The XM-Sirius Merger: Harmony, or Merger to Monopoly?

Posted in The Gnovis Blog

The proposed consolidation of XM Satellite Radio Holdings and Sirius Radio, is one media mashup that’s certainly gotten a lot of play.

As the Department of Justice (DOJ) antitrust investigation wears on to record breaking lengths (new window), predictions on the verdict continue to circulate. One of the resulting quesions is whether regulatory agencies can make old arguments fit new problems in the rapidly changing Telecommunications media market?

Section 7 of the Clayton Antitrust Act (new window) renders illegal any deal through which the effect “may be substantially to lessen competition or to create a monopoly.”

Final decision on the proposed XM-Sirius merger hinges on defining the relevant market. In the most straightforward and narrow understanding of competition, one would limit the market to fully substitutable products. Proponents of this view note that satellite radio is a unique product that is only available through either XM or Sirius. Under this rubric, no other true competitor exists. This is the standard that has been used by antitrust regulators as established in the 1968 DOJ/FTC Merger Guidelines (new window).

According to this view, uniting XM and Sirius will establish a bona fide monopoly in satellite radio broadcasting, causing undue concentration of market power, which will lead to anti-competitive practices on the part of the merged entity. This view is held by many industry officials including (rather dubiously (new window)), the National Association of Broadcasters (NAB) as well as the FCC. Mind you, the NAB adopts the exact opposite stance (new window) when arguing for consolidation in the terrestrial radio industry.

But the question of whether Satellite Digital Audio Radio Services
(SDARS) and terrestrial radio face significant competition from alternative entertainment
media is a salient issue. Rapid evolution of Telecommunications
devices, services and other technologies are broadening the array of
available entertainment media formats. Fragmentation of a finite
audience is a widely expressed concern among purveyors of media.

Mel Karmazin
, CEO of Sirius, and other proponents of the merger, emphasize that DOJ must consider the range of consumer options for audio entertainment, like iPods, internet radio, wireless streaming technologies, and of course, terrestrial radio. Using a more inclusive standard attempts to acknowledge the real market effects of audiences splintering due to the increasing array of entertainment media technologies, which pull audience members from a limited pool of captive consumers.

A similar case that is often cited in comparison to XM-Sirius is the merger attempted (new window) in 2001 by satellite television providers, EchoStar and Hughes Electronics/DirecTV.
DOJ rejected this merger based on its definition of the relevant market, establishing that the
only competition “that mattered” was the direct, head to head actions
of EchoStar and DirecTV. In addition, consumers in rural areas access television broadcast services exclusive through satellite, and consoliating the two companies would leave them with only one option.

Excluding free, over the air broadcasting from the market analysis in EchoStar-DirecTC mirrors current arguments against the substitutability of satellite and terrestrial radio.

Generally speaking, it is believed that the burden to prevent monopoly falls on antitrust regulators in order to avoid lengthy and costly investigations afterwards. Attempts to regulate behavior perceived as anti-competitive are difficult to accomplish and not likely to be effective. So it follows that FCC/DOJ would be very unwilling to approve the creation of unchecked monopoly power.

The Merger Guidelines include a rule of thumb based on pricing that establishes true competition, that if price is increased by “a small
but significant and nontransitory amount” the consumer would choose to
switch products. According to this argument , collapsing what they see as the satellite radio duopoly into one entity, would now allow its price to be constrained. By this account,
indirect competition from free over-the-air radio or alternative media
technologies would not serve the same limiting purpose.

But is that necessarily true? According to merger proponents, since terrestrial radio is free, the price of satellite radio would have to remain low. On the other hand, the rule may not acknowledge the price elasticity of pay services. The price of satellite radio is perceived as so low, that a higher price might be required for the consumer to opt for a another form of audio entertainment.

In either case, the “small, but significant” price guideline may fail to acknowledge the inherent differences in a media market that has changed drastically since antitrust merger guidelines were established, and since 1997 when they were last revised.

Portable music players existed when satellite radio was established in the form of CD and cassette players. They were not considered competitors for satellite radio, for what are probably obvious reasons. CD and cassette players are extremely limiting in terms of volume and variety of music the user is allowed to port. It has been argued by opponents of the merger that no appreciable difference exists between iPods and those earlier players, therefore iPods should not be considered competition for SDARS.

There are certainly reasons to interrogate consolidation of Xm and Sirius. But to dismiss out of hand (new window) that iPods or other media devices compete with satellite radio may be short sighted. These technologies can increasingly provide a similar if not better, and more tailored entertainment experience than broadcast or satellite services, even though modes of delivery and transmission may differ significantly in kind.

As it stands the consumer can readily download podcasts of myriad types of rich content like news, sports, radio programming, pre-recorded playlists curated by trusted online music aficionados. And near live broadcasts can be accessed on broadcaster websites and made available to the consumer in the car to/from work. These capabilities combined are fairly analogous to what satellite radio provides as a whole, showing that arguments against competition from mere “storage devices” begin to breakdown.

It is further undermined by the availability of XM and Sirius content online, their programming overlap with other networks like NPR, and the fact that satellite radio receivers function as mp3 storage devices as well.

Antitrust merger guidelines also address potential forms of competition on the horizon. The guidelines allow for merger if potential anti-competitive effects of c consolidation are offset by entry of new market players that would make anti-competitive practices unprofitable for a merged entity. But entry must be likely and foreseeable within two years.

It is reasonable to conclude that the mixed bag of multimedia technologies designated as alternatives to satellite radio such as iPods, internet radio, mobile phone wireless content streaming and so forth, do not currently pose a significant threat to the market share of XM or Sirius. However, those technologies are likely to develop extensively in the next two years.

One example is the development of Wi-Fi-Max technology, which will provide constant, mobile, high-speed wireless internet connections for vehicles, allowing uninterrupted streaming of rich content while traveling. This would facilitate accessing the vast array of multimedia content on the web, including internet radio.

Technological development often blurs the distinctions between what once seemed like distinct technologies/services that were not in competition. A classic problem (new window) in Telecommunications Law is that regulators don’t truly understand the technologies they are evaluating, in the current state or future potentials. As each multimedia device develops and adds features, many products in seemingly disparate businesses of supplying audio entertainment are converging into slightly varied aggregators of digital media.

The iPhone is just one example, through which users access media formats that overlap with radio, video, and various other products accessed via wireless and wireline services. Given the increased innovation that will come from applications engineered by third parties, it is not hard to imagine the eventual development of an iPhone that would function as a satellite radio receiver, approaching effortless switching between available media formats that will make existing competition between “simple” entertainment media devices and broadcast services more apparent.

Generally speaking, there seems to be a discrepancy between the guidelines used in antitrust merger review, and the realities of the market for entertainment and communications media. This indicates that perhaps a different standard should be implemented that is more nuanced and can account for less significant, but still very real forms of competition.

Given the fast-paced nature of development in this sector, using guidelines from 1997 may not be appropriate. Perhaps the example of vigorous head to head competition long extolled in the canon of economic theory, is stifling innovation in legal theory.

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