Satellite Radio Merger - Too Much Monopoly in a Nascent Industry
Satellite radio is literally a few years old, and yet XM and Sirius are planning a merger. Why? Because although they have 14 million subscribers between them, according to the New York Times, neither has yet turned a profit in the roughly six years they've been operating.
Well, duh. Even a new magazine can take a few years to hit profitability, and that's in an established market. This is an attempt to create not just a new venture but a new medium and industry. How long did cable television thrash about before becoming a profit powerhouse? Here's a bit of history to remind us. From its invention in 1948, cable TV had 14,000 subscribers by 1952. Ten years later and the number of subscribers was up to 850,000. Anyone want to hazard a guess as to how long they operated in the red?
Now we go from duh to dumb. To get enough cash in to invest, the satellite radio companies went public. That's understandable. But now investor feet get chilly and corporate managers, desperate for an answer to make shareholders happy and keep their jobs, start screaming economies of scale and elimination of duplicated resources. That is ridiculous. No one creates a new industry with only one company, and while satellite radio has a good start, it's not established yet. There has to be competition to make the companies try harder and, just as importantly, to create the perception of industry viability among consumers, investors, and potential business partners.
In the face of all academic studies and practical examples to the contrary, why do managers insist on the shopworn strategy of consolidation? A monopoly will not reduce the risk of all. Instead, given how many mergers completely fail to deliver the benefits they promise, this move will only increase risk. Better investors suck it up for now and realize that putting money into something new means recognizing that it's going to take time to pay off. Or should people have closed down an Amazon.com, let along a Federal Express, because they ran in the red for so many years?
Well, duh. Even a new magazine can take a few years to hit profitability, and that's in an established market. This is an attempt to create not just a new venture but a new medium and industry. How long did cable television thrash about before becoming a profit powerhouse? Here's a bit of history to remind us. From its invention in 1948, cable TV had 14,000 subscribers by 1952. Ten years later and the number of subscribers was up to 850,000. Anyone want to hazard a guess as to how long they operated in the red?
Now we go from duh to dumb. To get enough cash in to invest, the satellite radio companies went public. That's understandable. But now investor feet get chilly and corporate managers, desperate for an answer to make shareholders happy and keep their jobs, start screaming economies of scale and elimination of duplicated resources. That is ridiculous. No one creates a new industry with only one company, and while satellite radio has a good start, it's not established yet. There has to be competition to make the companies try harder and, just as importantly, to create the perception of industry viability among consumers, investors, and potential business partners.
In the face of all academic studies and practical examples to the contrary, why do managers insist on the shopworn strategy of consolidation? A monopoly will not reduce the risk of all. Instead, given how many mergers completely fail to deliver the benefits they promise, this move will only increase risk. Better investors suck it up for now and realize that putting money into something new means recognizing that it's going to take time to pay off. Or should people have closed down an Amazon.com, let along a Federal Express, because they ran in the red for so many years?
Permalink posted by Erik Sherman at 9:40 AM
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