By Scott Moritz

Clearing the way to merger approval, XM and Sirius agreed to pay a $19 million fine for violating radio transmission rules.

The move is aimed to end a 2006 inquiry by the Federal Communications Commission into radios that broadcast some signals in adjacent FM radio waves. The FCC stepped in when satellite radio transmissions interfered with conventional radio channels.

The two companies agreed to pay the fine - XM will pay $17 million and Sirius will hand over $2 million – and correct their radio and broadcast transmission problems.

The settlement is expected to pave the way for a 3-2 FCC approval. As the review entered its 18th month, it became clear that the agency was split along political party lines. The swing vote on the deal is Commissioner Deborah Tate, a Republican appointee, who is reportedly close to filing her vote in favor of the deal.

The two FCC Democrats, Jonathan Adelstein and Michael Copps, oppose the combination. Copps Monday gave an unconditional no vote on the deal and on Wednesday, Adelstein voted no after he made no progress getting the companies to agree to conditions like a six-year service price freeze and mandatory public access to a quarter of the combined companies’ airwaves.

Sirius and XM filed for a merger review with regulators in February 2007.  Just over a year later, the Justice Department approved the deal, saying that conventional radio and MP3 players like Apple’s (AAPL) iPods were sufficient competition to keep Sirius from setting high prices.

The FCC was a more difficult hurdle, in part because the agency wrote the original satellite radio charter, which specified that the two radio wave licenses should be in separate hands to foster competition.

In an effort to ease the concerns that the satellite duo would use its monopoly status to gouge consumers, the companies proposed new price plans like 50-channel and 100-channel a la carte  offerings that would cost $13 and $15 a month, prices that would stay static for three years. XM and Sirius currently charge $12.95 a month.

The companies also promised to set aside 4%, or 12 channels, for outside access like public service and minority programming.

But as the merger approval process dragged on for nearly a year and a half, the two companies saw growth cool and losses mount. And as new car sales fell, the satellite radio sector suffered as well. Investors worried about the perpetual need for new financing and the prospects of recapitalization pushed the stocks down. XM shares are down 23% from the pre-merger announcement level and Sirius has dropped 37% in the same period.

Looking ahead, if the companies manage to bring their operations together and find new sources of cash, the new entity will likely take aim at lowering high-priced programming deals like the five-year $500 million contract with Howard Stern, which expires in 2010.

By Scott Moritz

In what would be a 3-2 vote split along political party lines, the Federal Communications Commission has finally gotten close to approving the merger between Sirius (SIRI) and rival XM (XMSR).

The swing vote on the deal is Commissioner Deborah Tate, a Republican appointee. Both Reuters and The Wall Street Journal say she is close to filing her vote in favor of the deal.

The two Democrats on the five member commission – Jonathan Adelstein and Michael Copps - have voted no on the combination. Copps Monday gave an unconditional no vote on the deal, and earlier today, Adelstein voted no after he made no progress getting the companies to agree to conditions like a six-year service price freeze and mandatory public access to a quarter of the combined companies’ airwaves.

The FCC approval will include a $19 million settlement related to enforcement issues. The fine involves an FCC inquiry into radio violations. XM was forced to pull some radios off the market because the signal transmission crossed over into the airwaves of conventional radio channels.

Sirius and XM filed for a merger review with regulators in February 2007.  Just over a year later, the Justice Department approved the deal, saying that conventional radio and MP3 players like Apple’s (AAPL) iPods were sufficient competition to keep Sirius from setting high prices.

The FCC was a more difficult hurdle, in part because the agency wrote the original satellite radio charter, which specified that the two radio wave licenses should be in separate hands to foster competition.

In an effort to ease the concerns that the satellite duo would use its monopoly status to gouge consumers, the companies proposed new price plans like 50-channel and 100-channel a la carteofferings that would cost $13 and $15 a month, prices that would stay static for three years. XM and Sirius currently charge $12.95 a month.

The companies also promised to set aside 4%, or 12 channels, for outside access like public service and minority programming.

But as the merger approval process dragged on for nearly a year and a half, the two companies saw growth cool and losses mount. And as new car sales fell, the satellite radio sector suffered as well. Investors worried about the perpetual need for new financing and the prospects of recapitalization pushed the stocks down. XM shares are down 23% from the pre-merger announcement level and Sirius has dropped 37% in the same period.

Looking ahead, if the companies manage to bring their operations together and find new sources of cash, the new entity will likely take aim at lowering high-priced programming deals like the five-year $500 million contract with Howard Stern, which expires in 2010.

It amazes me that people still buy music. Though I love it above all other forms of entertainment, I’ve not bought a single CD, nor iTunes tune, for the past 18 months. Instead, I rent music from the streaming music site Rhapsody, and play it over my wireless Sonos network at home. It costs me $10.99 a month. That’s the annual pre-pay; it’s $12.99 a month if you pay as you go, and $14.99 if you also want to download anything you want to virtually any portable MP3 player except the iPod. For that fee, you get access to most of the world’s great music—Rhapsody is vague on the numbers, though it was 2.5 million songs the last time they advertised it on their home page. My colleague at Fortune, David Kirkpatrick, smartly refers to this setup—Sonos hardare + Rhapsody subscription service—as “music dial tone.” I can’t imagine life without it. In fact, take my real dial tone and cable TV service. You can have my Sonos remote control if you pry it from my cold dead fingers.

That said, both the Sonos system and Rhapsody aren’t perfect. But today, the Santa Monica Barbara, California-based Sonos unveiled a number of improvements that moved them much closer to the Platonic ideal. I wish the same could be said for Rhapsody.

Let’s discuss the Sonos upgrades first – a new hardware “bridge” and a number of software improvements – which I’ve been beta testing for the past month or so.

The Sonos Digital Music System is comprised of “ZonePlayers”—white, plastic boxes that are somewhat smaller than a shoe box, and that attach to your rack stereo (in the case of the $349 ZonePlayer 80) or directly to a set of speakers (via the amplified $499 ZonePlayer 100). A lovely $399 remote control, with a decent-sized screen for album art and other info, controls the set up. If you were Bill Gates and could afford it, you could put ZonePlayers in 32 rooms and stream separate songs to each. At least, that’s the company’s claim; I have had Sonos in three rooms and it works wonderfully as advertised.

The system suffered from two problems, however. The first has to do with connectivity. The ZonePlayers communicate to each other, and to Rhapsody, via an on-board Wi-Fi network. That was a problem for people like me, who have a lot of stone in their walls and other enemies of Wi-Fi in their homes. I had my own Airport Extreme network setup, with an Express to reach my daughter’s room, but that did me no good with the Sonos System. Its own network couldn’t reach that far. Now, thanks to the new, $99 ZoneBridge, I get five bars of signal in her room. (A double benefit since I can also use the Sonos alarm to wake her up every morning with her favorite music, or, if need be, an extremely obnoxious special effects recording I found on Rhapsody of fireworks exploding.)

Setup of the bridge was so easy, it’s not worth wasting words on. Like everything else in the Sonos pantheon, you simply turn it on, point your remote at it, and follow the prompts under System setup.

The other improvement the company made was to its software, with its 2.5 release. Finding songs or artists was always a bit of a chore, particularly via Rhapsody. Until now, you searched for music by genre first, then alphabetically by the first name of the artist. You could not search for a song, artist or album, by name, which was a real pain. Now you can: a “search” option has been added to the menu, which calls up a search blank. Unfortunately, the screen on the $399 remote isn’t touch sensitive, so you have to hunt and peck the alphabet via a scroll wheel – not ideal, but so much better than nothing. (Note to Sonos engineers: Please put the space bar, which one uses a lot, either on the middle button or one of the hard buttons alongside the hard “search” button.)

The software adds a number of other minor features, including text scrolling on the remote control for long song/artist/album names. You can read about it here.

Finally, Sonos added access to Napster (NAPS) to its line up of subscription services, which, besides Rhapsody, includes Sirius Satellite Radio and Pandora. This will give Napster, which has a 5-million-song library, a badly needed shot in the arm. Its service, at $10 a month, is also cheaper than Rhapsody’s.

Rhapsody definitely needs competition. That service has room for loads of improvement. One of the supposed benefits of a Rhapsody account is you can also stream music to your PC – which was a draw for me while in my office, and away from home. But the service is hardly usable via computer. The streams frequently drop out, causing my browser to crash. Maddenly, when I tried to reconnect, I’d get hung up while Rhapsody’s browser-based player tried to authorize my account. That could take 20 minutes or more.

Unfortunately, Rhapsody has some of the worst customer support I’ve ever encountered. They’re very polite and attentive. But they don’t speak English that well, which makes it very hard to communicate, especially at a time when you’re already in a bad mood. Worse, they can’t seem to fix the problem. (Though after an hour on the phone with a variety of folks yesterday, one of them suggested hitting Safari’s “reset” button after crashing. At least that lets me connect to Rhapsody faster after crashing.)

The good news is that Rhapsody over Sonos doesn’t often suffer from the same issues. An engineer there told me that’s because Sonos creates a big buffer while connected to Rhapsody, and can automatically renegotiate a dropped stream, without the listener even noticing.

I don’t know if Napster suffers from the same problems. Yet. I’ll let you know if I find a better alternative.