attractive services, we will be strengthening our merged business.  As I will explain in more detail below, satellite radio competes intensely with free terrestrial radio and a host of other audio entertainment providers.  The key to getting more subscribers will not be to widen the price gap between free and what satellite radio charges.  Instead, it will be to offer consumers a better value.  We are prepared at the appropriate time to discuss each of the issues with regulators and to guarantee these benefits as a condition of our merger approval.  

  II.                 a Sirius/xm merger will enhance  not harm competition.

  A.                 Satellite Radio is a Small Part of a Highly Competitive and Ever-Expanding Market for Audio Entertainment.

  The market for audio entertainment in the United States is robustly competitive and rapidly evolving.  Sirius and XM compete directly and intensely with a host of other audio providers for consumer attention.  As a result, although satellite radio has proven to be an appealing and popular new product, its market penetration remains quite limited.  A recent Arbitron study found that Sirius and XM account for just 3.4 percent of all radio listening, spread out among the approximately 300 channels that the two companies currently offer.  To provide the Committee with a sense of the fiercely competitive state of today's audio entertainment market, I would like to take a few moments to provide some details concerning some of our more salient competitors.  

  Terrestrial Radio:  By any measure, “over-the-air” AM/FM radio is the most dominant form of audio entertainment.  This is not surprising, given the ubiquity of the service:  AM/FM radio is offered free of charge to all consumers and comes as a standard feature in virtually every vehicle, home stereo, and clock radio sold to U.S. consumers.  Nearly 14,000 radio stations exist nationwide.  Approximately 230 million Americans choose to listen to terrestrial radio each week.  And much of the content available over terrestrial radio mirrors that provided by satellite radio.

  HD Radio:  The broadcast industry has made significant strides in rolling out digital services, and HD Radio technology is now spreading rapidly.  Just last month, HD Radio received a substantial boost from the FCC.  The agency issued an implementing decision that not only enables radio stations to broadcast higher quality digital entertainment, but also permits them to offer multiple streams of programming and data services over their existing channels.  Significantly, the Commission’s decision also allows radio broadcasters to provide digital subscription services on an experimental basis.  This flexibility surely will intensify the competition between AM/FM radio and satellite radio, not only for listeners but also for subscription dollars.

  Through the HD Digital Radio Alliance—a consortium of broadcasters that includes almost all major players, including Clear Channel Communications, CBS, and ABC Radio—the terrestrial radio industry has committed hundreds of millions of dollars to promoting this technology.  That investment already has had proven effects.  Approximately 1,200 HD Radio stations are already on the air, and hundreds more have licensed HD Radio technology.  

  In addition, the availability of HD Radio receivers is steadily and rapidly increasing.  A year ago, there were only four or five HD Radio models available and the lowest price was $599.  Now there are 30 manufacturers of radios and price points under $200.  HD Radio is now available on all new BMW vehicles and in RadioShack stores.  Wal-Mart, the nation’s largest retailer, recently announced plans to sell HD Radio receivers.  Statements and materials from the HD Digital Radio Alliance clearly position HD Radio as a counterpoint to satellite radio.

  Internet Radio:  Internet radio is another formidable and fast-growing player in the audio entertainment market.  A 2006 Arbitron study found that weekly listenership to Internet radio had increased 50 percent in just one year, and now approaches one in five Americans among key demographic segments.  In one survey, 34.5 percent of Americans aged 15-24 mentioned online streaming as a primary source of music consumption in 2006 (up from 9.7 percent in 2004).  Internet radio broadcasts have no geographic limitations and can provide listeners with radio programming from around the country and the world.  Several Internet radio services, including Yahoo! LAUNCHcast and Pandora, allow users to create their own radio stations based on their listening preferences.

  Internet radio, like HD Radio, is becoming a source for mobile audio entertainment as well.  Slacker, a service unveiled just weeks ago, allows users not only to customize their music channels, but also to listen to them on portable devices, including in their cars; the service includes a free, advertising-based version as well as a subscription option.  Various Internet radio offerings are already available on mobile phones, and Internet radio is expected to become widely available on portable devices, including car radios, by 2008.  

  iPods and Other MP3 Players:  MP3 players, such as iPods, also compete with satellite radio for listeners.  More than 116 million MP3 players have been sold.  Like other audio competitors, MP3 players are highly mobile.  There are now a variety of accessories available to play MP3 players in cars, through the vehicle’s FM radio or tape deck.  In addition, Apple recently announced that it has teamed with Ford, General Motors, and Mazda to provide iPod integration across the majority of their brands and models.  With the addition of these models, more than 70 percent of 2007-model US automobiles are expected to offer iPod integration.  Many MP3 players also can be connected to online music subscription services, such as Real Network’s Rhapsody, Napster 2.0 and Yahoo! Unlimited.  

  Mobile Phones:  Mobile phones represent yet another significant and expanding means of enjoying audio entertainment.  Approximately 75 percent of all Americans currently own a mobile phone, and the possibility of content delivery has not been lost on wireless carriers.  Several major carriers are now offering audio entertainment options, and subscribers are taking advantage of them in dramatically growing numbers.  For example, Sprint currently offers over 50 channels of radio and streaming video that subscribers can access via their devices for a monthly fee as well as music download capabilities for a one-time fee.  AT&T and Verizon Wireless provide similar services.  Approximately 23.5 million wireless subscribers currently own phones with integrated music players.  This demonstrated consumer interest in music-capable handsets likely will skyrocket in a matter of months when AT&T and Apple make the Apple iPhone available for sale.

  In addition, a number of other companies and consortiums have announced plans to deliver broadcast audio and video content through mobile phones and other wireless devices.  Three companies—MediaFLO USA, HiWire, and Modeo—have acquired nationwide or near-nationwide spectrum to deliver audio and video content through existing wireless service providers and are in the process of implementing, testing, and launching service.  A joint venture of Sprint and several cable companies is implementing a similar mobile entertainment platform.

   

  The above list is by no means exhaustive.  To be a competitor, businesses and technologies need not be exact copies of one another.  There are numerous other audio entertainment options available today as well as a constantly growing array of choices in the works.  Moreover, it is clear that these providers view themselves as being in direct competition with each other.  In public filings and statements, various members of the radio broadcasting industry have emphatically stated that they compete directly with satellite radio and other forms of audio entertainment—a view that is underscored by the fervent opposition they expressed toward the pending transaction before the ink on the merger agreement was even dry.  By the same token, Sirius and XM have listed a wide range of audio entertainment competitors in their SEC filings.  

  Just by way of example, NAB recently explained in the context of the FCC’s ongoing media ownership proceeding that “local radio stations compete for listeners with other forms of audio delivery offering an almost unlimited array of content.  iPods and other MP3 players, music services, podcasting and the Internet streaming of U.S. and foreign radio stations literally provide content from around the world to listeners in each local radio market in America.”  Such statements remove any doubt concerning the diversity and multiplicity of options available in the audio entertainment market today.

  B.                Given the Widespread Competition in the Audio Entertainment Market, the Merged Company Will Not Have the Ability to Harm Existing Competitors or New Market Entrants.

  In an attempt to cast doubt on the merits of a Sirius-XM merger, some broadcasters now appear to be reversing course and questioning whether satellite radio fully competes with AM/FM radio and other audio services.  Pointing to differences between various audio services, some even try to make the case that satellite radio is a market onto itself and, therefore, that the proposed merger will create a “monopoly” that will have the ability and incentives to harm competition and consumers.  Of course, this artificially narrow characterization conflicts with the expansive audio market that broadcasters publicly have described elsewhere.

  But broadcasters cannot have it both ways.  As the industry’s own prior statements make clear, the fact is that the market for audio entertainment is highly competitive now, and it will continue to be so after a Sirius-XM merger.

  Given the realities of today’s audio entertainment landscape, there is no legitimate basis for concern that this merger will enable the new company to charge “monopoly” prices or otherwise harm consumers or competitors.  In reality, a combined satellite radio provider will be unable to exercise market power, let alone dominate the market.  

  As explained above, although satellite radio has proven to be an appealing and popular new product, it accounts for only a small slice of the audio entertainment market.  The combined company will serve only a minor fraction of the consumers who purchase or use audio entertainment services.  Given that Sirius and XM together account for only about 3 percent of all radio listening, we will have every incentive to offer prices that will attract more subscribers, not drive them away.  

  In addition, customers can and do easily substitute other audio entertainment options for satellite radio, and this will continue to be the case after the merger.  Indeed, many of the existing options are potentially more appealing and less costly to consumers.  For example, AM/FM radio, as well as HD Radio, currently offers much of the same content as satellite radio for free to all consumers.  And the ubiquitous nature of AM/FM radios provides consumers with broad exposure to the programming of broadcasters.  The merged company’s prices will continue to be constrained by these inescapable facts.  Similarly, online music subscription services and podcasting enable consumers to replicate most of the content and the user experience available through satellite radio.  Moreover, Internet radio is capable of offering more variety and choice than any other option, and allows listeners to have substantial control over content selection and information about artists.

  As a further illustration of the substitutable nature of various audio services, several audio providers actively have been expanding their capabilities so that their services more closely resemble satellite radio.  For example, terrestrial radio has increased its format options while reducing commercials.  HD Radio provides higher-quality sound that is comparable to satellite radio, as well as expanded genres and music formats.  New automobiles increasingly come with input jacks that can be used to connect MP3 players or factory-installed iPod integration kits, similar to satellite radio.  Likewise, vehicles soon will support Internet radio and music over mobile phones.  

  Given the existing and emerging capabilities of a range of audio entertainment services, it is not surprising that consumers routinely avail themselves of multiple options.  In addition, many users of newer services, such as MP3 players and satellite radio, continue to rely on terrestrial radio.  These factors will continue to exist, and to impact the behavior of satellite radio and other market participants after the merger.

  Finally, aside from this existing, vibrant competition, entry by new competitors and expansion of current services will remain viable notwithstanding the pending merger.  New wireless networks are already under construction, which will support mobile audio services via devices such as mobile phones and Internet radio over WiFi and WiMAX.  In addition, there appears to be little limit to the growth of Internet radio and podcasting.  Other types of spectrum also are available that are capable of supporting services comparable to satellite radio.  For example, audio entertainment services similar to satellite can be deployed using the frequencies allocated to the Wireless Communications Service.  Indeed, this spectrum originally was identified for satellite radio, but was reallocated pursuant to congressional mandate.  The FCC could authorize audio entertainment services using spectrum alternatives without regard to a satellite radio merger.

  III.              conclusion

  Chairman Inouye, Vice Chairman Stevens, and members of the Committee, the audio entertainment market today is vibrant, competitive, and innovative, and every indication is that it will be even more so in the future.  We believe that the combination of Sirius and XM will be good for consumers as it will intensify this competition, expand the choices for consumers, and reduce prices.  We appreciate this opportunity to share our views with you, and I look forward to answering any questions you may have.

  Thank you.

   

• Mr. David Bank

  Managing Director-Equity Research

  RBC Capital Markets
  Read statement

  Testimony

  Mr. David Bank

  Good morning Member of the Committee and Guests.

   

  My name is David Bank. I am the media and broadcasting equity research analyst for RBC Capital Markets responsible for coverage of both the satellite and traditional radio broadcasting Industries.

   

  XM Satellite Radio and Sirius Satellite currently have a combined enterprise value including both debt and equity securities of approximately $11 billion and I hope to put the proposed XM and Sirius Merger into context with respect to issues that the capital markets are focused on. 

   

  Of these issues, the first and foremost of them would be the potential synergies and subsequent savings that we believe are possible in an XM and Sirius Merger.  We estimate the value of these synergies to be somewhere between $5 billion and $6 billion dollars.

   

  While it is unclear to us how, if at all, the combined entity might pass on savings and value creation to consumers, there are three primary constituencies that stand to benefit from the $5 - $6 billion of savings financially: 1) the employees of each of the companies as the viability of the combined entity becomes stronger, 2) the customers which could potentially benefit from greater innovation, more flexibility in pricing and a more diverse selection of content and 3) shareholders, who will see value creation from increased long-term earnings potential.

   

  Synergies would likely arise in two fashions.  The first is rather straightforward and will stem from simply eliminating redundant network components, marketing costs and operating support functions.

   

  The second is ultimately more difficult to quantify, but a clear driver, nonetheless.  It stems from a potential reduction in leverage that content providers (ie. Sports, Entertainment and News service) as well as automotive manufacturers previously exercised when XM and Sirius were bidding separately for content and distribution contracts.  These costs, extracted from XM and Sirius in the form of fixed payments, variable revenue share payments and subsidies, have been significant.

   

  At the time most of the original agreements were signed, satellite radio technology was still in its infancy relative to consumer acceptance. Sirius and XM were very aggressively bidding against each other for content and distribution deals that were thought to be key to long-term survival against a broader competitive backdrop that included standard and HD terrestrial radio, iPods, entertainment over cell phones and Internet radio.  In essence the Industry was competing against itself, as well as alternative distribution platforms. In addition, the demand for satellite radio subscriptions, particularly on the retail side, was expected to be more robust than it ultimately turned out to be.

   

  As an illustration of the change in the demand picture against a backdrop of higher fixed-costs, while our current expectation for year end 2010 subscribers for the combined Industry is approximately 26 million, our expectation for that figure in late 2004 and early 2005 when we first published estimates for year end 2010 subscribers was closer to 33 million, a discount of approximately 20%.

   

  Synergies will not occur overnight, but rather over a period of years – with more expected to be realized in the later half of the initial five year period after a merger because most agreements that the auto manufacturers and content providers have entered into are relatively long-term – most will not expire till at least 2011.  In addition, in our view the proposed combined company will likely need to maintain two separate network operating architectures for several years as it continues to service existing customers.  The itemized details and timing of these synergies by line item can be seen our report dated January 12, 2007, entitled – XMSR and SIRI Should Act On The Urge To Merge…Now.

   

  The bottom line is that, according to our estimates, these synergies could amount to value creation for XM and Sirius stockholders of approximately $8.00 and $1.73 per share, respectively, at the exchange ratio set forth in XM and Sirius merger agreement.  For further details on this analysis, please see our report of February 20, 2007 entitled, Wedding Bells Are Ringing For XMSR and SIRI.

   

  These amounts would correspond to premiums on the current equity prices of XM and Sirius of approximately 66% and 60% respectively at Monday’s closing price – and this probably is the major focus of the capital markets.

   

  We believe that the combined company will almost certainly have greater resources to invest in further technological innovation leading to a more rapid development of improved products than either company would on a standalone basis.  As for implementation, that will be up to management.

   

  We believe that the satellite Industry is a viable one with or without this merger.  However, we would note that as competition is increasing for the mobile entertainment consumer, (as illustrated by the evolution of the iPod to the iPhone, broadcast audio and video over cell phones and MP3 integration into the automobile, broader adoption of over-the-air HD radio), we believe that the Industry would be in a much healthier and stronger position should the proposed merger occur.

   

  In conclusion, I would like to note that RBC Capital Markets has at no time served as a financial advisor to either XM or Sirius. 

• Mr. W. Russell Withers Jr.

  President

  Withers Broadcasting Group
  Download Testimony (94.78 KB)

• Mr. Gene Kimmelman

  Vice President for Federal and International Affairs

  Consumers Union
  Download Testimony (155.67 KB)

• Ms. Gigi B. Sohn

  President and Co-Founder

  Public Knowledge
  Download Testimony (199.66 KB)