SiriusBuzz

Back in December of 2007 the FCC approved new media ownership rules by a vote of 3 to 2. The commissioners against the new rules were democrats Copps and Adelstein. Both commissioners have now issued statements in light of the recent senate vote to overturn the new rules. President Bush has promised a veto of any overturn attempt, so of course the entire issue is a contentious one. The National Association of Broadcasters has come out against the Senate resolution citing “seismic changes in the media landscape over the past three decades.”

What sector watchers may find interesting are the comments of commissioner Copps and Adelstein. Can their position on the media ownership rule translate to their likely opinion on the satellite radio merger? The answer to that question is subjective, but the tenor of their comments could lead one to believe that the democrat commissioners will not be positive votes on the issues surrounding the proposed merger of Sirius and XM.

Adelstein Comment

“The Senate’s complete rejection of the FCC’s attempt to permit greater media concentration represents a great victory of the people over the powerful. In light of the Senate’s action, any proposed transaction seeking to exploit the new rules will likely face intense scrutiny. This vote reflects a strong consensus across the ideological spectrum against further media concentration, from left to right and virtually everybody in between. The FCC veered dangerously off-course from the American mainstream, so our elected representatives are trying to steer us back. This unequivocal, bipartisan rebuke of the FCC is a wake-up call for us to serve the public rather than the media giants we oversee. Chairman Inouye, Senator Dorgan, Vice Chairman Stevens, Senator Snowe and the many other Senate leaders and public interest organizations who pushed this forward deserve our congratulations and the thanks of the American people.”

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In what can only be termed as a cautious use of words, the National Association of Broadcasters expressed opposition to the passage of the Senate Joint Resolution 28 that would serve to rescind the FCC media ownership vote that happened last December.

The NAB’s Dennis Wharton said, “NAB strongly opposes efforts to overturn the FCC’s exceedingly modest reforms made to media ownership rules. We are hopeful that policymakers ultimately come to fully appreciate the seismic changes in the media landscape over the last three decades, and stand down on this unnecessary proposal.”

This would seem to be an acknowledgment of a competitive environment in the media sector.

In a 186 page Ex-Parte filing with the FCC, U.S. Electronics has filed suit over a Freedom of Information Act request. The issue centers on a request by U.S. Electronics to see documents relating to rules and regulations of the FCC and whether or not Sirius and XM have complied.

Is this issue really a concern of U.S. Electronics with relation to the merger?

What exactly does the location discrepancies of terrestrial repeaters have to do with U.S. Electronics?

I could go on and on, but there is little point to doing it. U.S. Electronics may have a point with open access, but these other things leave a question as to their motives.

Read the U.S. Electronics Filing

Position - Long Sirius, Long XM

One worry for sector watchers regarding the merger is the refinancing of putable debt. With credit markets strapped for cash people worry that the merged company would not be able to reach terms that carried a reasonable rate. One key aspect of the current bonds is the value of them as they stand vs. the potential value in relation to a merger. Simply stated, would bondholders rather have the current situation, or be a bondholder of a merged company that will deliver synergies.

Cowen analyst Tom Watts believes that current bondholders and management could have an “agreement in principle” by the end of May. The analyst also notes that management had temporarily stepped away from the refinancing talks in order deal with issues at the FCC. According to Watts, “Timing of the FCC review, and pace of negotiations with XM and SIRI, suggest an approval (FCC) could be handed down as early as June, prompting management to make both announcements together.”

While this news is positive in a couple of aspects, it also indicates that FCC approval could still be a few weeks away. It goes without saying that the FCC process would be down to discussion on various drafts that Chairman Martin had drawn up about a month ago. It is our opinion that the sticking points deal with spectrum, minority ownership, and public interest channels. An FCC decision can come without notice.

Watts also notes that Sirius could return to pre DOJ levels which implies a 25% upside.

Position - Long Sirius, Long XM

The Squeezebox Duet is a Home Run, and it’s because Logitech has covered all of the bases. Simply Stated, this is a MUST HAVE ADDITION to the sound system of any person who appreciates audio entertainment!

We got our hands on the new Squeezebox Duet for a review, and I can tell you this…No one will get this nifty device out of my hands. The Squeezebox Duet is a home run! The sleek and stylish controller and receiver fit any decor, the 2.4 inch color LCD screen allows further customization to suite whatever your mood, and that is just the beginning.

Logitech’s Squeezebox Duet allows users to access millions of songs from Internet radio or even your own play lists. All of this is in CD quality, and controlled through the easy to operate Squeezebox handheld device. Better still, one Squeezebox can let your kids listen to their tunes in the playroom, while you listen to yours in the den, and your wife her own in the living room. Want every room in the house to have the same music? With the Squeezebox system it is possible.

Logitech covered all of the bases by developing a simple user friendly Squeezebox system that will add gusto to any audio entertainment system. The Squeezebox Duet also has the ability to allow consumers to build a whole house system at a pace that fits any budget. Out of the box the Squeezebox Duet comes with one controller and one receiver and that is all it takes to get yourself started. This allows you to instantly hook up the Duet to your existing home stereo and begin enjoying all of the music that the Internet has to offer. At $399 the Squeezebox Duet will give your existing stereo functionality that you did not think possible. No more CD’s on shuffle. Instead, you music choice is only limited by your imagination.

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While this is being published a few minutes early, it would appear that the merger agreement between Sirius and XM will, as expected, continue. When they announced the last extension, the expiration was may 15th, 2008.

“XM Satellite Radio (Nasdaq: XMSR) and SIRIUS Satellite Radio (Nasdaq: SIRI) today announced that the companies have agreed not to exercise their rights to terminate the Merger Agreement prior to May 15, 2008. SIRIUS and XM also announced that they have agreed to further extend the merger agreement, as necessary, for rolling two week periods unless either side notifies the other of its intention not to extend.”

We may not see an announcement regarding the continuation of the deal at all since the extensions are automatic. This means that the status of the deal is still in the “ON” mode through May 29, 2008. At that point, either company could walk away from the deal without penalty ($175 million), however, with DOJ approval, and the FCC having seen about all of the information possible, it is unlikely that either party will walk away.

Thus, while the political tensions play themselves out at the FCC, investors have a fresh new two week window to be excited or frustrated about.

This issue may cause some confusion, but the terms of the rolling extension are quite clear. The next date to mark on your calendar is May 29th.

Position - Long Sirius, XM.

With economic stimulus checks being issued, retailers are finding many interesting ways to attract consumers to spend their new found dollars at their respective establishments. Satellite Radio has an opportunity to reach into this arena as well. Imagine an ad campaign touting all of the diverse programming on satellite radio.

STIMULATE YOUR EARS with music from any genre.

STIMULTATE YOUR MIND with compelling talk from politics, to cooking to current events

STIMULATE YOUR IMAGINATION with Oprah an Chopra or with Kids Stuff and Radio Disney and Radio Classics.

Whether these companies will initiate such a campaign is unknown, but given what many retailers and establishments are doing, it would not surprise me to see Sirius and XM put some stimulating deals on the table in the coming months.

Position - Long Sirius, XM.

Coming out a day after the flood of analyst reports hit the street, Barrington has issued their take on the quarter as well as the merger. The form feels that given that the DOJ has approved the merger, that the FCC will follow suit. Timeframe is still an unknown, but the analyst feels that should the merger not gain FCC approval that Sirius is better positioned than XM. Of course, this is but one opinion among many. Barrington carries a Outperform on Sirius with a price target of $3.50 and a Market perform on XM with no price target.

This analyst like many others sees the OEM picture as the main subscriber contributor in the quarter. Q2 will offer the first real retail quarter of 2008. All in Retail in SDARS is negative (49,000) for the year. Fathers Day is typically a boost for SDARS, and both Sirius and XM have substantial campaigns in place to help consumers spend their government stimulus checks for Dad’s and Grad’s.

In my opinion, should the merger be approved, it is possible that we see a reemergence on retail as soon as A-La-Carte radios become available. Those who have been waiting to upgrade may well want the radios with the additional capabilities. Investors should be cautioned that having good retail sales does not necessarily translate to subscribers. Upgrades for existing subscribers will mean a retail sale, but will not add to the subscriber numbers.

As stand alones, each company has their stronger and weaker metrics. If the merger is not approved, it will be a renewed race out of the gate to reestablish market position.

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Position - Long Sirius, XM.

In yet another twist of events, Public Knowledge and Media Access penned a letter to the FCC outlining their position, and making clear that there is no relationship with Georgetown Partners. In the letter, published on the FCC website today, they make clear their desire for a 5% spectrum set-aside for informational and educational programming.

Public Knowledge and Media Access expressed that they appreciate the offer b y Georgetown to facilitate a mechanism to make their proposals a reality, but also stipulate that they take no position on the Georgetown Partners 20% spectrum proposal. They also make clear that the 20% is not a substitute for the 5% that they are seeking.

Public Knowledge and Media Access want to be clear that they have requested or received any consideration from Georgetown Partners for their proposals.

Ironically, it is my opinion that if the Georgetown Partners proposal becomes a concession that the merger simply will not happen, and thus, there will be no chance of any Public Knowledge or Media Access desires to come to fruition.

FCC Filing

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You have to read between the lines to see it, but it seems even more clear now than it ever has. Sirius and XM are not going to give up spectrum to facilitate the merger. Mel Karmazin, and David Frear both stated in strong terms that they are not going to do anything that is not in the best interest of shareholders and subscribers, and that they would walk away from the deal if it came to that. Giving back spectrum would harm both shareholders as well as existing subscribers.

Consider that Sirius and XM have promised that existing radios would work, and that existing subscribers would still have access to the quantity and quality of programming that exists today. If Primospere were to get 30% of the spectrum how could Sirius and XM keep their promise? The same is the case for the Georgetown Partners proposal seeking 20%. In either situation, both subscribers and shareholders absorb the pain.

Simply stated, the Primosphere plan is a deal breaker. So is the Georgetown Partners plan or any plan seeking a swath of the current spectrum. They are all deal breakers.

Sirius and XM have committed to 4 channels each (a total of 8 channels). Perhaps that will become 10 channels total, but they are not giving up spectrum to accomplish this. Public Knowledge has sought several conditions in the merger process, and much of what they are seeking can be accomplished if the merger is allowed to proceed without further cannibalization. However, if Primosphere or Georgetown were to get there way, none of this can be accomplished. Georgetown recently committed to Public Knowledge and Media Access Project that they would facilitate the goals of each IF Georgetown got their 20% AND these groups got what they were seeking. This will never happen, and hopefully Public Knowledge and Media Access Project are aware of this. The Georgetown proposal is a deal breaker.

The FCC now needs to consider whether they want something or nothing. If the FCC wants A-La-Carte, Interoperable Radios, some Public Interest a programming, and Open Access, it will only happen with a merger. If the FCC steps into the realm of stripping away spectrum, they will squash the deal and then none of the consumer benefits will come to fruition.

Simply stated, the merger and all of the benefits will not happen if spectrum loss is part of the equation. The FCC, Public Knowledge, and others need to weigh weigh the benefits that can be brought vs. the thought of having the merger fall apart, and a status quo situation (Sirius and XM with exclusive OEM deals, exclusive content, no interoperability, and no A-La-Carte) for current subscribers as well as future subscribers. There are 17 million existing subscribers that have a certain level of service right now. To disrupt that service or take away from it is something that the FCC should weigh carefully. Many existing subscribers are the very people that have committed to and are fans of satellite radio. To take away from these subscribers would be a disservice to them.

Georgetown’s Proposal - Deal Breaker
Primosphere Proposal - Deal Breaker
Public Knowledge Proposal - Workable
Media Access Proposal - Workable

At this point the cards are on the table. If this was not clear to people earlier it should be now.

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Position - Long Sirius, XM.