The urge to merge within both the recording and satellite radio industries this week reflects how tough it is to compete profitably within the evolving digital media market.
Struggling satellite radio operators XM Satellite Radio Holdings Inc. and Sirius Satellite Radio Inc. announced a proposed $4.9 billion merger and Warner Music Group Corp. this week said it had approached Britain’s EMI Group Plc about a possible takeover bid in the latest twist in a seven-year mating saga between the two.
The deals are seen as defensive reactions to an increasingly complicated digital entertainment market.
“Both these potential deals in the satellite and the record industries reflect rationalization in business models due to changes in the consumption of music and entertainment in general,” said Paul-Jon McNealy, analyst with American Technology Research.
Both potential corporate pairings face regulatory hurdles, but analysts and lawyers believe regulators may revise views that such combination would throttle competition.
“In both cases, they’re going to argue that technology has changed the landscape so much that their set of competitors are no longer confined to companies like themselves,” said Josh Bernoff, analyst with Forrester Research. “They’ll argue their mergers are part of a larger transition.”
As the record industry struggles to change into an increasingly digitally-based business, satellite radio providers are asserting the explosion of portable music players, Internet-delivered music and cell phone-based content services is hurting their efforts to turn profitable.
Indeed, XM and Sirius have said they should be allowed to merge as they now compete with every audio device consumers use, from typical car radios to digital music players.
“Over a decade ago, when the first satellite licenses first came out, there were no iPods, there was no HD radio, there were no streaming music on cell phones,” XM Chairman Gary Parsons told Reuters in a phone interview.
Despite thousands of lawsuits against people who download music illegally, labels like Warner and EMI still bleed millions of dollars in sales to piracy. Eric Garland of Web consultants Big Champagne estimates that more than 1 billion digital tracks are illegally traded each month.
Both the satellite radio operators and music companies are suffering as they try to sell their wares against the ultimate competitor: free music and content.
“More music is being consumed by the public than ever before, but the trick is monetizing it. The downloading … is pretty much killing both the satellite and record businesses,” said entertainment attorney Fred Goldring.
Both XM and Sirius have continued to add subscribers, but their shares have tumbled on investor concerns about slowing growth and the cost of building their services.
Neither has turned a profit as they spent lavishly on content such as Sirius’ five year, $500 million deal for shock jock Howard Stern.
Struggling with a 23 percent drop in global CD sales between 2000 to 2006, the music industry also finds itself slashing costs and scrambling to find a way to survive in an increasingly fragmented, digital marketplace.
Bernoff of Forrester believes the regulatory climate could ease this time around for EMI and Warner. “When the whole business is collapsing, the regulatory authorities tend to be more lenient in allowing mergers to happen, such as in the case of the railroads,” he said.
Goldring said neither industry has found the right business mix for the digital environment. “The promise has always been the great jukebox in the sky,” he said, but added, “neither of these industries has yet answered the call of the consumer.”