The controversial merger between US radio broadcasters Sirius Satellite Radio and XM Satellite Radio finally concluded last month after a protracted series of negotiations between the two parties and US authorities. John Parnell analyses the deal and takes a look at the commercial potential of satellite radio services in the Middle East.
The ongoing controversy surrounding merger talks between US satellite radio giants XM and Sirius can mainly be attributed to US Government objections to the deal, first through the justice department and latterly through the Federal Communications Commission (FCC).
The merger deal was first touted in January 2005 with denials issued soon after by both parties. The conclusion of the process was signalled last month with XM announcing subscriber numbers, a move which was thought to be a pre-cursor to financial re-structuring that would follow the deal's approval. And then, finally, the last ballot was cast in favour of the deal, with the panel previously tied at 2-2.
The merger has come at some cost to both parties, with the FCC insisting on payment of around US$19.7 million in fines over the positioning of ground-based signal repeaters.
The partners have also been required to offer a lower cost subscription package and to develop more non-commercial public service stations to cater to ethnic minorities.
The backbone of the burgeoning US satellite radio sector is the automotive market with a range of major manufacturers including receivers in their models.
The potential for subscribers in emerging markets in the Middle East, Africa and India is huge. The nature of the satellite signal allows wide coverage across large but sparsely populated areas. In this sense, the Middle East represents a gold mine of potential.
Worldspace Middle East currently offers 50 channels across the Middle East and Africa in 12 different languages including Arabic, English and Malayalam.
The offering is part of the recently rebranded 1Worldspace service that boasts coverage across the Far East, the Indian sub-continent, Eastern Africa and the Middle East. While the company is presently working on a European service, the emerging markets remain its core focus.
"We have a number of reputed international news channels, a wide range of genre-based, commercial-free music stations covering almost every genre and appealing to Arabic, Western and Asian listeners," says Mathewkutty Sebastian, managing director of Worldspace's India and Middle East division.
"Considering the current demographics and the demand from expatriates for a familiar station from home, we are confident that the Middle East [will prove] a very good market for satellite radio services."
The company currently operates a network of uplinks in Singapore, Dubai, Johannesburg and Toulouse amongst others.
A recent cash flow problem was averted following a series of agreements with creditors and the company is now looking to establish its service in Europe as well as building on its presence in the Middle East.
Sebastian is also adamant that satellite remains the best medium for the development of extended choice and coverage of digital radio services in the region.
"There have been several initiatives such as Eureka 147 DAB systems and Digital Radio Mondiale (DRM) technology before the arrival of satellite radio," he argues.
"Entry costs, content and even technological challenges limited the growth of the subscriber base of these, which in turn has affected the revenues and thereby the feasibility of the business model."
Satellite radio is not without its issues, however. The initial cost of satellite transponder space plus the terrestrial repeater stations is not insignificant.
There are also potential issues relating to the fact terrestrial and satellite radio services typically operate under different frameworks.
"There are tremendous opportunities in developing markets for satellite radio services," argues Sebastian.
"However, challenges lie in securing regulatory approvals, developing the best products that match up with consumer price-value perceptions, as well as developing unique content that is rich and compelling."
Issues of price could prove a deal breaker as could the security issues relating to encrypted signals.
Sebastian says Worldspace is using its own proprietary encryption and subscription management systems and he is also confident that the piracy challenge will not reach the same extent as that seen in the Middle East.
The other challenge will be persuading consumers to make the initial outlay for a receiver on top of the subscription fees.
"I expect the price of receivers to come down as the volumes increase. The resistance to price will also come down as more and more customers see the value in what we offer," he says, adding that in the future, he expects receivers to not only become cheaper but to also be integrated with other devices and eventually, once the manufacturing cost has decreased sufficiently, be offered free with every new subscription.
Worldspace claims to offer coverage to a population catch of five billion and 300 million cars globally.
It is the second of these figures which will prove crucial to the company's success in the emerging markets, just as it is for Sirius and XM in the States.
Sebastian suggests that one important differentiator for emerging markets in order to encourage consumers to purchase a receiver could be the development of a portable unit that can be used as both an in car receiver and also transferrable into the home.
This would remove the need for subscribers to purchase two different pieces of hardware in order to access channels in both locations.
Regardless of any price cuts to hardware, questions still remain regarding the willingness of consumers in the region to sign up to a regular monthly subscription.
Regardless of Sebastian's claim that satellite radio will not suffer the same challenges as the region's pay TV operators, service providers could do well to take note of the trend towards ad-supported free content in the media content delivery sector.
The evidence suggests that the region-specific nature of satellite service delivery could prove popular with advertisers.
A recent Arab Advisors Group report found that advertising rates among pan-Arab FM stations were far higher than their local FM counterparts. The survey suggests that as pan-Arab stations are broadcast in Saudi Arabia - one of the region's largest consumer markets - and one where competition from local FM stations is limited, those with the broadest footprint reap the greatest share of ad revenues.
The challenge for Worldspace is to identify the plausibility of the subscription model in the long term and if necessary, implement an ad-funded distribution model.
Time is of the essence: if this process proves all too time-consuming, satellite radio in the Middle East could go the same way as many other digital radio formats.
The Middle East advertising market may be growing across all mediums however the global averages for radio ad revenues continue to diminish. The following figures show the change in ad revenues over the first six months of 2008 compared to the same period last year.
SOURCE: Radio Advertising Bureau, research by Miller Kaplan Arase & Co accounting.