• by Erik Sass  @eriksass1, September 10, 2007

Analysts with major Wall Street investment advisors have issued contradictory forecasts on the likelihood of the proposed XM-Sirius merger being allowed to proceed. While the forecasts are at odds, one thing is clear: the merger is far from a done deal.

First up, the positive prediction: in a note to clients last Thursday, David Bank and Ryan Wineyard of RBC Capital Markets gave the merger more than a 50% chance of success. They wrote that these odds applied to both the upcoming Department of Justice ruling--which is expected in the next two months--and the FCC decision, expected sometime before the end of the year.

According to the RBC analysts, the most important issue remains "market definition, which we continue to believe should be broadly defined." Here, they referred to conflicting definitions of the competitive arena where satellite broadcasters operate. If their market is defined as just satellite radio, it's more likely that regulators would say the merger constitutes a monopoly--and refuse to allow it. If the market definition is widened to include MP3 players, streaming radio on the Internet, and HD terrestrial radio, as Sirius CEO Mel Karmazin argues, then satellite radio becomes a small player in a much larger market--and the merger would probably be allowed to proceed.

Karmazin's argument for a "big market" definition got a boost last week from a seemingly unrelated legal ruling allowing Whole Foods to acquire Wild Oats Markets, a smaller competitor. A federal judge dismissed the FTC's attempt to block the acquisition, citing its too-narrow definition of the market where the deal is supposed to take place. Essentially, the judge ruled that their merger would not constitute a monopolistic action in the larger context of the supermarket and grocery store industry. The FTC had argued that the relevant market definition was in fact a subset of that industry: the "premium and natural organic food markets."

RBC's positive outlook wasn't shared by Bank of America analyst Jonathan Jacoby, who has lowered the odds of the merger succeeding to 30%. In his note to investors, Jacoby said he believed that Sirius and XM's legal filing in favor of reversing the decade-old regulatory statute preventing them from merging were weak and unconvincing.

Ultimately, these arguments hinge on the market definition issue described above. And while the satcasters may find general support in legal precedents like the Whole Foods ruling, they must still present a convincing argument concerning the competitive landscape in their specific industry. Jacoby said his contacts in Washington, D.C. believed they failed to do so; instead their argument merely pointed out that the FCC has the power to reverse provisions like the anti-merger clause, and repeated their assertion that "satellite radio is a small part of a broad and competitive market for audio entertainment."

The filing makes several attempts to ward off fierce opposition from the National Association of Broadcasters, which represents terrestrial radio and argues for the "small market" definition. But in trying to dismiss the NAB's arguments about pricing and market dynamics, XM and Sirius seemed to concede the issue remained unresolved, citing NAB's failure to respond to "expert opinion" marshaled by the two companies.