Sirius -- XM Radio -- Why Won't Anyone Simply Tell the Truth

The FCC has had the proposed merger between Sirius Satellite Radio and XM Radio under consideration for almost a year. As in the most major regulatory proceedings, parties and economists have filed numerous lengthy papers, and all parties have beaten the bushes for support from Congressman, trade associations, and local governments. Yet the proceeding is somewhat unusual in that the major arguments of both sides are based upon totally false premises. Rather than admit they are failing businesses, Sirius and XM have been forced to argue that they will provide superior service as a consolidated entity. Since this argument is of dubious validity, they have fallen back on a promise to provide a broader range of prices for consumers by breaking up each supplier's current single monthly price structure into various levels so that consumers could choose packages that would include fewer channels than they have now.

The arguments of the opponents, led by the National Association of Broadcasters, appear equally specious. In order to defeat the merger, they have to argue that there is a separate satellite radio product market in which Sirius and XM would obtain a monopoly. If this were true, there is no reason for NAB to even be in the case, since its members supposedly do not compete with the satellite broadcasters. Of course, this is not the case, and the market includes satellite radio, local broadcasters, iPods and Internet.

While the satellite radio providers may not meet the definition of "failing business" under the antitrust laws, it is clear that they are failing. The business model on which they were based in the mid-90s has been blown to smithereens by the iPod, and the availability of free local radio has restricted their ability to price their services to achieve a profit. If people want to listen to unlimited music, they can simply plug their iPod into the radio unit on their dashboard or in their home. The potential for satellite radio outside the automobile has been destroyed by the growth of the Internet, which has made hundreds of radio stations from all over the world available to individuals in their homes. As a consequence, the potential for satellite radio has fallen far short of initial expectations.

Both Sirius and XM have suffered enormous losses over the past several years:

Net Loss

($ millions)

Sirius XM

2004 $712 $615

2005 862 666

2006 1,104 719

In the first nine months of 2007, Sirius improved to a loss of only $399 million, while XM lost only $298 million in the first six months of its fiscal year. Sirius's accumulated deficit over its lifetime is $4.23 billion.

Why haven't they made the "failing business" argument? It may be that they don't technically comply with the antitrust definition, because they may have to show that they make good faith efforts to find other purchasers. More likely, they do not want to admit defeat because that would make it extremely difficult to raise enough money to limp along in business.

The product market arguments in opposition to the merger are equally specious. The applicant's argument was as follows:

As of December 31, 2006, XM and Sirius combined had approximately 14 million subscribers. One study predicts this will grow to 25 million by the beginning of 2010, and others have projected similar growth. Although satellite radio has proven to be an appealing and popular new product, the current 14 million subscribers pales in comparison to terrestrial radio’s approximately 230 million weekly listeners (and is also dwarfed by Internet radio’s 72 million monthly listeners). Both companies offer many channels of music and a range of other programming, including national and international news, sporting events, and talk shows. Both also offer consumers a variety of ways to access this programming, including in their cars, on their computers, at home, and in a portable capacity. Despite strong initial growth, satellite radio’s market penetration remains quite limited: A recent Arbitron study found that satellite radio accounted for just 3.4 percent of all radio listening, spread out among the approximately 300 channels that XM and Sirius combined currently offer. (Sirius -- XM Application, pages 22-23)

In response, the NAB said:

As the American Antitrust Institute has explained, terrestrial radio is not a substitute for satellite DARS. As a preliminary matter, it is important to recognize that terrestrial radio is not a single entity in the local markets in which each radio broadcaster competes. Rather, each local market consists of multiple terrestrial radio licensees competing vigorously with each other. With respect to channels and content, local broadcast stations (individually or collectively) cannot offer the hundreds of channels offered by satellite DARS providers. Nor can they provide geographically continuous service; each licensee serves a limited geographic area and there is no local radio owner with nationwide coverage. They also do not offer the range of out-of-town sports programming or niche programming offered by satellite DARS, and cannot offer the kind of risqué programming offered by satellite DARS, which is unconstrained by indecency regulation.

Moreover, it is significant that terrestrial radio is a free, rather than subscription, service. If satellite DARS and terrestrial radio were substitutable products, it would defy common sense for anyone to pay $12.95 or any other price if they could get an essentially equivalent product for free. Satellite radio subscribers may also listen to terrestrial radio but that is because it is always there for free as another, different or complementary listening option, not because the subscriber is “switching” from one substitutable service to another. As Sirius CEO Mel Karmazin has pointed out, “satellite radio subscribers are heavy listeners to radio in general, and spend even more time listening to AM/FM radio than they do satellite programming.” (NAB Motion to Deny, pages 13 – 14)

One can only say that the NAB argument is pretty weak. I know from my own experience as a Sirius subscriber that I listen to both satellite and terrestrial radio when driving around in my car. I listen to Sirius classical and country music stations, but switch to AM radio for talk radio programs, and to FM for a particular country music station that I like. Certainly, both satellite and terrestrial radio compete for my patronage. NAB is really arguing that satellite has different types of programs. However, the product -- radio -- is still the same. NAB seems to be arguing that, in order to be competitive, each local radio station would have to offer multiple channels. There is no basis for such a claim -- there can be dozens of radio stations in an area that, together, and offer a wide variety of radio programming.

In addition, free terrestrial radio would seem to be a pricing constraint upon satellite radio. Both satellite companies provide service that is worth $12.95 per month, but neither has been able to raise the price. Since both are losing such large amounts of money, you would think that they would be raising their prices in lockstep. Instead, both have stuck with $12.95 for at least a couple of years. If they raise that price much higher, they would probably lose customers who would cancel contracts and go back to terrestrial radio.

It will be interesting to see how FCC disposes of this case. It would be a much simpler proceeding if Sirius and XM would simply admit their financial difficulties.

[note: since this is my first substantive post,it is clear that I need to do more about font sizes and columns. I can only say that this is a learning process and offer my apologies.]