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Primary Source: Mel Karmazin's case for getting Sirius

September 17, 2007 |  6:14 pm

Radio Hall of Famer Mel Karmazin, co-founder of Infinity Broadcasting, former Viacom COO and now CEO of Sirius Satellite Radio, stopped in to see the editorial board Monday. Sirius is in the midst of a troubled negotiation to merge with XM, its only rival in the satellite-radio space. The merger, which would leave Karmazin in charge of the combined company, has been intensely scrutinized by the Federal Communications Commission and the Department of Justice and has raised questions ranging from antitrust to content decency. (The ed board has opined that the Houses of Howard and Oprah, respectively, should be allowed to unite.) Sirius now has 7.1 million subscribers to XM's 8 million, and part of the two companies' argument is that their combined power will provide strong competition for terrestrial radio stations. Some highlights from Karmazin's talk:

On whether Sirius and XM are in trouble:

Sallie Hofmeister: There were a lot of people who made the argument that without the merger, both of you would go out of business. Is that part of your argument?

Mel Karmazin: No, because I, I mean I can't make that argument. If I, if I could make that argument I would make that argument, and we'd get the merger approved. Because the...

Sallie: There's no...

Mel: ...the government would say... There's not an argument in there... As a matter of fact the reverse is true, because I can't make an argument that I can't back up, is that if in fact we believe... So let's assume, an epiphany came to us because we suddenly realized our cost structures were just crazy, then we would file comment, and we would be a troubled company, you know, and we'd sit there and say, "The reason you should approve this merger is that if you don't approve the merger — right? — the country would be without any satellite, and isn't it better to have one than..."

David Hiller: Are both companies profitable now?

Mel: Neither company has made a dime.

David: Neither?

Mel: Neither company's made a dime. You know, it's, we are unable to make the failing-company argument so, you know, some people have said, you know, it's ailing but not failing. And I believe it's not failing. And, and I bought personally a whole bunch of our stock, you know, I mean a lot, you know. And um, I believe that the company will be successful without the merger or with the merger. I just don't know why... 

Sallie: You have to say that because if the merger's not approved, your stock would sink I guess.

Mel: Well it's not, it's a real issue but if you take a look at the equity the companies have right now, there's a substantial amount of equity, so below the deck, I mean, you know... 

David: What is the equity?

Mel: $10 billion.

David: Combined, of the two?

Mel: Yeah. So I mean how do you, you know, look at, you know, an equity value of $10 billion — you can sit there and go, Wall Street... It's hard to make the argument that you're failing because you're growing. Our number of subscribers is growing. You know, we're going to have a billion dollars, Sirius will have a billion dollars of revenue this year. Now, you know, I mean in my opinion that's substantial. Now our costs are, we're at high fixed costs. It costs us three hundred thousand — three hundred million dollars for each of the three satellites we have up in the air today.

Tim Cavanaugh: $300 million per year per...

Mel: Per satellite, no. To buy them. Right? You buy a satellite, it costs you $300 million; satellite life is 12-13 years. So if you looked at the investments the company has made: we've invested $5 billion, right? We've spent $5 billion in cash, and we're still not making money. Now, I wasn't here then. I would not ever have gotten into this business, OK? I mean, I came in at the end of 2004, as I saw profitability on the horizon. The reason I'm not expanding into Europe... I mean, just think about it, look: You know, if satellite radio's a good thing in the United States, why aren't you doing it in Asia and China? Because it's going to take you 12 or 13 years of losses before you make money.

On why the satellite radio giants might be able to win:

Mel: We're going to win because we have the best radio on radio, and we're gonna have better and more desirable content than anybody else can.

David: What do you find on internet radio right now?

Mel: It's, there's probably, maybe a million different channels. Because anybody, there's no barrier to entry. So you're not acknowledging...

David: Would that be something like WGN radio?

Mel: No. Mel Karmazin can put up a channel. So you don't have to have WGN radio...

David: But they can too...

Mel: They are.

Jon Healey: But it's really about narrowcasting, not broadcasting. That's the challenge for the broadcaster because somebody else on the internet can say, "I have the David Hiller station, and Dave, you've told me the five artists you like most and we will develop 24 hours of programming around those five artists."

Mel: So that's why...

David: Do you have to pay ASCAP?

Jon: Yeah, and you have to pay SoundExchange.

Mel: That's where we make a difference. Comparing us to broadcasters: They can't have a Grateful Dead channel. They can't have a Frank Sinatra channel. Because we have these 134 channels, so that we can have it; whereas, you know, Clear Channel has eight channels in a market, they're not going to devote any of them to such narrowcasting. When you compare us to these internet sites, we have the ability of spending more for content. And even though we have niche content, that's not as narrow as you're describing, but it's going to appeal to sufficiently more people than they would.

Is customer growth coming from people seeking out Sirius or buying cars with Sirius already installed?

Mel: Right now, about two-thirds of our subscribers bought their radio in Best Buy, Circuit City or Radio Shack. And a one-third are OEM. But we just started ramping up OEMs. As time goes on, it'll be, you know, 50-50, and then probably go toward OEM -- because it just is neat. You know, you don't have this thing, you know, a radio sitting on your dashboard. You don't have to wire it into your car; you're able to just, you know, get your new car and have a button that says, you know, Sirius.

Crucified by the FCC?

Tim: How does it stand now with, uh, the, with your merger and with your overall relationship to the FCC, and is it going to change when the, if, under a potential, um,  Democratic administration?

Mel: Well I think uh, it's amazing how um, both the Democrats and the Republicans have issues on this merger. You know, I mean it's not like you're hearing Kevin Martin saying, "I love it" and Michael Copps saying, "I hate it." I mean you're hearing questions about it from everybody. I mean there was a time when there was a very clear distinction between what the Republicans wanted and what the Democrats wanted. So I think that our relationship is certainly, uh, you know, cordial, I mean I've had multiple meetings with every one of the commissioners since we announced the deal. They now have to make their decision based on the information that they have as to whether or not they're going to approve it. They'll wait for the Justice Department, and that's, historically what they've done is let the DOJ make their decision first, and then the FCC will do it afterward.

Tim: Are any of Martin's objections content-related?

Mel: Um no, I think the only thing is that he has historically liked a la carte, you know, we know that, based on comments that he's said. And he's made some positive comments about our offering... One of the things I've never agreed to in the past but I've agreed to it now is we've said that we'll block any channel; if you don't want to receive a certain channel, we'll block it. If you don't want Howard Stern, we'll make sure it doesn't come into your car or into your home. But we never gave them credit for that. So we will give them credit for that.

Tim: See, I think you should charge the customer a fee for that.

Mel: The sense is that the organizations, many of the conservative groups feel that they don't want their members subsidizing the content. So the premise behind it is, OK, I'm not getting it into my home, you know, but I'm paying for it so I'm subsidizing that content. So we've said that, after the merger, if the merger's approved, that uh, that we would have a family plan of content. So if you don't want the Playboy channel, and you don't want some of our rap music, and you don't want, you know, some of our comedy that's more mature, that we'll block it, and we'll give you credit.

Tim: As a customer, can you have it your way or are you buying an off-the-shelf family plan?

Mel: What we're talking about is that we're only talking about content, not... because you've got the a la carte option in terms of which channels you want, right? But if you say I want to block the Catholic Church channel, we're saying no you can't do that. We're saying the language is the issue. You don't want this adult content. So we're gonna block all the adult content.

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