Feb 17, 2009 2:17 PM

Liberty Deal Keeps Sirius in Orbit — for Now

Image by John C Abell via Flickr

Liberty Media’s 11th-hour bailout of Sirius XM Tuesday leaves contracts with Howard Stern, Oprah Winfrey and other high-profile personalities intact and ensures continuity for subscribers to the beleaguered satellite radio service for at least a few years to come.

The $530 million deal also gives Sirius XM some time to figure out how to compete. While it was not so long ago a technology and Wall Street darling, a growing array of existing and easy-to-imagine alternatives — and the implosion of the new-car business, which had been its prime new-customer delivery system — has brought Sirius XM back down to earth. Subscriber numbers are grim, and this penny stock actually trades for pennies — 16 of them, even after a 52 percent gain on today’s news.

And the deal did not come a moment too soon: In return for 40 percent of the company, Sirius XM gets an immediate loan to pay off $172 million in debt that came due today. A default would not have put it off the air right away, but a bankruptcy filing could not have been too far behind and with it, uncertainty.

"What this means is a nice steadiness for consumers," said Rebecca Arbogast, former division chief for telecommunications at the FCC and current principal analyst for Stifel Nicolaus. "They can count on being able to continue with the same programming. If [Sirius XM] had gone into bankruptcy, some of those contracts with very high-paid performers might have been renegotiated. What this deal means to consumers is that you continue to get your Howard Stern."

And when it is time to renegotiate, a DirecTV-affiliated Sirius XM will have a stronger bargaining position. "If you control the only satellite radio service and one of the satellite TV companies," she said, "you can cut a better deal with some of the programmers and some of the entertainment."

Absent this deal, Echostar or another potential owner of Sirius XM may have scrapped not only Stern, but also the rest of the service’s audio programming, in favor of video or another as-yet unannounced wireless product, much to satellite radio fans’ dismay.

Although the FCC mandated in 1995 that satellite radio’s 25-MHz wireless spectrum be used primarily for audio programming, Echostar or another player could lobby to overturn that rule, arguing that cellular (and, later, WiMax) networks are capable of streaming live audio directly to cars more efficiently. In that case, satellite radio could have become nothing more than a fond memory for fans of the medium.

Liberty Media’s hefty minority stake and its new presence on Sirius XM’s board of directors leaves Mel Karmazin in charge of the company, and analysts expect the company to continue offering audio programming for the foreseeable future. Liberty’s acquisition of Sirius XM may have been, in part, a matter of executive ego maintenance and practical bargain hunting.

"This is a small little world, these satellite guys and these media guys, and some of it may have been animated by a desire just to keep [Echoster chairman Charles] Ergen [who runs Dish Networks, a DirecTV competitor] from having control over the asset," she said. "Or, it could be that it’s not so much a strategic acquisition, as [Liberty chairman John Malone] just thinks it is a decent business that is encumbered by debt, and that eventually, it could crawl its way out of it."

In addition, DirecTV might be able to make use of Sirius/XM’s earthbound repeaters to extend its signal in areas with interference. "DirecTV may be able to make use of XM/Sirius repeater network to offer mobile video," said Gregory Crawford, chief economist at the FCC from 2007 to 2008. "At the time of the XM/Sirius merger, Sirius had something like 125 repeaters in 60-65 markets, and XM had roughly 800 in 60 markets… That in my view is the strongest potential synergy from the merger, with the caveat that they may need regulatory approval to take advantage of it."

Rather than seeing their programming curtailed further, as it may have been under an alternate scenario, satellite radio subscribers could find the Liberty-backed Sirius XM more receptive to their needs. Many have complained about the disappearance of certain channels due to the merger; Liberty’s extensive programming experience could result in their bellyaching being taken more seriously.

"During the last several months, Sirius XM has canceled channels that were favorite of consumers," said IDC audio analyst Susan Kevorkian, "and that had an alienating effect — not just for specific individuals, but it also led to bad press, and bad feelings among potential consumers." Canceled channels include the NBA for some subscribers, punk channels and more.

"Satellite radio made niche programming to a mass audience possible, and yet the company, in our opinion, has not been careful enough in the way that it’s trimmed its channel lineup" added Kevorkian. "It’s not only money [that Sirius XM gets as part of the deal], but also the influence of a company like Liberty which runs other types of satellite-based [offerings] like DirecTV…. We certainly see an improved possibility for Liberty Media’s influence to [make the service] more consumer-friendly in the future."

For the time being, Sirius XM will remain mostly the same, and its programming might even improve. But in the long term, as internet- and cellular-based competitors encroach on the car (just like Karmazin said they would when he argued to the FCC that Sirius and XM be allowed to merge), satellite radio’s fate is anything but certain.

"There could be some wonderfully byzantine endgame in mind that’s eluding us all," concluded Arbogast, "that will appear wonderfully clever when it’s revealed."