Radio Deal Could Face Technical Difficulties
XM, Sirius Systems Already Strained

By Charles Babington
Washington Post Staff Writer
Monday, March 19, 2007; D01

To hear officials of XM and Sirius satellite radio tell it, a merger of their companies would make almost everything bigger and better.

"The merger will allow XM to provide more programming choices for our subscribers," said Nate Davis, president and chief operating officer of District-based XM Satellite Radio Holdings. "We will be able to add popular content from Sirius to the XM lineup."

Instead of offering a one-price, all-or-nothing lineup for $12.95 a month -- as both companies do now -- they would offer smaller packages at a lower price and bigger packages at a higher price, company executives said. And shareholders would benefit, they said, because a merger would result in savings by eliminating duplications in programming, marketing and other operations.

But an examination of the companies' structures suggests that these benefits will not be easily attained, even if they persuade the Federal Communications Commission and the Justice Department to allow the merger. Both XM and New York-based Sirius Satellite Radio have huge fixed costs, mainly in multiyear, multimillion-dollar contracts for big-name talent and sports events.

On top of that, industry experts say, both firms are straining their systems' transmission capacities even before they try to add each other's content.

XM and Sirius typically drop channels when adding new ones, suggesting a filled-to-the-top transmitting system. For example, Sirius recently dropped C-SPAN Radio, a charter channel, because C-SPAN objected to being bumped off the network when Sirius wanted to air sports events.

"At any given time, we use all the spectrum" allotted to Sirius, said David Frear, the company's executive vice president. He added, however, that the number of channels can increase, depending on how the spectrum is handled.

Independent experts agree that XM and Sirius can use data compression to squeeze more channels onto their allotted spectrum -- but only to a point. The greater the data compression, the poorer the audio quality, a trade-off that cannot be pushed beyond subscribers' tolerance.

"They probably are putting about as many channels up there as they can get away with," said Ken C. Pohlmann, director of music engineering technology at the University of Miami and author of the book "Principles of Digital Audio." "They'd be total dopes if they already hadn't maxed out" their capacity, he said, because XM and Sirius have long boasted about the number of channels they carry.

The capacity question is important because the two companies have promised that no existing XM or Sirius receiver will become obsolete. That means millions of receivers, mostly in cars, must be able to receive the merged company's enhanced content for years to come. Because XM and Sirius operate on different systems, all the offerings will have to fit separately on Sirius's spectrum and on XM's spectrum.

"We'll take the XM content and feed that on the Sirius system," Mel Karmazin, chief executive of Sirius, told a congressional panel on March 7. Conversely, he said, Sirius content would be fed to XM receivers via XM satellites.

That feat will be even more challenging because Karmazin, who would run the merged company, has vowed to give listeners even more options. "Those who want to take advantage of new services, like the best of both program lineups, will be able to do so for less than this would cost today -- all with their current radio," he said in written testimony at the hearing.

The companies say they could eliminate some duplication under a merger. Each, for example, has individual channels dedicated to music from the 1960s, '70s, '80s and '90s, and to various genres, such as country, rock and jazz. But analysts question how many XM or Sirius channels can be dumped before subscribers begin to feel they are getting fewer options, not more. Dropping music channels is important, because music requires more spectrum bandwidth than do talk or sports programs.

Still, "the promise of more programming at the same time as protecting the current programming is hard to believe, given the limited capacity of the two current satellite radio systems," said Gene Kimmelman, who tracks telecom issues for Consumers Union and who testified at the March 7 hearing. "Mr. Karmazin needs to explain much more clearly how he can both offer a guarantee for today's channels and new packages without an enormous technological breakthrough that doesn't exist today," Kimmelman said.

Frear, interviewed separately, said the feat is achievable. Partly through data compression and elimination of redundant material, he said, "we can make room for some additional channels, which could be the current Sirius lineup and a 'best of XM' offer."

But even big technological breakthroughs may be of limited help, Pohlmann said. Satellite radio engineers might find a way to compress much more data without greatly eroding sound quality, he said, but the data would have to be sent by upgraded satellites and received by new, upgraded radios. Given Karmazin's promise that existing XM and Sirius receivers will serve their owners for years to come, Pohlmann said, such a breakthrough "does no good."

As for hopes that a merged company could quickly reduce costs, analysts note that many of the firms' costliest attractions -- including Howard Stern, Oprah Winfrey, NASCAR, Major League Baseball and the NFL -- hold long-term contracts. "Our concern is that a lot of the big programming costs for the high-profile artists aren't going away anytime soon," said analyst Tom Eagan of Oppenheimer & Co.

Meanwhile, the satellite radio companies are learning there's a cost to dropping one channel for another. C-SPAN Radio remains on XM but not on Sirius. "We were unable to reach agreement with them for a new contract because they demanded rights for extensive preemption of our channel in order to carry sports programming," C-SPAN stated on its Web site after receiving numerous complaints.

Ed Knight, a federal government retiree from Mount Vernon, is among the unhappy C-SPAN devotees. His new Chrysler came with Sirius, he said, "and one of the reasons I was enthusiastic about it was the C-SPAN." Knight, 70, called Sirius and C-SPAN to protest, to no avail.

Frear said C-SPAN "was not a highly listened-to channel. . . . We have others that speak to public affairs, including BBC, CNN and Fox News."