Orbitcast Interview with Sirius XM CEO Mel Karmazin (Part 1)

When Mel Karmazin came on board as CEO of Sirius Satellite Radio Inc. in November 2004, the company had about 700,000 subscribers. Today, after a grueling 18 month merger process and relentless opposition from broadcasters, Karmazin finally finds himself heading a newly minted Sirius XM Radio Inc.

I recently had the opportunity to interview Karmazin, who just this past Sunday celebrated his 65th birthday. It was nearly a year ago when I last interviewed Mel, and so this was a fitting follow up to what has been one of the longest mergers in history.

Orbitcast: This is arguably the hardest merger you've done to date. So, how does it feel?

Mel Karmazin: Well, it feels good. But I tell you, it was a long process as you know. We had months of political involvement, four congressional hearings. We had the NAB, we had John Kerry, we had State Attorney Generals, we had heavy influence from a lot of places.

I said this before, but the fact that these broadcasters were so against the deal really proved our case. They weren't opposing the ExxonMobile merger right? Because they didn't compete with them, so they don't care. But if we were really "a monopoly" and Sirius and XM only competed against each other like they were trying to say, then they wouldn't have cared? Any regulator who saw this really understood it.

 But I never thought it would take this long, but in the end, the government found that we were right. And that feels good.

Orbitcast: Now regarding that political involvement - you had the NAB, you had front groups like C3SR, but then there other opponents like Georgetown Partners and iBiquity that weren't necessarily trying to scuttle the deal, per se, but trying to get a piece of the action.

Were there any particular instances in the process where you were afraid you would need to walk away if the FCC agreed to these conditions?

Mel Karmazin: Well, it's interesting about Jesse Jackson. I dealt with him and Chester Davenport before with Viacom. They approached me back at Viacom and asked me to sell UPN to a minority owner. I don't really know why UPN had to be sold to a minority owner, right? But they told me that UPN, which I think is now the CW, needed to be sold for minority ownership. And I didn't agree to it then, and I wasn't going to agree to it now. It just didn't make any sense.

I never understood how the removal of all these channels to accommodate 20% spectrum wasn't going to benefit anyone. There just was no way that the FCC would buy into it.

Orbitcast: Except for Adelstein.

Mel Karmazin: Well, (laughs), right. But it was a hard time justifying the elimination of all these channels from current subscribers for these demands.

Now with iBiquity, HD Radio inclusion was a different matter. They wanted to require that all auto manufacturers would need to add this extra equipment. But that's going to increase the cost for the automakers. And the only way the automakers could recoup that cost is by passing it on to customers. And that's not in the public interest.

Orbitcast: Well, I think the Toyota and GM made a pretty strong case against that.

Mel Karmazin: Right, and so you had iBiquity and Clear Channel making these demands that were quite clearly not in the public interest, but the deal that we agreed on quite clearly was in the public interest, and that's ultimately why it was approved.

Orbitcast: Speaking of Clear Channel, that brings up an important point. A lot of folks made the jump to satellite radio because of all the acquisitions and the eventual homogenization of terrestrial radio - led largly by Clear Channel. Formats were killed and playlists got shorter, all in the name of efficiency.

Today a lot of people are afraid that with the Sirius-XM merger, the same thing will happen to Satellite Radio. People are afraid that Satellite Radio will essentially become FM radio without the commercials. Can you speak to those concerns?

Mel Karmazin: Sure. The difference is that these are two completely different business models. Terrestrial radio depends on advertising and advertising alone. For us, advertising makes up around 4% of our revenue. Now, I'd like it to be more, but even if it grows, advertising won't be our main driver of revenue. It never will be.

Our revenue comes from the subscribers. We can't go cutting down playlists and voicetracking, and using these tactics that terrestrial does, because we'll lose the subscribers. We have a different way of doing business.

I get a lot of complaints from people. I never seem to get the good emails though. Only the bad ones (laughs), the good ones must go off somewhere else. I get these emails from people who say "why do you keep repeating the same songs?" You know, the hits. Some people don't always want to hear the hits. But then I see emails from people who say we don't play enough of the hits. They get in their car and they want to hear something familiar on the way to work. So you can't keep repeating the same songs over and over again, that's what an iPod is for see? The tough part is finding that place in the middle. You can't always please everyone. If we removed a channel in the name of efficiency, and we lost subscribers and increased churn, then it wouldn't be very smart now would it?

The thing to remember is that we're not trying to drive advertising through the music. We're trying to bring the best in audio entertainment to market. Any bad move that we do would mean a loss in subscribers, and we don't want to make that kind of move.

Let's take the 80s channel right? We have an 80s channel, and XM has an 80s channel. They're both popular, right? But we have the MTV personalities on ours and XM doesn't. The nice thing is we can take a look at both channels and see what works and if those personalities work or not. We could have two 80s channels, but then people would complain "why do you have so many 80s channels?" And that's not really very smart.

There's obvious areas of duplication, but we don't gain much from cutting down the channels that people like. The idea is to take a look at what parts people like from the Sirius side, and what parts work from XM's side, and then put them together. If you look at it from an advertising view, the advertisers want to reach as many people as possible right? So the benefits in selling advertising from this merger isn't about making things more automated and removing choices from people, but about opening up the content to both subscriber bases.

Orbitcast: So it's not about removing options, it's about opening them up.

Mel Karmazin: Right. Ultimately we want to make sure the subscribers are happy and that we're providing the best content out there.