With regards to the merger of Sirius and XM, some filings have garnered a bit of attention.  Lately, filings of Michael Hartleib have become noteworthy to several publications covering the merger.

Before going on, I must state that I have had regular conversation with Michael for almost two years, and am very familiar with his filings as well as his stance on the merger.   Mr. Hartleib and I have spoken often about what he filed with the FCC, and our discussions centered around not only the merger, but these equities in general.  Michael contacted me during the past two weeks, and while I was on vacation, we did speak about the filings he was making.

Michael wanted to clarify some aspects of his filings that he felt were being misquoted or misrepresented.  Because of our relationship, he expressed a desire to get his whole point across here on Sirius Buzz.

Michael is very pro-merger.  He has long had a desire to see the interoperable aspect that this merger promises come to reality, and he, like myself, felt that an interoperable solution, particularly in the OEM channel, would have been beneficial to satellite radio as a whole a long time ago.   It was because of these feelings, and some language in Sirius and XM filings, that he requested a declaratory ruling regarding the interoperable receiver.

In order to properly understand the issues at hand, we must go back to the early days of satellite radio.  There was a point in time where the FCC mandated that the companies develop an interoperable receiver.  The language is not very specific, and to this day has many interpretations.   Some feel and interoperable receiver is a receiver capable of decoding both Sirius and XM's programming simultaneously.  Others feel that an interoperable receiver be capable of switching from Sirius to XM or vice versa (dual mode – would require you to subscribe to one or the other, but you would not be able to get both at the same time).   Additionally, there is the interpretation that such a receiver need only be developed, and not necessarily marketed.

Now, as time progressed it became clear that these companies were not particularly interested in making the receivers they manufacture and subsidize capable of receiving the programming of the competitor.   The business model was expensive enough getting their own radios in the hands of consumers.  Why put out all of those dollars only to have a consumer go to the other service?   This was and is a business decision, and right wrong or indifferent, it was the path that these companies took.

Interestingly, if indeed the interoperability mandate gets enforced via a more stringent definition, it may make it more difficult for an outside suitor to step into the picture.   Would the value of one of these companies to an outside suitor be as high with interoperability in the picture?  Likely not.   This is why this merger produces the most synergies.

With all of this in mind, we took some time to talk with Mr. Hartleib about his FCC filings, comments, and opinion on the merger.  While he has had conversation with others, this is the first in depth interview he has granted regarding this subject.  Read On For An In Depth Conversation With Michael Hartleib.

Tyler Savery – Michael, First and foremost as I stated earlier, we have known each other for over a year, and have conversed about these issues several times. I already know the answer to this question, but for the benefit of the readers could you outline who you are and who you represent.

Michael Hartleib – I am an investor in satellite radio, and I represent myself.  After subscribing to what I believe was a fantastic service and/or product, I decided to invest in the sector. I am an investor as well as a subscriber to satellite radio. I represent my interest first and foremost. I unofficially represent other consumers and  investors in the sector some of which have upwards of 2million shares in their individual accounts.  Having what I consider to be a substantial investment into these equities, I made it a point to keep as informed as I could about the sector.

Tyler Savery – You expressed some concern to me about being misquoted or misrepresented in some recent stories.  We would like to give you this opportunity to set the record straight in your own words.  One story insinuated that you "smell a rat" with regards to this merger.   What do you say to that?

Michael Hartleib – That is their interpretation, not mine. In navigating my way through the process I have made it a point not to throw anyone under the bus and have avoided making such comments. I must say, having dealt with government agencies and regulators in the past, I find the FCC to be very responsive and professional. I am a fan of Chairman Martin and feel he has done an excellent job overall. That being said, on the Interoperable Mandate, I feel the FCC has failed the consumer miserably. In fairness to Chairman Martin and the Commission, this situation was created by others and inherited by them. I hope to speak to Chairman Martin directly in the upcoming weeks so that I can express my concerns directly so that there can be no misinterpretation.  My question is simple.  Are they in compliance or not?  I also have asked “What is or was the intent of the Interoperable Mandate”? I posed this question to a 12 person FCC Committee and none was willing to provide an answer.  The answer to this question could have ramifications on my investment and satellite radio consumers for many years to come, and perhaps could shed additional light on what to expect from the merger.

Tyler Savery – So there was language that states that the companies would make interoperable devices, and there is language that stated that these companies would back each other up in case of catastrophic malfunction.   Do you think that they are capable of doing this?  How does the recent event where an XM satellite went off line impact your opinion?

Michael Hartleib – Not only was there an FCC Interoperable Mandate, but there was also a settlement on a patent infringement case (Sirius v XM) and in that settlement stipulation, they agreed to develop a unified standard and/or interoperable device.  In that settlement stipulation, they specifically address catastrophic back up provisions. Due to the settlement stipulation, Sirius and XM formed a joint venture called “Interoperable Technologies LLC”. I’ve been told that Mr. David Frear, Mr. Patrick Donnely, and I believe Mr. Karmazin, as well as other XM executives are on the board of directors. This company’s sole purpose was to develop the interoperable device.  The question is are certain current receivers already capable of receiving the other carrier’s signal with a firmware update?  Is there a bridge and/or gate in the current chipset (Field Programable Gate Array Circuitry) that allows this?   I have confirmed from multiple sources, this is indeed the case.  This programmability enables a chip that was designed for a certain format and/or function to do additional and/or different functions.

Tyler Savery – You expressed that you support the merger, and your comments and filings with the FCC reflect that as well.  Why do you favor a merger?

Michael Hartleib – I have always felt that these companies would be a "natural" to work together.  As a consumer it is frustrating to buy a car, and not have the audio entertainment you want.  Why does this have to be the case?  Why can't I buy an Acura and get Sirius?  Why can't I buy a BMW and get XM?   I realize fully that the various deals have differing structures, and this complicates matters.  This is one reason I feel that the merger makes great sense for both the consumer and these companies.   In my opinion, a merger would present the consumer with the best of everything.  AM, FM, HD, Satellite, I-Pod interface all at their fingertips in the dash of the car.

Tyler Savery – What is your opinion in terms of pricing for a merged company?

Michael Hartleib – I think consumers and the companies can both win here as well.  Consumers that want less can do so at a less expensive price.   Those that want more can do that as well, and of course, there are those that can simply keep the status quo in terms of service.  Some lower pricing helps enlarge the market for satellite, and some more expensive options help the bottom line for satellite radio.   Let's not forget that satellite has barely scratched the  surface in terms of subscribers.  A merged company could afford to be more flexible in pricing and promotions because of the economy of scale.   That being said, satellite radio is not for everyone.  There are those who simply do not desire the product being offered. I have friends who can’t understand or grasp the concept of paying for radio. They say “why should I pay for radio when I can get radio for free?” My response to them is “You’ve got to try it before you make judgment. Once you try it, it’s almost impossible to go back to traditional radio.”  The merger benefits those that already subscribe, and those that are potential subscribers in the future.

Tyler Savery – Do you think the OEM's will like the merger?

Michael Hartleib – I think that OEM's are looking for more ways to give the consumer more options.  I am sure they would appreciate being able to give their customers choices, especially if they are getting a piece of the pie.   Interoperable receivers, or a merged company could deliver the best scenario for the OEM's.  Of course, some of these deals may need to be restructured, but in the end the consumer wins because their choices are not being limited.   Interestingly, you can buy a $75,000 car that has every imaginable bell and whistle, but you can't necessarily get the satellite radio service you want in it.   There is something fundamentally wrong with this. As things stand now, consumers are being locked out of dashboards. We should not have our choices limited to one service or the other because of exclusive and/or exclusionary OEM deals.

Tyler Savery – So, in essence, your filings with the FCC were made to get answers as well as show your support for the merger.   Would that be a more accurate portrayal of your position?

Michale Hartleib – Yes! To get answers and provide clarity as to the Interoperable Mandate. I don’t believe the companies are completely innocent as to the confusion surrounding capabilities of current receivers. I do, however, understand the reasons they have not been completely transparent and/or forthright. They’ve been competing against each other for market share.

Tyler Savery – Thanks Michael, and I look forward to speaking again.  Any closing comments?

Michael Hartleib – Thank You.  I would like to add one last note.  I find the FCC process very interesting though I have concerns as well.   They display some comments on the transaction page but not all.  I inquired as to what determines which comments and filings make it to the transaction page and they stated that it is at the discretion of the FCC.   I find this a bit troubling,  and perhaps something that should be looked at in the future in the FCC process.  All voices should be heard and an equal weight placed on each and every comment. Putting more weight on some comments simply is not right, and there could be accusations of bias by the FCC in their decision process for which comments are on what page.   Additionally, I feel they should clearly put a link to all of the comments on the transaction page.  Almost 5,000 people have filed comments.  Their voices deserve to be seen and heard. I’m also concerned there are meetings and conversations going on behind closed doors discussing conditions as to the pending merger which I have confirmed through multiple credible sources but yet in the Ex Parte notifications filed I fail to see any mention of this. I intend to address this with the FCC in the coming weeks and will be asking for more specificity in the filings of Ex Parte as I believe many have become too generalized, therefore, not in compliance with the Ex Parte rules.