Tech Mediums

Well, in the never ending saga of the XM/Sirius merger, the FCC Chief, Kevin Martin, said he’s cool with the deal, especially after Sirius/XM proposed to freeze rate increases for three years. 

One of the commissoners, Michael Copps, said that he didn’t see how the merger would benefit consumers.

Well, I think that’s one of the reasons that explains why this deal has been held up.  Both companies, on their own, are not profitable (cash basis and GAAP), and there appears to be no reason to expect them to be profitable in the near future.

As a result, they will cease to exist. 

In my mind, that is worse for consumers…there will be no satellite radio at all if the merger doesn’t happen. 

Here are the other items that XM and Sirius have proposed (from Washington Post).

· Place price caps on programming and offer a la carte programming so that subscribers could pick programs they want and not have to subscribe to all channels or certain packages. Officials with XM and Sirius said they would offer radios configured for a la carte programming within three months of the merger.

· Open their technology standards to any radio-device manufacturer, paving the way for consumers to buy radio transmitters from retail stores. Currently, subscribers must buy directly from XM and Sirius, or through car manufacturers that have installed the devices in new cars.

· Provide interoperable radios. Current subscribers have radios that deliver programming from either XM or Sirius. Within one year of the merger, these listeners will receive radios that could access programming from both providers.

· Each set aside 4 percent of their radio spectrums, or 12 channels, for noncommercial services such as educational and public safety programming. They would lease another 12 channels for programming run by minorities and women, groups that are underrepresented in entertainment broadcasting.

In a move to increase its page views it offers to advertisers looking to reach the African-American demographic, Radio One, through its digital arm, Interactive One, has worked a 5-year multi-million dollar deal to exclusively provide advertising to AllHipHop.com, one of the most popular hip hop/urban focused sites on the web.

The deal allows Radio One to exclusively fill AHH’s advertising with its inventory.  The press release reports that AHH has more than 500 million pages a month from more than 4 million unique visitors per month. 

In April 2008, Radio One also acquired Community Connect, which owns social networking sites BlackPlanet.com and AsianAvenue.com, among other social networks for $38 million.  That acquisition provided Interactive One with millions of page views.  According to Community Connect, in 2007, BlackPlanet.com alone served over 400 million pages views and averaged 4 million unique monthly visitors.

The deal makes conceptual sense (barring analysis of financial terms).  The demographic for Radio One, which is one the largest holders of radio stations and the largest that focuses on African-Americans, crosses AllHipHop’s audience very well (although a p[orto.  Further, AHH has been on the internet since 1998 and has the kind of brand and digital footprint that will allow Radio One to distribute its advertising inventory quickly.

These kinds of deals, presuming they financially make sense, definitely make sense conceptually for traditional advertising based media companies was mentioned before.

Here is the press release.

XM released earnings today and, losses for the quarter were greater than expected.  Losses for Q1 were $129 million.  Sirius, on the other hand, also reported losses, but were less than expected and came in at $104 million.  What’s more important is cash from operations.  XM didn’t report this number in the press release, but Sirius did, which was a cash loss of $139 million.  I would presume that XM has a cash loss as well.

Damn!

When I first began to watch these companies in 2004, both expected to be cash break even in two years…so 2006.  It’s 2008 and it doesn’t sound reasonable to expect a cash profit by the end of the year.

I’m saying, why not allow them to merge.  There’s but so much debt and equity that the companies can issue. 

I don’t know that if together they will be better off in the short-term, because it’ll depend the level of short and long-term financial commitments (like the use of satellites), but presumably there are some operations that will provide considerable cost savings. 

I’d say, let them merge or expect them to die off over the next few years and then you won’t have any competitors in this space.  I can’t imagine someone buying them…except to cell off some of the assets.

There doesn’t appear to be much of an argument for keeping them separate on anti-trust grounds. 

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.    

In light of the inability to close the buyout of Clear Channel by Thomas H Lee Partners and Bain Capital, I thought to finally talk about Clear Channel as a fascinating company and how much it reminds me Standard Oil, John D Rockefeller’s oil monopoly.

First things, first.  Standard Oil had a ridiculously enormous command over the oil market.  That’s why it was forced to break up into the BIGGEST names in oil you’ll have ever heard of.  I’ll list them, and note that some were merged with each other.

·        Exxon

·        Mobile (merged in 1999 from the union of Exxon)

·        Chevron (merged with Texaco in 2001)

·        Amoco (merged with British Petroleum in 1998)

Clear Channel isn’t quite the monopoly that Standard was (in some markets it didn’t own as many as 7 radio stations as in others :-D), but it’s got some of the same memorable names in the market place (btw – you could make the same case about GE, but GE is in such different industries that GE is more like a mutual fund).

·        Radio – where CCU had its origins; included in this are real estate holdings of radio towers: properties include the Steve Harvey Morning Show, Power 105.1 in NYC and Rush Limbaugh.

·        Live Nation (fka SFX) – one of the largest outdoor concert promoters.  Live Nation was spun out as a separate company and just did a deal w/ Jay-Z

·        Outdoor advertising (billboards) – through a purchase of Eller Media circa 1997

·        TV (local TV stations) which CCU announced it would sell in 2006 and completed in 2008

The Telecommunications Act of 1996 enhanced Clear Channel’s ability to acquire so many properties. 

 Nonetheless, radio is having a HARD time, since advertising is moving more and more online.  Clear Channel, Radio-One, Cumulus Media, all of them…revenues from radio have either not had meaning growth or are considerably down.  That’s why companies like Radio-One are figuring out their online strategy.

So the news of Clear Channel going private is probably one of the best decisions it can make given current trends – it can always reverse the decision and go public again, like a vasectomy J.  

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.

The battle for Middle Earth (I mean, internet advertising) is getting VERY interesting.  So you have the 400 lb sumo wrestlers in the ring (based on traffic), Yahoo & Google, each having 139 million and 137 million uniques/month, respectively.  AOL comes in 4^th (behind Microsoft) with 111 million uniques according to comScore.  

Next up, Yahoo is to use Google’s Adsense to deliver relevant ads alongside its own ads on a test basis (two weeks).  It’s looking more and more like a move to tease Microsoft just enough so that it will either increase its offer to something more acceptable to Yahoo or make them go away (how did Microsoft become the kids that no one wants to play with…more of a rhetorical question).

 So Let’s Play This Out…

No secret that a few online properties dominate online advertising, which is estimated to be about $21 billion in 2007 (online ad spending is expected to hit about $51 and about 15.4% of total media buys billion by 2012). 

So if Yahoo expands its “test” with Google and completely runs Google (which I don’t think will happen – 1) it would shift Yahoo power to Google, 2) that would allow Google to dominate in ways it doesn’t/can’t now and 3) it’s shaping up to be a bluff anyway), then that exposes advertisers to potentially more than 270 million unique visitors (or if you look at ad networks’ overall reach, a combined Yahoo and Google ad network would be 310 million uniques).

 Monopolies

That’s a heck of a lot of control over ad rates that a combined Yahoo/Google network would control.  That would force smaller players to combine, which I think will happen anyway as a defensive tactic:

1. While internet advertising is growing at a great pace, overall actual dollar spend is still finite…there’s so much money in corporate coffers, and
2. the number of online properties that can be created is infinite - thus, you have an infinite number of online properties competing for finite dollars. 

 Offline Going Online

No. 2 above, combined with internet advertising growth, is driving traditionally offline media to partner and acquire online properties. 

Radio One, the biggest urban terrestrial radio company, announced on April 10 that it is acquiring Community Connect, owner of BlackPlanet.com and AsianAve.com, for $38 million (Black Planet was one of the FIRST social networking sites, and it focused on the niche model which has gotten hot – it’s lost a little luster with the propensity for being spammy, like MySpace,  but it’s still one of the go to sites for people and studios pushing certain films).

Hearst Media, known for its offline properties (magazines, newspapers and TV stations), has been acquiring websites as well.

The Goal: offer advertising clients a greater reach off AND online.  One point of contact for a wider reach.  Of course, the main goal is to maximize revenue since terrestrial radio and magazines have been having a tough time growing revenue.

 Smaller Sites

How do smaller sites, that have a few tens or hundreds of thousands of visitors, compete? 

Get this - borrow from the big boys and merge.  If not merge, then create a network of sites that can drive pricing power with advertisers.  This could be a lot more lucrative if done right. 

 Competitive Landscape

So you basically have the following groups in this order

1. Search – Yahoo, Google, AOL
2. Traditionally offline who already are online – NY Times, LA Times, Fox Interactive
3. Large Social Networking – MySpace, Facebook, etc.
4. Traditionally offline media going online – Hearst, Radio-One
5. Smaller sites that combine to form a larger network - ?