Satellite Radio Competition

by Russ Roberts on March 7, 2007

in Antitrust

Sirius and XM Radio want to merge. There could be lots of reasons for merging. Economies of scale. A desire to exploit consumers and make huge amounts of money. A desire to avoid bankruptcy.

I have no idea if there’s room for two satellite radio companies or whether there’s room for 50. What I do know is that there is no meaning to the idea of satellite radio market share. After this merger, the new company, SiriXM, say, will have a complete and total monopoly of the satellite radio market. But that is meaningless. Satellite radio has to compete with my regular radio, internet radio, my CD collection and my iPod. Oh, and my TV and talking on my cell phone with friends and a thousand other ways to pass the time.

Five years ago there was no satellite radio. When one company came along (I don’t know who was first, Sirius or XM), should the FCC have shut them down for daring to monopolize the market? So why is it now that there’s two going back to one we have a potential calamity that the government has to worry about?

Look at this absurd complaint (HT: Drudge) by the head of the FCC:

Kevin J. Martin, the chairman of the Federal Communications Commission,
has privately questioned recent Congressional testimony by the
architect of a proposed merger of the nation’s two satellite radio
companies that subscribers would both pay the same monthly rate and
receive significantly more programming.

As he sought to sell the proposed merger of Sirius Satellite Radio and XM Satellite Radio to Congress, and by extension to regulators like  Mr. Martin, Mel Karmazin,
the chief executive of Sirius, vowed last Wednesday that prices would
not be raised and that listeners would benefit enormously by getting
the best programming from both companies.

But in separate conversations with two people after Mr. Karmazin’s
testimony to a House committee, Mr. Martin said that subscribers may be
surprised to learn they may actually have to pay more than the current
monthly rate of $12.95 if, for example, they want to receive all the
games of Major League Baseball (now available only on XM) as well as
all the professional football games (now only on Sirius).

Mr. Karmazin, reached on Tuesday, said his testimony was not
misleading and that he meant to say two things: subscribers wanting to
keep their existing service would not face a price increase, and
listeners who wanted the best of both services would pay less than the
combined rate of $25.90.

This is ridiculous. Right now, both services offer lots of music of lots of different flavors. But one has the NFL and one has MLB. So if you want both of those, you currently subscribe to both. Most people make a choice and choose one or the other. So the debate between Martin and Karmazin is over whether consumers who want both under the merged scenario will pay just $12.95 or something more than that. I assume they’ll pay more. So does that mean Karmazin lied? Oooohhhhh. Gotcha.

Let them merge. Get out of the business of trying to figure out how many angels can dance on the head of a pin, that is, trying to figure out whether a merger is good or bad for consumers or dictating what the price of service should be for customers of the new company and particularly, trying to figure out the "real" market share of the new company. A merged Sirius and XM can’t hurt consumers. There are too many choices. Hey, FCC. Get out of the way.

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David Peterson March 7, 2007 at 4:47 pm

I suspect it has more to do with eliminating an unregulated competitor to regulated broadcast radio than it does actual concern of monopolization.

Aschkan March 7, 2007 at 5:13 pm

I find this entire debacle a bit strange. While I'm far from a proponent of competition laws and agencies, I can at least understand where they attract popular support at times. However, comparing the mass of Windows\Office endusers or Alcoa aluminium endusers vs. the satellite radio enduser base, I hardly find satellite radio a convincing target for anti-competitive action. Not only is there very limited pricing power for such a price elastic good, but there are both very positive network externalities to consumers from having one service provider with all channels and also the very real problem of attrition. Satellite radio providers could be easily seen as a standard, and multiple standards usually hinder adoption rates (as seen in HD-DVD vs. Blu-ray) and access to the mass consumer. Either they merge or at least one (or both) will likely fade into obscurity. At least by merging you can minimise the capital hemorrhaging.

my 2 pence

Matt March 7, 2007 at 5:51 pm

While I agree with you about the economics, as a legal matter, this isn't a generic anti-trust issue.

Neither Sirius nor XM are entities that emerged in a free market. Congress chartered both at the same time with a view to creating a competitive (or at least duopolistic) market for satellite radio. Congress believed in this outcome strongly enough to write into each station's charter that it could not acquire control of its competitor. (That's why this deal is structured as a "merger of equals" rather than an acquisition, even though in effect Sirius is the acquiring party.)

The XM and Sirius charters regard satellite radio as a distinct market. That's nonsense for the reasons you describe above ( legislators' original reasoning was predicated upon higher demand for satellite radio than now seems feasible). Congress should waive the clause in the charters and bow to reality. But until they do, it isn't surprising that the debate mostly concerns the (meaningless) market for satellite radio.

Charley March 7, 2007 at 8:22 pm

If they let them merge, they should have to return 100% of the part of the broadcast spectrum that one of these companies now uses. The govt can auction it off again to insure competition. The companies can achieve the economies of scale by cutting the operating overhead in half for their businesses. They just cannot kill competition by holding on to the airwave monopoly.

colson March 8, 2007 at 6:18 am

Oh bullocks – they should not have to return any share of the broadcast spectrum. This is a case where everyone seems to be looking at the "satellite" part of satellite radio and ignoring the radio portion.

Consider for a moment the recent shift in the FM frequency ranges as radio stations have begun to offer HDRadio – thought to be serious competition for satellite radio because current frequency owners can cram up to two more stations on the sides of a single frequency they own. No one has argued that these people should give up those additional slots to increase competition. Consider that Clear Channel already offers HD Radio on the backs of many of their stations, there is no more compelling reason to force SiriXM to give up a part of their spectrum. It is akin to saying that SiriXM can only have up to "x" number of channels while giving the benefit to the traditional, land-based operators who operate a far greater number of channels over a larger portion of the US.

The problem with government regulation is that they (guvment) hardly know what technology is, what it is capable of and what is on the horizon. The FCC is notoriously stupid considering they forced Telco operators to open up their own phone lines and then just within the past year or so, rescinded that requirement because of mounting competition from VoIP and Cable operators. All the FCC and legislation has done has been shifting power from one end of the market to another.

Aschkan March 8, 2007 at 11:13 am

The idea of auctioning off the spectrum is an intriguing one, but something tells me between the $7 Billion or so of cumulative losses for SiriXM and the prospect of a pissing contest with such a big and established player, it's only economists, and not financiers, that are legitimately considering that alternative. I would venture to say the only proper auction would be for the FCC to pay someone to take it, with the guaranty that they would build out service (or bankrupt).


Watts March 8, 2007 at 2:09 pm

Actually, they *can't* return any broadcast spectrum used by either company even if they want to. Not for a long while, anyway.

From a market perspective, there's no substantive reason to oppose the merger–as others have noted, the market is essentially just radio. XM is competing for my attention against terrestrial radio. (And more recently against podcasting, at least in my car!) But it's good to be realistic about what this actually means.

I followed Radley Balko's link over here, frmo the article in which he writes, "there were only two business models in an entirely new industry," and "had there been a truly free market at work, there would have been a dozen or more companies." But I don't think that's true. First off, there was only one *business* model here–monthly subscription radio. There were two *technology* models, in that Sirius and XM use different satellites, different modulation, and different codecs, but the techologies are clearly similar–including the Achilles' heel: they're frightfully expensive. A single communications satellite, including manufacturing and launching costs, is upwards of $200 million. Even if the FCC hadn't set an arbitrary limit on the number of satellite radio companies, the chances of there being more than three successful providers strike me as very unlikely. Look at the DBS satellite TV market, which has no such restriction, but has nonetheless only been able to sustain two competitors over the last decade.

The technology, though, is why they can't return broadcast spectrum: the satellites currently deployed aren't going to each magically double in capacity, and existing receivers aren't going to magically know the other guy's protocols. We're not going to end up with a combined company that provides twice as many stations to all 13+ million subscribers; it's not technically possible. And from a financial standpoint, even if they could it'd be stupid to try. If they combined "as is," they'd turn two failing companies into one bigger failing company.

So be realistic about what to expect from this. If the merger is approved, the two companies are going to look at their respective lineups and start slashing stations. We'll end up with one new lineup which has some stations from one, some stations from the other… and about the same number of stations total. The same lineup will be broadcast on both existing satellite networks. In the long run, it's likely that either the existing Sirius protocol or the existing XM protocol will be anointed as the One True Codec, and all the satellite receivers being sold from that point on will use it. But the "other" codec will continue to be supported until the satellites broadcasting it reach the end of their service life.

(I should note I'm not arguing against the merger; having "only" the same number of satellites I'm paying for now isn't a step back, after all. I do suspect a $14.95/month charge is in the cards, though.)

Paul 8 April 9, 2007 at 8:52 am

This is just another example of big politics interfering in our daily lives. I don't feel the need to be "protected" from a satelite radio merger from our federal government. This whole thing is being driven by terrestrial radio who is in fear of it's life by satelite. We should celebrate the new media we call satelite radio not try to stifle it. A merger is not a monopoly just better programming for those of us who are currently subscribers. The traditional terrestrial radio is scared and they are using our crooked politicians to fight their war. Congress should work on some real issues that are adversely affecting Americans.

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