A throw-away, obligatory question from The Deal's Richard Morgan at the Convergence 2.0 conference back in June to Mel Karmazin led to widespread speculation and a temporary uptick for both Sirius and rival XM's share prices. Karmazin played the devil's advocate when asked if Sirius would do a deal with XM, the press took him seriously, and continues to do so.

SmartMoney magazine has an interview with Karmazin in its December issue, and a big focus of the interview was a possible merger with XM. Karmazin didn't deny the rumors, only stating that he couldn't speak about any negotiations. Does this mean negotiations actually are taking place? It could, but I don't think it's a good idea. Both XM and Sirius launched with huge holes to dig out of. Neither company has turned a profit yet, and the cost of subscriber acquisition is still upwards of $100 per subscriber. Karmazin's outlook on the company continues to be positive, "By 2010 we will have $3 billion in revenue and $1 billion in free cash flow." Of course, being the single largest shareholder in Sirius gives him a big reason to remain positive.

The positive outlook for Sirius, as it continues to gain marketshare on XM, is the very reason that a deal does not make sense at this point. The cost of integrating the companies' disparate technologies would dig that hole much deeper, and it would increase the number of years it would take to dig out of it. Karmazin doesn't shut down the rumors because they're healthy for his company's stock price, but in the long run he sees his company surpassing XM and becoming the No. 1 satellite radio company. (This may happen sooner rather than later with Sirius stealing the Nascar deal from XM in 2007).

If anyone should be hoping for a merger, it's XM, whose lead in the sector continues to shrink quarter after quarter while it has to adjust its forecast. — Brian Ward

Go to story from SmartMoney

Technorati tags: satellite radio, sirius, xm.