Gary Parsons, Chairman of XM Satellite Radio, last week took the time to talk with Orbitcast to discuss the pending merger with Sirius, and the state of satellite radio today. If regulators approve the deal, Parsons is slated to become the Chairman of the combined XM-Sirius, not to mention boss of Sirius' current CEO, Mel Karmazin (whom I interviewed in August).
During the requisite pre-interview chat, I was surprised (and admittedly pleased) to learn that Parsons not only "regularly" reads Orbitcast, but also reads the comments posted on the site. It's not horn tooting (well, maybe a little) but quite honestly I'm a strong believer in the power of the community and it makes me proud to help foster this kind of community. The fact that he follows what readers write here shows that our opinions are, in fact, reaching those who are in charge and hold extraordinary value (beyond being NAB fodder).
So without any further palaver, onto the interview...
Given the passionate opposition of the merger by the NAB, do you fear that the political influence of the organization will somehow prevent the merger from going through? They do have significant clout up in Capitol Hill.
First, let's first go with your characterization of "passionate opposition." There is a lot of "huffing and puffing, blow your house down" running around that's going on. I actually have to tell you that their opposition is actually helping our case more than it is hurting it. I think particularly so when more of their deceptive practices have emerged. Such as misrepresenting the views of Congressmen or companies like Toyota, and funding shell organizations so that it appears they have raw support. Those elements I think certainly damage the credibility and strength that they have built up over the years.
While certainly they are a formidable lobby in Congress, the analysis of this effort right now is going on at the FCC and the DOJ.
And one of the most compelling prima facie evidences of being positive for competition and positive for the consumer, is the apoplectic response of the dominant provider. That is exactly what anti-trust specialists look for, and that is being played out in grand fashion.
Mel said last week of the DOJ that "They continue to ask for information," - has the window for the DOJ's decision been extended somehow? or do you still expect a decision by the end of the year?
We're still feeling that the end of the year is a reasonable time frame. I wouldn't say there was any feeling that it's been extended at all.
I've seen people focus on the 30-day deadline that they needed to respond after substantial compliance of their document request. But that really isn't a final deadline given that the FCC has to also rule on it. I think people misinterpreted that as being a hard and fast issue, which it never was and isn't. They are moving through their process at an appropriate pace. There is an expectation that the DOJ will not only continue to gather more information, but also have depositions and interview other parties on this - that is just how they go about their assessment.
So I don't read anything unusual into that. As a matter of fact, it would be unusual if they were not going about it at that level of rigor and detail.
Just so you understand, I'm not prognosticating or saying I have any unique insights based on our interface with the DOJ about anything. How they're going about it, and what they're doing, is exactly what you would expect.
XM has historically concentrated on attracting passionate subscribers. Now some of those subscribers fear that the service they've grown to love will somehow be "tainted" by merging with Sirius. What can you say to address those fears?
I'm sure that there are passionate and enthusiastic fans of each of the individual services on both sides. And anytime that is the case, people have a concern that what they know and love might be changed. But the pure and simple fact is - as a good businessman, I want to ensure that the very best consumers and supporters continue to receive whatever it was that they really really liked. That's what keeps churn down, that's what builds for passionate word-of-mouth support, and that's how you grow a business.
So it is very clear that in a combined company, you want to go to extraordinary lengths to ensure that the best aspects of each company are retained to the greatest extents possible, and that you're able to take the additional content and capabilities that each of the companies has developed, and make that available as an additional option... to expand the choices and capabilities.
Let me say this: there is no subscriber who feels more passionately about XM Satellite Radio than I do. I'm mean, it's been over a decade, and to see this vision come to fruition, and I am extraordinarily proud of the quality of the product and the service itself... it's what keeps me going day and night.
I also feel very passionately that as an executive my primarily obligation is to the shareholder to deliver value. See, it's very interesting. Mel is more of a salesman, and I'm more of a technologist. But I will guarantee you that both of us feel passionately about doing right by the common shareholders. Both of us have poured a bunch of money into this, and neither of us have taken a penny out. And yet we have not seen the rewards to the shareholders that they deserve, and that the quality of this product should warrant.
And so at the end of the day, the merger is primarily about significantly de-risking the business going forward. Regardless of either company's near term path to positive cash flow and profitability. The combined company's prospects, and the degree of certainty of that path, are significantly improved in a combined form.
...now if the merger doesn't go through, would XM be open to being acquired by another company?
Oh boy, I would never go into that level of speculation (laughs). Once again, both companies on a standalone basis have a path towards being successful, and that's our responsibilities individually to achieve that - and I think it's certainly doable. It is just far more probably, and more rapid, on a combined basis.
By the way, I've seen lots of comments about synergies. Clearly some of the synergies on a combination are on a longer term, and others are more near term. And while every expense category has an opportunity for improvement, it's not really the classic case of head count reductions... you know, fire a bunch of people. Because both companies are still growing strongly and they need to grow which requires that head count to grow outwards. That's not where the savings come from.
Think about it for a minute, if you save $10 off of combined chipsets or manufactured radios... that's $100 million a year in saving! If Sirius' SAC costs are in the low-100s, and ours are in the low-70s/upper-60s, if you just make that reduction, that's $100 million dollars of annual savings.
Now, Sirius is already dropping their SAC costs on a continuing basis, but is it reasonable to assume that that could be accelerated if you combined the radio designs, manufacturing and distribution channels efforts? I think it is. Those are the types of elements that when you have outside analysts look at it, and try to go through some approximations, you see they come up with compelling numbers. I've seen all of the analysts' reports, and some of them probably get a little overboard, and either project it faster or project the numbers to be much bigger than may be reasonably achievable. But the pure and simple fact is, the potential savings are either large, or enormous.
And that is a key element for both of companies' ability to improve the overall financial performance, but also our ability to then pass through some of these savings into these lower costs packages and a la carte options. These are so clearly in the public interest, and I think that's being strongly recognized by editorial writers, consumer groups of all varieties - as well as by regulators - but it also has great potential to expand our subscriber base.
If you look at the adoption rate after the 3-month free trial - it has stayed very strongly in the 50% range now. And by the way, that's during the time frame from when we've gone from 15% to 20% penetration in automobiles, to 30% penetration, on our way to 40% penetration next year. You're seeing significant expansions of penetration into the OEM world, while still seeing that from everyone who is exposed to the product, over half of them want to become full time subscribers. That, by the way, has been a statistic that most of the analyst community has been projecting would decline as we expanded our penetration.
Would you be able to improve that adoption rate if in fact you had several different alternatives and lower pricing packages that you could offer? Could you improve that penetration by also offering a selection of the other company's best programming that may have been particularly attractive? I think so. If there were a Chrysler customer who really loved Oprah, she may not subscribe to Sirius at the end of her trial. If there were a General Motors customer who was a Stern fan, or an NFL fan, they might not become a self-paying XM customer after the trial. But if they had that option, that's got to be additive and not subtracting.
I have to tell you, it was an insightful observation a year ago that this business was moving towards OEM centric. It's the elephant in the living room right now, and whether that's XM, or XM and Sirius, clearly the OEMs are contributing to a larger and larger percentage of all of the new net additions. Quite candidly, I'm pleased to see some of the work that's going in Detroit right now. What with settling of the Chrysler deal and GM getting its ratification from the UAW. And frankly GM, who is one of our biggest supporting partners, needs to get a lot of credit because they're not only strengthening their economics as a company, but the product line and the competitiveness of their product. Kudos to their executive management, as they don't necessarily get a lot of kudos as they should.
So OEM is a centric part of XM's strategy, but penetrating into people's homes and pockets can be just as valuable... what can we expect to see for the year ahead?
I think for the year ahead you're going to see dense penetration and growth in the OEM marketplace and I think you're going to see more stability in the retail marketplace.
Obviously it's been a number of quarters in a row where it's been negative year-over-year growth, not only in the retail sales on a gross basis but the industry has been seeing negative year-over-year net additions on a quarterly basis on the combination. That has not been helping and certainly has led to the drop in stock price over the past 18 months or so. I think when you look at what most analysts are projecting, they are actually projecting some level of inflection point in the sense that you be likely returning to year-over-year net ad growth from year-over-year net ad reductions. And so the principle driver as a business model comes from OEM, but with a continuing level of ongoing net additions from the retail to keep that marketplace solid.
So people who buy cars take the service with them elsewhere....
Right. It's interesting, an increasing amount of retail sales come from our direct channel. Quite often a person who purchases a new car loves the product and as they are committing to us to become a self-paid subscriber, you have an opportunity to offer them a second service for their home, or for their spouse's car. And that is proving to be a positive addition to the ongoing growth.
So last question... what keep you up at night? What's your biggest fear?
Well, I wouldn't say it's my biggest fear, but what is keeping me occupied day-in and day-out is the seeing the merger through to a successful completion. I feel positive as to where it stands right now, but there's a lot of work left to do on that. We clearly understand that we are competing in a very vibrant and increasingly competitive marketplace.
You actually wrote about that a little while ago. When you start seeing HD Radio teaming with Apple; Microsoft and Ford and the SYNC system; Ford's commitment to HD; Gates returning to pitch the Zune player; Slacker and their mobile device out; AT&T's $2 billion buyout of Aloha and efforts into the rich multimedia field. All of these things are in fact competition that we have to be prepared to deal with.
But as much as it is a fact that you're dealing with a competitive marketplace, I still remain extremely positive about the attributes that we bring to that competition. I mean, the breadth of our programming, and the compelling nature of our programming. The diversity and the depth of the music experience. The exclusive non-music and talk content. The extraordinary amount of sports - particularly for out-of-market sports fans - that we bring to bear. The data plus audio entertainment value proposition that we bring to the car companies, and the elegance and ease-of-use that which we present to the consumer.
All that and the fact that the service is $0.40/day or something. This isn't a $70/month or $25/month service. It's a reasonable competitive service... and I like our prospects as good as anybody.
Well thank you Gary for taking the time to provide us with some insight...
Thank you, and keep up the great work with the blog.
Great interview, Ryan.
Thats a great interview Ryan! Thanks!
Best lines right here:
"But the pure and simple fact is, the potential savings are either large, or enormous."
"Let me say this: there is no subscriber who feels more passionately about XM Satellite Radio than I do."
Incredible interview Ryan. Thank you.
nice!
Yes, savings would be large to companies as well as savings to consumer if they wish to opt for a lower priced package--There is only ONE group that loses here(NAB)
The explaination on the synergies was the best I've heard to date. People always think its all about headcount and I'm glad Gary directly addressed this point....
SIRI/XMSR will be in good hands when this gets approved....
Great interview.
>>>> The explaination on the synergies was the best I've heard to date.
Presumably, you're referring to the following paragraph, since it is the only one that really "explains" synergies at all:
"Think about it for a minute, if you save $10 off of combined chipsets or manufactured radios... that's $100 million a year in saving! If Sirius' SAC costs are in the low-100s, and ours are in the low-70s/upper-60s, if you just make that reduction, that's $100 million dollars of annual savings."
But wait a minute. He's saying you save $10/unit off the COMBINED chipsets. Is it "synergies" if the savings is based on the "combined" chipset? I think not. XM, if the merger fails, presumably won't be installing "combined" chipsets.
Based on his remarks and as a rational XM stockholder, what I see is this:
Old chipset cost = $X
New (post-merger) chipset cost = $2X -$10.
So much for chipset synergies. Unfortunately, this kind of crap is precisely the kind of irrational thinking that the analysts use in working up these numbers.
The term "synergy" and the numbers it represents certainly can be misleading, and this is a perfect example. Yes, there is a savings off of the cost of the "combined" chipset. But XM wasn't going to produce a combined chipset without the merger, so it is totally irrelevant.
This is akin to federal government budget terminology, in which "budget cuts" are not cuts at all, rather, they are budget increases that are less than someone earlier thought they would be. In this instance, the savings are savings in costs that would never have been incurred in the first place were there no merger.
Sirius chipset = $10
XM chipset = $10
Total chipset cost without merger = $20
Total chipset cost with merger = $10
Yeah you're right. It is really difficult to understand where the cost savings come from.
Stackpointer wrote:
"Is it "synergies" if the savings is based on the "combined" chipset? I think not. XM, if the merger fails, presumably won't be installing "combined" chipsets."
"Synergies" implies the combining of TWO THINGS. If there's no merger, OF COURSE there's no synergies.
The formula should be more like this:
XM chipset = $X
Sirius chipset = $Y
Combined chipset = $(X+Y) -$10
>>> The formula should be more like this:
Whatever. The point is a $10 savings off of a combined chipset may not constitute a "savings" at all -- it could well represent an INCREASED cost over simply providing the XM or SIRI chipsets alone.
>>> Sirius chipset = $10
>>> XM chipset = $10
>>> Total chipset cost without merger = $20
>>> Total chipset cost with merger = $10
>>> Yeah you're right. It is really difficult to understand where the cost savings come from.
$10 before. $10 after. Sounds like zero savings to me.
Ryan, great job as usual!
I'm looking forward to "Gary Parsons: The StackPointer Interview"
Now Stack has clearly outsmarted all those Harvard MBA's in addition to the 10-year tenured Chairman of XM satellite radio. Well done sir.
Perhaps Parsons can clarify it for Ryan: Is he saying that a COMBINED XM/SIRI chipset will be $10 cheaper than an XM (only) chipset? If so, that would be synergism at work. $100M/year doesn't justify the merger, but it is a start. Only $750 M to go, right?
Stack, come on man. I know you're trying to stick to your guns and prove a point here, but your argument would mean that NO MERGER would have any efficiencies.
Yes, if neither company merged, they would still be spending $10 per radio each. Great. But as a combined company, they're still only spending $10 per radio. Get it now?
When you instantly double the revenue, double the subscriber base, reduce redundancies, and yet your production costs go down.... well that sounds like cost savings to me.
Parsons gave a good example that the layman can understand, yet you still argue the point based on YOUR OWN DEFINITION of the word. Well here's the ACTUAL DEFINITION of the word just so no one gets confused.....
syn·er·gy (sĭn'ər-jē)
n., pl. -gies.
1. The interaction of two or more agents or forces so that their combined effect is greater than the sum of their individual effects.
2. Cooperative interaction among groups, especially among the acquired subsidiaries or merged parts of a corporation, that creates an enhanced combined effect.
Great interview and I'm happy he reads our comments....we are lucky enough to have an outlet to express ourselves.
Great interview and I'm happy he reads our comments....we are lucky enough to have an outlet to express ourselves.
>>>>>>>Stack, come on man. I know you're trying to stick to your guns and prove a point here, but your argument would mean that NO MERGER would have any efficiencies.
Nonsense. If you want to talk about REAL synergies, look at the savings from not having to market the products independently. Instead of XM running 50 Million/year in XM ads, and Sirius running 50M/year in Sirius ads, perhaps they'll run only 50M/year in XM/Sirius ads. THAT is synergy.
Being able to dump SIRI's Decades channels or other music channels that XM does, but does better, THAT's synergy. Unfortunately, these don't amount to any real money because it cost next to nothing to program them and there is no bandwidth savings.
I fully comprehend what is meant by "synergy", but we're talking about SAVINGS from synergies. And it isn't SAVINGS unless you save money over what would have been spent without the merger.
>>> Parsons gave a good example that the layman can understand, yet you still argue the point based on YOUR OWN DEFINITION of the word.
He did, and it would seem to convolute the hell out of the meaning of savings.
>>> Yes, if neither company merged, they would still be spending $10 per radio each. Great. But as a combined company, they're still only spending $10 per radio. Get it now?
First of all, you seem to have made a huge leap in your assumption that we're talking about spending $10 per radio. We are NOT talking about $10 per radio. So perhaps your earlier remarks could be made more realistic with:
Sirius radio = $50
XM radio = $50
Total radio cost without merger = $100
Total radio cost with merger = $90
Whatever the numbers are, it isn't a "savings" when you increase the line item by nearly double.
Hoo hoo. I invented synergy
I don't quite understand why we're talking about chipsets since the XM satellites and Sirius satellites will both be floating around for several years. As long as the birds are up, there won't be a single system, rather more expensive radios that contain BOTH sets of chips. But really, $10 isn't the barriar to selling radios. Half the time we're GIVEN radios for free, and at worst, there are several models less than half the price of a midrange iPod. The barriar is the monthly rate, so cheaper packages, as promised, will be the real improvement: not chips.
And I hope they buy just as much advertising after merging, but demand better rates since the account will be twice the size. Keep the service on the market's mind!
Martin
What you losers don't understand is that the Orbitcast interview is really all about StackPointer.
I wish to thank Gary Parsons and Ryan for giving my hero, StackPointer, a platform to shine his brilliance to the idiots running the satellite radio world and all the analysts of Wall Street.....
How about you stop comparing Oprah With Howard Stern there Parsons. You have Opie & Anthony. Them vs. Stern would at least be a valid comparison. I'm really starting to think Xm's management is just stupid. I'm not trying to start a flame war here, I like O&A because I have my own thoughts and I find them useful for making decisions on what I like and don't like. I'm just sick of the idiots mentioning Howard and Oprah as the big gets. How about Sirius has Stern and Bubbles, Xm has O&A and Ron & Fez. Thanks in advance for listening and following my advice.
You all don't get it. O and A are small time compared to Stern. You are in your own little world, in your own feud. The two cannot be compared. Stern has been compared to "Oprah for men".
Get over yourself already and stop comparing the two. No one else does!!
You all don't get it. O and A are small time compared to Stern. You are in your own little world, in your own feud. The two cannot be compared. Stern has been compared to "Oprah for men".
Get over yourself already and stop comparing the two. No one else does!!
Father Matt why the stutter? Uncle leave a bad taste in your mouth? Or do your friends call you "shaker" ? Of course you are 100% correct though, sir. Oprah does 30 minutes a week on XM, Stern does 30 minutes a week on Sirius. Although I think Stern gets more vacation time per year. But then you do get "Master Tape Theater" which is good. Thank you for correcting me.
Enjoy your "Oprah for men" you fucking faggot. At least Oprah's still relevant.
Thanks for derailing the entire thread about economics and merger into a pissing match between fucking O&A fans and Stern fans. The two camps exist on this planet - get fucking over it. Can't you shitheads find anything else to whine about? Christ - you'd think that all life on the planet was at stake over who is fucking better - Stern or O&A? Oh my god, someone mentioned O&A - I'd better do them one better by bashing them. Stern? Hoo hoo comments - yeah, that'll teach 'em.
Stick to the fucking topic you whiny babies.
Parsons: "if you just make that reduction, that's $100 million dollars of annual savings."
Reduction? What??? They're getting rid of Howard?!?!?!
Oh...never mind.
Mike P said: "I'm not trying to start a flame war here"
But you just did, congratulations for wrecking the thread. *insert car crash sound here*
Come on now folks.
There's much more to XM and Sirius than Opie and Anthony and Howard Stern. Face it, there are other channels on these services. Have you ever bothered to grab your remotes and tune around to the different channels? A constant stream of O&A and Howard is very hazzardous to your state of mental health. Switch around once in a while for Christssakes!We can't even have an intelligent discussion without this going on. As for the interview...very nice job! At this point I'm not even worried about any of the details until I hear the big announcement and then I'll know the facts. Unlike others I don't speculate and go off just based on what I think will happen. I'll be watching this site, and I'll be skipping the O&A VS. Howard pissing contests. They serve no other purpose than for people to argue about which one is better and you can do that til the end of time. People's opinions were already made a really long-ass time ago. Let it go.