February 26, 2008

SEC regulation created ratings monopoly

An excellent editorial in the Wall Street Journal today outlines the problems created by the SEC regulations that sharply restrict the number of ratings organizations. As the WSJ describes the history:

"Since 1975, the Securities and Exchange Commission has limited competition in the market for credit ratings by anointing only certain firms as "Nationally Recognized Statistical Rating Organizations" (NRSROs). A 2006 law has begun to lead to faster approvals of new entrants, but this follows decades of protection for the incumbent firms. The SEC went an entire decade, beginning in 1992, without allowing a single new competitor into the market".

The result is that the two largest ratings agencies, Standard & Poor's and Moody's, are involved in the ratings of well over 90% of corporate bonds. Of course, the price for such services is much higher than it would be if they were broader competition.

The SEC is apparently begun to study regulations that would have a more direct impact on investment policies of financial institutions. Rather than requiring investments in securities receiving certain ratings from the NRSROs, they are creating new descriptions of what they want financial institutions to do. One professor has recommended elimination of the whole NRSRO designation:

"NYU professor Lawrence White recommended elimination of the NRSRO designation at a Senate hearing last fall. He forecast the results: 'The participants in the financial markets could then freely decide which bond rating organizations (if any) are worthy of their trust and dealings, while financial regulators and their regulated institutions could devise more direct ways of determining the appropriateness of bonds for those institutions.' "

The ratings agencies are proposing other forms of regulation that would not do away with include increased competition. It will be interesting to see how the SEC resolves this rather arcane issue.

February 18, 2008

JFK Slot Limitations Protect the Rich


I have just been catching up on the JFK slot limitation rulemaking decision that was issued on January 15. I wondered at the time why there had not been more of an uproar among carriers who have fought so hard to eliminate the slot control rules over the years. Reading the decision provides the answer -- it does not really restrict incumbents, but protects them against new entry, particularly from Virgin Atlantic, which had wanted to expand JFK -- West Coast service. The major carriers were like Brer Rabbit -- oh please don't throw me into that briar patch of regulation.

At scheduling meetings called by the FAA, incumbent carriers withdrew a proposed 2008 increases in schedules and retimed the existing operations, but were not forced to reduce any current operations. The FAA describes this as follows:

During the individual air carrier sessions, American Airlines, Delta Air Lines, and JetBlue Airways, which together now account for approximately 75% of the total operations at JFK, withdrew the schedule increases that they proposed for summer 2008 during the airport's peak hours of3:00 p.m. through 7:59 p.m. They also retimed operations from those hours, in some cases below the levels that they operated during summer 2006. Other participants were agreeable to retiming some scheduled operations to reduce scheduling peaks and to produce a more efficient overall schedule. Because the summer 2007 schedules already exceed the announced targets during some hours, proposed new operations could not be accommodated at those times. The FAA offered alternative hours when the airport had capacity, however, to the air carriers seeking to retime previously conducted operations or to add new flights to their summer 2008 schedules.

Virgin Atlantic was the big loser, since its plans for operation were severely curtailed:

The FAA cannot accommodate Virgin America's suggestion that each air carrier

receive 30 operations at JFK during the peak hours. Because Virgin America, like all other U.S. and foreign air carriers, had the opportunity to add operations at JFK during the hours when they could realistically conduct them, it appears that their request more specifically seeks 30 operations during their preferred hours. As one of three major New York-area airports and a key international gateway, however, JFK is not a typical facility. During the summer of 2007, JFK enjoyed service from no fewer than 83 different U.S. and foreign air carriers. Of these, only four offered more than 30 daily operations at JFK. As an airport that is so significantly oversubscribed, it is simply impossible to grant every air carrier 30 operations at the times that they would prefer.

Thus, incumbent airlines continue to operate basically as they did before and are protected from new entry. The FAA did not seem to consider the basic question whether there should be any regulation at all. It simply assumed that passengers would choose not to be delayed, even if they have to pay higher fares. It never seemed to face the question of what was the appropriate trade-off between lower fares for consumers and schedule delays.

February 7, 2008

Why is the NAB fighting so hard?

The Orbitcast blog has an interesting article that may explain the NAB's ultimate goal in opposing the Sirius/XM Radio merger. In reading NAB's pleadings in the merger proceeding, I had noted references to the fact that Sirius and XM would have a monopoly on the spectrum used for satellite radio, and suspected but that was the real reason for its opposition. Now, Orbitcast has an article entitled "Source: Surrendering spectrum is the "end game," in which a source says that NAB and Clear Channel have been working towards the goal of forcing the merger partners to surrender spectrum.

I'm glad to see my suspicions confirmed. This is a good example of why you often can't take pleadings at face value in the regulatory process.

February 5, 2008

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.]

Introduction to this Blog

This is my first article in my first attempt at a blog. I am a retired airline regulatory lawyer with a lingering interest in my old line of work. I hope to use this blog to highlight some of the more egregious regulatory activities. I will not limit myself to the federal government, but will also try to include state and local activities.I am a firm believer in the law of unintended consequences, and will hope to analyze regulatory proposals or decisions in its lights. However, I will not limit myself to critical analysis of proposed regulations -- that would be too boring.

The dictionary definition of "Follies" is as follows:

  1. A lack of good sense, understanding, or foresight.
    1. An act or instance of foolishness: regretted the follies of his youth.
    2. A costly undertaking having an absurd or ruinous outcome.
    3. Perilously or criminally foolish action.
    4. Evil; wickedness.
    5. Lewdness; lasciviousness.
  2. follies (used with a sing. or pl. verb) An elaborate theatrical revue consisting of music, dance, and skits.
    1. Obsolete
      1. Perilously or criminally foolish action.
      2. Evil; wickedness.
      3. Lewdness; lasciviousness.

While the definition will give me ample opportunity to discuss crazy regulations, I may also just watch the passing parade and comment on regulatory development at various agencies. I don't know where this blog will take me, but it should be an interesting journey.