Source : Ottawa Citizen

In the United States, XM Satellite Radio and Sirius Satellite Radio are doing their best to merge. For now, the fates of their Canadian counterparts, and more than half a million customers, are up in the airwaves

The fate of more than 500,000 Canadian satellite radio subscribers has been placed on the edge of a razor as they await the outcome of a battle taking place in the United States.

In one corner stand two giant American satellite radio broadcasters. In the other, the U.S. Federal Communications Commission and Department of Justice.

The satellite companies are fighting with the federal regulators to allow a $4.84-billion U.S. merger of their businesses. The federal regulators are reluctant to allow a merger in the interest of protecting consumers by fostering competition in the market.

Satellite radio offers listeners crystal-clear audio and a plethora of commercial-free radio stations based on topics such as sports or comedy, or genres such as '70s tracks or alternative rock. The services also have exclusive content from celebrities such as Oprah Winfrey (who has her own station on XM Satellite Radio) and shock-radio jock Howard Stern (who is featured on Sirius Satellite Radio).

But in the middle of the U.S. satellite radio battle are Canadian satellite radio subscribers who have no say in what is going on but may see their service and monthly fees change as a result of the outcome.

It's a situation that XM Canada and Sirius Radio Canada, both independent licensees of their American counterparts, are still scratching their heads over and trying to sort out.

The U.S. government's decision about the U.S. broadcasters could be the equivalent of a nuclear bomb blast for the Canadian companies -- a blast that may see one of the two Canadian companies disappear overnight.

For XM and Sirius Canada it's nail-biting drama at its worst.

"We will continue to deliver 110 channels to our customers and watch what happens south of the border and determine what the opportunity may be for us, as it relates to whatever that outcome is," said Mark Redmond, chief executive of Sirius Canada. "As for now, it's business as usual."

Officials from XM Canada refused to comment on the issue.

The two companies are now quietly hashing out contingency plans while they sit perched before television screens and watch as the future of their business is decided in a foreign fist fight that they have no part in.

If the FCC allows XM Satellite Radio Inc. and Sirius Satellite Radio to merge, then the Canadian competitors will likely be forced to follow. If no merger is granted, then life returns to normal.

"Once the FCC renders its ruling, we will know if we are living in world 'A' or world 'B,'" said Darren Meister, an associate professor of information systems at the University of Western Ontario's Richard Ivey School of Business. "The worst thing they (Canadian providers) can do is announce a merger ... then have the FCC in the states turn around and order (the American businesses) to stay separate."

At the heart of the problem is the business relationship that XM Canada and Sirius Canada have with their American counterparts.

While each company shares a brand name with the U.S. businesses, they are not majority owned or run by the American companies.

Canadian Satellite Radio Holdings Inc., a publicly traded company on the Toronto Stock Exchange, is responsible for XM Canada. XM is majority owned by CSR, which is operated by Toronto businessman John Bitove. XM U.S. has a minority stake in the company.

Sirius Canada is privately held. The company's ownership is divided between Canadian Broadcasting Corp., Standard Radio Inc., with Sirius in the U.S. holding a small percentage of ownership.However, each company licenses content and pays the U.S.-based companies for the music and programming that Canadians hear while listening to their satellite radios.

The American satellite firms broadcast their signal across North America. A few Canadian channels had to be added to that broadcast before XM Canada and Sirius Canada could begin selling subscriptions here.

The Canadian firms are not governed by their American counterparts, meaning they make their own business decisions

Even though the American satellite firms have agreed to a merger, the Canadian companies have not.

But, with plans from their U.S. content providers to merge channels and release a new receiver capable of picking up both XM and Sirius signals, the Canadian firms are being forced to re-examine their businesses.

Without two American companies to provide two different sets of radio programming, the Canadian firms will find themselves peddling the same product.

"It is not going to be like two companies under the same roof. It will be like one new company," said Susan Kevorkian, an analyst with research firm IDC's consumer devices and technology service. "With the merger, redundant channels will be cut out. It will default to one or another. Or, one service's 'era' stations will take precedence over another."

Both XM and Sirius have era stations that play nothing but music from a given time period i.e.: the '60s, the '70s and the '90s. Streamlining those offerings, into one set of stations available on both carriers, is one of the ways the companies hope to save money.

The companies are also examining merging their exclusive content, such as certain sports which are only available with one subscription or another, broadcasting the same sports games on both platforms.

If the two American giants start broadcasting the same content, it means that customers of XM Canada and Sirius Canada will be listening to exactly the same thing.

"If you have XM receiving Sirius content ... price is the only way you could differentiate between the two products," said Western's Meister. "If they get into a price war they will never get out of it. They can't get into a price war."

Mel Karmazin, chief executive of Sirius in the U.S., dropped hints the American companies are already working to homogenize their signals while speaking before a U.S. federal telecommunications subcommittee meeting earlier this month.

"Those who want to take advantage of new services, like the best of both program line-ups, will be able to do so for less than this would cost today -- all with their current radio," he said.

Technologically speaking, Sirius signals cannot be received by XM satellite receivers and vice-versa. If the companies hope to provide both program lineups to current subscribers, they will have to duplicate the broadcast signal on both radio services.

A tiered pay-per-channel service is also likely to emerge.

As with cable TV services, people will have the opportunity to pick and choose channels they want and don't want. That may mean that premium sports packages may become part of a special subscription.

In addition, there are questions regarding the cost of a monthly subscription and whether those costs are set to increase.

Karmazin has said that current subscribers may see rate changes for the services they currently buy.

In Canada, a Sirius or XM subscriber pays around $15 per month for around 110 stations. Speaking to government officials earlier this month he said the price of getting all of the stations from both providers would be less than what someone would pay today.

By his calculations, Canadians would pay around $30 a month for all XM and Sirius programming today. If the two companies merged people would be paying "significantly less" than $30, but more than they currently pay according to Karmazin. He did not elaborate on exact pricing.

He also said, depending on the channels a person wants -- if they only want 10 of the 110 available -- they could end up paying significantly less for their subscription than they do today.

The proposed merger has ignited a political firestorm in the U.S.

In order to be allowed to continue with their plans, Sirius and XM must get approval from the FCC and the U.S. Department of Justice.

Some analysts have speculated that getting approval for the merger will be near impossible as many groups and individuals stand staunchly opposed to letting the businesses continue with their plans.

A few days after the companies announced their intentions to merge, former U.S. Attorney General John Ashcroft released a statement damning the satellite companies' plans.

"I do not express such reservations about potential mergers lightly," read Ashcroft's letter. "Consumers, I believe, subscribe to satellite radio not because it comes from satellites rather than radio towers, but because it is a unique mobile multi-channel product with nationwide reach. If these companies merge, no other entity can provide this content ... to create now a monopoly for a single licensee is to create a unitary dominant player who would have both the incentive and ability to use monopoly rents to undermine competition."

David Rehr, president and chief executive of the National Association of Broadcasters, had much harsher words regarding the planned merger.

"XM and Sirius are not credible candidates for merger, not deserving of a government bailout for their bad business decisions," Rehr wrote in a letter to the U.S. House of Representatives. "Local broadcasters call on the Anti-Trust Task Force to protect consumers, and protect competition, by opposing a merger of the nation's only two satellite radio providers."

Aside from the public opposition the merger faces, there are numerous regulatory hurdles that hinder the plans of satellite firms.

The companies must overcome an earlier FCC ruling in 1997. While issuing their broadcast licenses, the regulator passed legislation that prohibited the two companies from ever merging.

They must explain how satellite radio competes for listeners with broadcast radio, iPods and music downloads by cellphone users.

And, the two companies must also explain how a merger of satellite radio companies is different than a merger of satellite TV companies.

In 2002, the FCC told Hughes Electronics Corp. and EchoStar Communications Corp. that they could not merge because it would create a monopoly in the satellite TV space.

Karmazin believes the landscape for broadcasters has changed and competition has increase significantly in the past decade. As a result, he argues, the 1997 ruling should be set aside and the companies be allowed to merge.

Hearings before numerous federal committees are ongoing. A decision about the merger is expected to be rendered by the end of this year.

With their futures very much up in the air, Sirius Canada and XM Canada are working hard to reassure their partners and customers that no matter the outcome, the Canadian show will find a way to go on.

Sirius has 300,000 satellite subscribers and XM 237,000 subscribers in Canada -- far less than the 7.6 million XM subscribers and 6.0 million Sirius subscribers in the U.S.

A little over two weeks ago XM Canada president Stephen Tapp sent an e-mail to subscribers in order to try and calm fears stemming from the merger talks south of the border.

"The U.S. development has no immediate implications for Canadian subscribers," reads Tapp's letter, without referring to any consequences that may occur after the planned merger.

Sirius's Redmond, has made guarantees to his subscribers that if the merger goes through their radio will continue to work. Should the U.S. firms be allowed to merge, although, "what gets delivered down our pipe may change in the near term," he admits.

Redmond would not say whether the U.S. situation has the two Canadian companies considering consolidation. "We do not comment on any confidential discussions we will have with anybody," he said.

However, industry experts believe that given the situation in the U.S., the Canadian companies must be talking about their own merger.

"I will be very surprised if these companies don't have to work out some sort of merger," said Western's Meister. "They are also facing many of the same business problems that they are in the States."

During the first nine months of 2006, Sirius reported net losses of $859.3 million U.S. while XM had net losses of $378.3 million U.S.

Canadian Satellite Radio Holdings, which runs XM Canada, reported a net loss of $23.9 million during its first fiscal quarter in January. The company reported net losses of $102.7 million, for its fiscal 2006 year.

In order to expand its customer base, and increase revenues, the company has been signing deals with non-traditional partners such as Telus Mobility and Videotron. XM Canada is hoping to send its content directly to mobile phones and into people's home over cable lines. The company also recently announced a deal with Air Canada, allowing passengers on flights to listen to XM's programming.

Sirius Canada is privately held and, as a result, does not report its financial situation to the public.

The hefty losses experienced by the satellite radio companies are largely caused by cost of acquiring new listeners.

The price that a person pays for a satellite radio receiver is heavily subsidized by either XM or Sirius.

The $60 to $250 that customers pay for a satellite receiver is only a fraction of the cost of the unit, thanks to the subsidies that XM and Sirius pay to attract new listeners.

In recent years the companies have also been struggling with the rise of the iPod, and similar devices, which can be loaded with hours of music and plugged into a car's stereo.

The competition for in-vehicle listeners hits the companies particularly hard as research firm IDC has reported that 60 per cent of all satellite radio receivers shipped in the U.S. during 2006 ended up in new cars.

The interest in satellite radio from drivers of new vehicles has seen both companies spark deals with automobile manufacturers such as General Motors Corp. and Toyota Motor Corp. -- both of which offer XM radio receivers in their vehicles -- and DaimlerChrysler AG and Ford Motor Co. -- which offer Sirius receivers to customers.

But with regular FM radio being free, the satellite radio firms have struggled with a mental barrier that many people have about paying a monthly subscription fee for radio programming -- even though the satellite radio has no commercials and a greater selection of music.

"This contrasts sharply with analog AM and FM radio, which is free to those with compatible receivers, which are ubiquitous and, for low-end devices, extremely cheap," IDC's Kevorkian wrote in a research note on February 21 about the problems facing the satellite radio merger in the U.S.

The American companies, which have thus far failed to turn a profit, believe merging could produce lucrative savings and help them to better expand their business.

According to analysts at Merrill Lynch, the deal could reduce the newly combined company's costs by $400 million U.S. by 2008, through reduced marketing and customer care costs.

That figure could grow to $4.3 billion U.S. in savings by 2017 according to Merrill Lynch.

But, with the merger still facing numerous hurdles, Western's Meister said Canadian satellite radio providers have no choice but to take a wait-and-see approach.

"Lets just calm down," he said. "There is no advantage for the Canadian companies to rush into this. It is positive to the industry as a whole."

With the proposed merger is a promise of new satellite radio receivers capable of receiving video signals, as well as broadcasts from both companies satellites.

The potential of having added services, as well as more programming, may see many potential new satellite radio customers steer clear of subscribing until the dust settles in the U.S. later this year and they have a clear picture about where the industry is heading.

© Ottawa Citizen