Implications of the XM-Sirius merger for the US Hispanic Market.

The proposed merger of satellite radio entities XM and Sirius has drawn interest from many regulatory, business and civic corners, including major players in the US Hispanic market.

As happens in large telecom and media mergers the lobbying effort on the Hill and at the Federal Communications Commission (FCC) has been intense. XM and Sirius have mounted substantial efforts to convince regulators, the business sector and consumers including specific ethnic and demographic segments of the value of the merger to the public.

A number of groups including the National Association of Broadcasters (NAB) have opposed the merger outright.

Yet, Hispanic market interest groups including LULAC, Latino Coalition, New York Federation of Hispanic Chambers and the Hispanic Federation have responded very favorably and have sent letters in support to the FCC.

However, a number of pundits question whether the promises made by companies like XM and Sirius when dealing with merger and the eventual delivery of these especially when it comes to market demographic sub-segments are real.

My questions is whether in a free market economy a business, even if regulated has a need to make promises to any one group or is it not better to allow market forces of demand and supply to be the logical mover of any eventual change that could have greater appeal to any one demographic?

So let’s look at some of the business issues that arise from the merger specifically relating to the US Hispanic market.

On the consumer side, XM has 4 Spanish music channels and 2 specialty channels (“XM Deportivo” and “CNN En Espanol”) for a total of 6 Spanish language channels out of a total of approximately 130 channels.

Additionally, XM programs 2 extra music channels which air on DIRECT TV and has been perhaps the more aggressive of the two companies recently hired Spanish language programming veteran, Jesus Salas as Senior Program Director for Latin Channels Sirius has 2 Spanish language music channels and 2 Spanish language specialty channel (“CNN En Espanol” and “ESPN Deportes”) out of a total of approximately 130 channels.

Hence, XM has 3.5% and Sirius 3.1% of its channels in the Spanish language.

The US Hispanic population accounts for a much larger number than the percentage of channels which XM and Sirius presently program in the Spanish language.

Moreover, in most markets including major markets such as, Los Angeles, New York and Miami Spanish language over the air stations and their personality driven programs account for dominant audience positions within these entire markets making US Spanish language radio a viable and highly profitable industry.

Clearly, the Hispanic market has favorable metrics and there is direct and palpable demand for radio programming services to which consumers respond in a big way.

However, as presently configured the bandwidth for both companies is at capacity which limits its ability to include more niche oriented channels.

It must be remembered that satellite radio as a result of its larger channel capacity serves the general market and all of its listeners with many niche offerings, such as and with multiple iterations Jazz, Blues, Rock, Country and many other specific and duplicated formats. This is one of the very attractive features to consumers of subscribing to satellite radio as a consumer can listen to very specific formats which by their nature attract niche audiences and demos.

Both companies identify Hispanic subscribers as a key area for growth and opportunity due to the US Hispanic market’s unequaled metrics.

One aspect of XM’s and Sirius pitch to Hispanic civic and interest groups has been that due to the financial hardships of satellite radio it is in these groups interest for these companies to continue airing Spanish language programming.

However, where Hispanics may really benefit is in the potential for a greater number of Spanish language channels becoming available again due to the superfluous duplication of general market Jazz, Blues, Rock, Country and other channels.

In the XM – Sirius merger case the promises encompass the addition of more Spanish language channels, as well as providing more programming choices for their respective subscribers including the best of both services with the radios consumers have already purchased.

While both companies fully utilize their spectrum today, SIRIUS and XM are able to add the best of the other’s lineup to their service.

– Advancements in technology: Since their inception, XM and SIRIUS have updated their number of channels by 35%, adding 7 to 10 channels a year of new content. Engineers at both companies continue to look for, and find, new ways to expand the number of channels offered while maintaining superior sound quality.

– Additional availability on current channels: Several of the major sports seasons do not overlap, or are weekend-only events, allowing the merged company to offer multiple sports leagues by alternating use of the same bandwidth over the course of the week or year. Some of the sports channels are only in use for several hours during the day, allowing bandwidth for other programming in the dormant off-hours.

– Variable bandwidth requirements of different stations: In terms of the amount of bandwidth they require, not all channels are created equal. For example, sports and talk content requires less bandwidth than music programming.

– Rotation in the normal course: Both companies routinely replace low audience channels with more appealing content to ensure that subscribers and prospective subscribers get the best value possible. This will continue after the merger, enabling some popular content from each service to be offered on the other service.

Today, XM and SIRIUS have approximately 20 million radios in the market, including millions built into vehicles manufactured by automakers. This merger will neither interrupt nor affect customers’ use of these existing radios. After the merger, current subscribers may choose to continue to receive substantially similar service at the same price over their existing satellite radio. No customer will need to purchase a new radio in order to keep substantially similar service.

The merger will also foster the commercial introduction of interoperable satellite radios. In originally implementing rules for the satellite radio service, the FCC required the companies to develop designs for a radio capable of receiving the signal of either system. In accordance with this requirement, SIRIUS and XM created a jointly funded engineering team that has developed radios that are interoperable with each other’s networks.

After the transaction is consummated, the marketplace itself will provide economic incentives to encourage further innovation and the subsidization and commercial distribution of interoperable radios.

With appropriate subsidies to lower the costs, radio manufacturers would likely shift some amount of production, consistent with customer demand, to fabricating radios that tune to all channels of the combined service. Indeed, over the long run, such radios will enable the combined company to offer significantly enhanced content and services.

The merger will enhance the availability and distribution of interoperable equipment allowing consumers to obtain all of the content available on both systems with a single consumer device.

When interoperable radios are commercially available, consumers who want to have access to the complete offerings of both companies will be able to do so on a single device for significantly less than the current price of $25.90.

On the industry side, content is king. XM and Sirius merged or individually have the opportunity to devote investments to content generation as opposed to carrying the debt load of valued FCC licenses.

In any case, it is the market demand and opportunities and the company’s response to these that should and will dictate the benefits to any one specific demographic.

The Hispanic market is large and growing and needs and can depend on its size and metrics today and in the future.

Because of socio-economic and migration reasons the US Hispanic market under indexes in satellite radio penetration. It is this lag that creates a greater growth opportunity for satellite radio within this market as compared to other market segments.

Not addressing this market today will have missed opportunity costs to any company in the future.

By Julio Rumbaut
Julio Rumbaut has a unique blend of operating, strategic and transactional experience in US and Latin American media and is currently CEO of Miami based media brokerage and consulting firm Rumbaut & Company.