Why is XM/Sirius Merger Still not Approved by the FCC?

The merger between the only satellite radio companies is still on hold, pending approval from the FCC.  What I don’t get is why the hold up?

Sure, on the one hand, there are two companies who own the satellite radio space.  Thus, on the surface, if the FCC agrees to the merger, then it would create an absolute monopoly, which is a no no.

But that presumes that there is no competition.  Not true. 

Satellite radio competes, in some cases, ineffectually, with terrestrial radio, MP3 players in cars, CDs, TV, internet, stereos and pretty much any other at-home or in-car entertainment system.

In general, it’s combining two companies in a space that doesn’t monopolize radio, or entertainment as a whole i.e., is a drop in the bucket among the litany of entertainment choices). 

So think of it like combining all the major movie theatres.  Theatres, like sat radio, mark a fraction of the distribution for movies.  People watch their movies on the internet, on their mobile devices, laptops, DVD players AND in theatres.  Like satellite radio, it’s an impact, but not a major one (not like having an oil monopoly.

So combining XM and Sirius does not create a monopoly in the broader sense.    

An update to the saga of the leverage buyout of Clear Channel and it’s buyers, lead by Thomas H Lee Partners, LP, and Bain Capital LLC …

The buyers have concluded that their bankers are trying to back out.  Bankers have concluded that the buyers aren’t acting in good faith in negotiating the terms of the loan agreement.  Sounds a little like Hillary and Barak, eh?

 The Quicks:

The unclosed deal, reaching its two year anniversary on November 26, 2006, was valued at $26.7 billion (current estimates are about $19.5 billion), of which the banks agreed to finance up to $22 billion.  The offer price was $37.60/share in cash.  Clear Channel’s stock closed at 29.74 on April 22, 2008.

The bankers are a sextuplet including Wachovia, Citigroup, Deutsche Bank, Morgan Stanley, Credit Suisse, Royal Bank of Scotland.

Their concern is that there is a major credit crunch that’s making reselling of the loans to the secondary market extremely difficult (and difficult for many private equity deals).  The banks are skittish given the numerous write-downs that some have had…like Citi’s $18 billion write-down in the 4^th quarter of 2007.

“Don’t call it a comeback, I’ve been here for years.” - LL Cool J’s “Mama Said Knock You Out”

I gotta give it to MySpace!  Looks like they are coming up with a way to unlock the value in the site.  Based on a lot of feedback from current and former MySpace users, the current model was getting stale.   The new venture is ripped (in a good way) from the page of how to unlock intrinsic value while protecting your ass from current and future lawsuits. 

The Quicks: MySpace is spinning out its music service as a separate venture with minority shareholders being 3 of the 4 major labels: Universal Music Group, Sony/BMG and Warner Music Group (there’s some speculation that EMI will likely join given that the other 3 are in).  The deal was made on Wednesday after UMG agreed to drop its lawsuit.  The ad-supported site will offer free music and video streaming, DRM-free downloads for any device including iPods, concert ticket sales and merchandise and social networking features such as sharing customized playlists with friends.  Check these sources for more info: NYTimes, Tech-Ex and Yahoo News.

So why would they do this?  Among a few, here are three:

·        creates a formidable competitor to iTunes,

·        aligns record labels interest with MySpace’s, and

·        unlocks some value within MySpace.

 The iTunes Play

It’s no secret that iTunes is enormously popular.  In 2007, iTunes became the largest music retailer overtaking the behemoth marketplace that is called Wal-Mart.  Since iTune’s primary format is digital, then it has a pretty enormous share of the digital download market – the only part that’s actually growing (increase of 21% to 29 million downloads in 2007).

So it’s not exactly rocket science that the majors want to help mitigate the impact of one company’s (Apple’s) influence over the market. 

 The Align Interest Play

“Keep your friends close and your enemies even closer.”  That pretty much sums this one up.  With the labels having a stake in the company, their interests are aligned with MySpace’s.  Thus the threat of another Label v MySpace lawsuit is significantly reduced.  Each can make money on the mega trend of streaming content, and, at the same time, creating value (enhanced by litigation reduction – see Value Reason Play below).

Thus, it makes sense for the labels to partner with MySpace in spinning off it’s music division, since it already has a large footprint (about 30 million uniques/month and 5 million artists).  It also diversifies the labels revenue stream, which I’ve argued for before.  This is smart!!!

 The Value Reason Play

Often, spinning out a division of a company unlocks the real value of that division (i.e., the sum of the parts is greater than the whole).  Think of it this way…RJR Nabisco had tobacco and food divisions.  Tobacco, because of the litigation, limited the growth of the company’s stock price.  Consequently, the value of the food division was hindered because of the tobacco.  So RJR spun off the foods division into a separate company.  Corporate raiders of the 80s did this kind of thing all the time (buy a company on the cheap and sell off the parts and make a killing).

So maybe this is what’s being done here.  Outside of this deal, MySpace’s growth prospects weren’t looking so good.  We sampled 20 non-artists who have MySpace pages and asked if they still used it.  If not, what social networks do they used?  17 of them didn’t check their MySpace pages frequently (generally going to it once every 2-3 months).  The social network that’s grabbing 15 of them…FaceBook.  Artists still use MySpace as I found out at the Urban Network Summit a few weeks ago.  It’s still a great platform to showcase their wares.  Just that the fans don’t seem to be clamoring for MySpace the way they used to…so outside of this deal, MySpace was dieing.

So the good thing is that MySpace has a stake in the new venture that will enhance it’s own valuation. 

 What about Independent Artists?

The one thing that MySpace did was help even the playing field for independent artists.  With the majors owning a stake in the new venture, what does that do for the indie artists?  This wasn’t clear in the MySpace press release.  Logically, the labels will want to have their artists featured, but it’s the indies that really made MySpace what it is.  There’s a LOT of them and their enormous fan base.  I wonder if they’ll have to fight to get exposure.  You know?

 Btw -

I presume that the labels will not exclusively distribute their content on the MySpace music site.  I can see arguments either way, but

 Facebook

FaceBook has always been rumored to be talks with the labels to establish a similar music service.  It already has music services, but nothing to the extent of a full-feature music service (the current system is more of a application). 

We’ve written about 360 deals before.  The much rumored deal between Jay-Z (aka Shawn Carter) and Live Nation is expected to finalize this week along those lines. 

The NY Times reported that the deal is valued at $150 million.  The short of it is that Jay-Z gets what amounts to an investor in Live Nation for future ventures that he creates.  These would include record distribution, merchandising, concert ticket sales and merchandising.  Live Nation will annually fund Jay-Z’s umbrella company (that will partake in the venture) and share in the profits thereof.

The deal reflects the kinds of 360 deals that we’ve talked about, where more and more mergers and acquisitions will happen along the vertical: record labels, distribution, artist management, merchandising, advertisers, promoters, etc. 

The inevitable ‘why’ comes to mind.  Because CD sales are down, more music is becoming free or low cost, but demand appears to remain strong. 

So the best business models will seek to diversify and capture different streams of revenue, presuming that core demand is still there. 

 What’s more interesting is that LiveNation is positioning itself as the ‘GE’ of music. 

Live Nation could have its hand in just about every aspect of music (rather entertainment).  Investing in Live Nation could be like investing in a mutual fund for entertainment.  Distribution, concert tix sales, merchandising, promotions, the whole nine. 

 Logical Next Step

What would be interesting is to see Live Nation partnering/acquiring a company in the web 2.0 space, like a distributive media company (e.g., widgets), a virtual world like Doppelganger’s vSide or the next FaceBook kind of social media company. 

It would make sense when looking at the mega trends of more people spending time online, TONS of dollars going in online advertising, online services, etc.

Live Nation appears to be building such a model.  It acquired Music Today, a one stop shop for merchadising, fan club building and more for artists.  Live Nation has been partnering with several companies to develop its online presence, like Last.FM.  Full acquisition might be the next step.

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Further, it is marking its territory to become the better record label model.  It already wooed Madonna from Warner.  Now, Jay-Z is leaving Def Jam.  This is particularly interesting since Live Nation has historically focused on rock and country.  

I asked a couple of record labels about possible acquisitions as a revenue strategy, but maybe it could be basic business strategy to ward off companies like Live Nation.  Most said they really hadn’t thought it through.  But a few are realizing the game is changing and it’s not really about entertainment, but a basic business policy that creates allies everywhere to further the mission of the company.  I’ll write more on this later. 

Fascinating!!!

On an industry panel, I made the comment that copyright holders, particularly young, independent artists, should focus more on distributing their content on all available platforms, rather than on DRM (digital rights management).  Not that DRM isn’t important…but at this stage, it’s not as important.

Consider a DRM free model.  For an independent artist this is invaluable.  People can freely distribute that content on any and all platforms.  But get this…it doesn’t cost anything.  It’s free promotion without the artist having to do a darn thing.  If you consider the potential for lack of royalties because of the DRM infringement (as an opportunity cost), then consider this cost as a cost of marketing.  How much would it cost the artist to get that content in front of people who can’t hear the music because of DRM?  I don’t know, but do you want to take that chance of the content not proliferating to the full extent possible?

This is at a very critical stage now.  The internet has been THE go-to platform to distribute, play and search for content by all stakeholders (artists, fans, labels).  Being a copyright holder who makes it easy for anyone to hear/see that content will continue to win…because it gets it in front of the maximum amount of people possible. 

Sure, no one wants to get hosed on losing control of the content, but it’s that very control that can limit exposure.  The focus shifts into brand building and creating demand…

I was on a digital media panel at the Urban Network Summit last week.  Various subjects were broached but I kinda got fed up of MySpace being tossed around as the be all/end all social media platform for artists. 

First shot came from me: ”MySpace is dieing.  People are looking for a more intimate interaction.  People are on MySpace because they have to be.  MySpace is spammy and you can boost up your numbers with bots.  Facebook is where things are headed.”

You should have heard the ruckus!  Heads immediately shot in my direction.  One fellow panelist took it personally.  The room, almost at capacity, even got anxious as a result.

Return fire (from the fellow panelist): You’re kidding!  MySpace has millions of visitors.  In fact, how many people use MySpace? (about 70% of audience)  How many people use FaceBook? (about 30%).  See.  How can you say MySpace is dieing???

Blast back (from me): I’m not saying don’t use MySpace.  Should be on all platforms.  But still, look at the growth rates.   FaceBook is growing at lot faster pace than MySpace.  FaceBook is where MySpace was 1-2 years ago, in terms of growth rates.  But people aren’t going back 1-2 times a day on MySpace as they are for FaceBook.  MySpace is played, from a fan perspective. 

I felt good since some people came up to me afterwards and got what I was saying.  But I think the “use all social media platforms” idea was lost.

 For Fans

People aren’t going to MySpace as much to socialize.  Too much spam.  That’s why they’re going to FaceBook.  I have friends from 23-34 in age who log onto MySpace MAYBE once every 2-3 months.  They say they’re tired of MySpace.  FaceBook, because of the closed model, can only allow friends to chat and post on their page.  It’s more meaningful.  What MySpace was.

It’s about quality of friend interaction, not quantity.

But I have to admit, FaceBook was NOT intuitive when I first signed on.  The only reason why I spent time learing it was because I thought I had to.  I have yet to work my MySpace page though. 

 For Artists

Being all social networks is one of the best, low-cost ways of getting noticed…after all, that’s the main thing for young artists.  Now that FaceBook has plans for launching music and video players for artists, FaceBook becomes a lot more appealing.  Having a lot of people sharing your video/audio on FaceBook probably means more than on MySpace – fans here are more likely to be REAL fans. 

 For Record Labels

Labels want to know who’s hot.  The problem with MySpace is that you can’t really rely on MySpace for friend counts, title plays or views.  You have to gauge.  The problem with FaceBook is that it’s a closed model, so you can’t get exposed to new content as easily.  Although, the people playing the content will probably be real people.. 

An interesting play would be a technology that could aggregate all plays, views, votes from all social networks.  Imagine a dash board where you can see anyone’s total plays on FaceBook, MySpace, Veoh, FunnyorDie, or any other site that lists, most watch, most popular, newest. 

That would be hot and usable by everyone. 

But let me offer a few pros/cons.

The latest…Warner Music Group said that it is looking for consumers to pony up $5 extra in their ISP bills to have full access to WMG’s library of content.  The goal is to create a large pool of money to be distributed to the value chain (labels, artists, writers, etc).  Jim Griffin was tapped by WMG’s Chairman/CEO, Edgar Bronfman to come up with this proposal and has said the fee is not mandatory.    There’s been a LOT of hub bub about this.   

Why?  I don’t get it. 

It all amounts to a cable operator model…where you pay a basic ISP fee, and an optional fee for premium services (much like the basic cable bill, then an extra fee for HBO). 

The Problem

The potential problem that I see is actually economics.  Someone pays $5/month to get unlimited downloads.  But on iTunes, the tracks would be $.99/track.  Depending on the division of that amount, I wonder how much dough WMG could be leaving on the table, given the reach of iTines and it’s massively used iTunes store.  Presumably, WMG would pull all of its content off of iTunes for the cable model.  But since iTunes acts as an enormous aggregator – with many fans liking non-WMG artists as well – then WMG might be limiting the amount of potential sales because people might not want to move over to a WMG platform to discover and purchase content (i.e., it loses some consumer ease of use). 

A Tax???

Despite what you may have heard, Griffin explains that the fee is not mandatory and, thus, is not a “music tax”.  If it were, I’d be yelling bloody murder too!!! 

Some people don’t listen to music all that much in any form.  Thus, a mandatory fee would force non-music lovers to subsidize music lovers – as the goal of any tax is.  Opponents of a “tax” say the government would get involved.  I don’t see the Fed getting involved in a private industry thing such as this, which doesn’t serve a moral purpose, rather than labels, artists, etc.

The Point

The point that Jim Griffin is addressing is that the industry has to move away from a model that controls distribution to one that seeks to monetize that distribution.  The current route of suing every college student, and Tom, Dick & Dana for downloading should go the way of the dodo.  Rather, if people are doing it anyway, find a way to make some money off of it.  I have to agree.

Maybe there is another way to make money on the back end by investing in the companies that provide a better downloading/file swapping experience.   Hmmm…kinda like investing in oil-related companies when you’re outraged that gas prices are going through the roof.   

I still think that using music as a way to sell other services is the best model.  That’s way more labels are considering 360 deals (they get a share in merch, concert sales, advertising, in addition to record sales).

Given that CD sales have been tanking, it was inevitable that labels were looking into getting more of the pie by structuring what are called 360 deals. Basically, labels would give more money as an advance to an artist, but get it back in recorded music sales AND concert tix, merch, advertising, etc.

360 deals are good for artists who can be called brands…maybe the music isn’t that good, but the artist is a character. 50 Cent is a current example. MC Hammer comes to mind too (although, back then, I doubt if he had a 360 deal).

Historically, artists relied heavily on concert tix sales and other non-recorded music sales to put money in their pocket, since the recorded music sales were subject to recoupment of the advance.

I would expect to see more 360 deals, within limit, since not all artists can be seen as brands (multi-talented who can act, perform well, pitch a product, etc).

What’s more interesting is that I would expect more labels to be acquiring non-label companies. Some labels are beginning to do this. One I know recently purchased a merchandising company to bring this function in-house. Imagine that labels would own businesses within the verticals…advertising companies, ticketing companies, merchandising companies, etc. As labels need to grow revenues and profits, acquiring a vertical that can be accretive to earnings immediately or shortly afterwards will be key and expected…barring any regulatory rules, that is.