A Senate committee chairman said Tuesday Sirius Satellite Radio Inc. has “a steep hill to climb” in showing that its proposed purchase of XM Satellite Radio Holdings Inc. will not hurt competition in the audio entertainment market.
Sirius Chief Executive Mel Karmazin told members of the Senate Commerce, Science and Transportation Committee a combined satellite radio provider would benefit consumers by letting them access both companies’ services for a diminished price.
Both companies currently have subscription fees of $12.95. Karmazin said a merged company would be able to provide both companies’ programming on one “interoperable” radio for less than the $25.90 it would currently cost to subscribe to both services.
Karmazin also said the merged company would offer consumers the option of subscribing to fewer channels for a monthly price lower than $12.95.
The combined company would consider offering regulators a guarantee that they would not raise prices in order to complete the merger, Karmazin said.
Sirius’ proposed buyout faces significant regulatory hurdles.
FCC granted licenses to the two companies in 1997 on the condition that they would never merge to create a potential satellite radio monopoly.
But Karmazin argues that new technology has evolved over the last 10 years to provide them with significant competition in the form of high definition radio, online radio and even iPods.
“The audio entertainment market is robust, competitive and teaming with innovation and will remain so after our merger,” Karmazin said.
Karmazin received a cool response to this argument from Democratic Senators, including committee Chairman Daniel Inouye, D-Hawaii.
“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,” Inouye said.
Inouye is the second Senate chairman to express doubts about the merger in as many months. Sen. Herb Kohl, D-Wis., chairman of a Senate Judiciary subcommittee on antitrust, aired misgivings about the deal during a March hearing.
Karmazin, who previously headed CBS Radio, walked a thin line in his testimony between affirming the profitability of satellite radio while drawing attention to the financial challenges both providers have faced.
After investing more than $5 billion in each of their businesses, Sirius and XM reported operating losses last year of $1.1 billion and $719 million, respectively.
Some lawmakers questioned the rationale for the proposed merger after Karmazin said that both companies would still be able to prosper if they do not combine forces.
“You are saying both companies are in pretty good shape and you believe both companies are in position to achieve profitability,” said Sen. Byron Dorgan, D-N.D. “That is not what provokes a merger.”
RBC Analyst David Bank agreed that satellite radio will remain a viable business without the merger, but he said both companies, and their shareholders, would benefit even more from joining forces.
“The combined company will almost certainly have greater resources to invest in further technological innovation leading to a more rapid development of improved products,” Bank said.
Shares of XM rose 31 cents, or 2.6 percent, to $12.18 in midday trading, while Sirius fell 6 cents to $2.98, both on the Nasdaq Stock Market.