XM And Sirius vs. The FCC: The Battle Is Joined

With yesterday’s announcement of the proposed merger between XM Satellite Radio and Sirius Satellite Radio, and the announcement last month by the Chairman of the FCC that he would oppose such a merger, the battle that will determine whether this merger will go forward has begun, and it will revolve around the question of whether the FCC takes an expansive or restrictive view of what the relevant market is:

Winning approval for a proposed merger of the nation’s two satellite-radio companies turns on whether regulators buy their argument that iPods, Internet radio and other new technologies have expanded so dramatically that a monopoly would not harm consumers’ choices or purses.

It may be a difficult argument to win, but XM Satellite Holdings and Sirius Satellite Radio‘s officers say it’s worth the gamble and have assembled an expensive and experienced team of lobbyists to aid them in the fight. Alone, the companies have suffered heavy losses and spent heavily on recruiting personalities such as Howard Stern and Oprah Winfrey and on marketing to compete against each other.

Now, New York-based Sirius and XM of the District are lining up some of the best-known and highest-paid lawyers and lobbyists, while competitors and consumer groups vow to fight back. The biggest potential roadblock for the merger is a 1997 Federal Communications Commission declaration that a single owner may not control the subscriber-only satellite radio business.

But the advance of technologies such as iPods and other MP3 players, music-playing cellphones and land-based radio stations with digital broadcasts offer so much music, news and talk that the competitive climate is radically different and the FCC should waive the 1997 rule, Sirius chief executive Mel Karmazin said in a conference call yesterday. “Consumers today have a significantly broader range of audio entertainment options from which to choose,” he said.

As I argued last month, it is clear that limiting an analysis of the economic impact of an XM-Sirius merger to only the market for satellite radio is incredibly short sided. It would be like limiting an analysis of a proposed merger between a two pizza restaurant chains to just the market for pizza. There are competitors to satellite radio and they include not only traditional broadcast radio, but also the expanding technology of “high definition” radio, along with other methods of music, talk, and news delivery such as those cited by Karmazin.

More importantly, though, are the economic realities that XM and Sirius are presented with. Neither company is making money right now, and the prospects of either one of them being able to turn a profit as an independent company given the immense operating costs that they have to deal with is pretty slim. Satellite radio is still, and will likely remain for a long time, a niche technology. Most of the people who subscribe to it do so thanks to the receiver that came with the new car they bought, but not everybody wants a car with XM or Sirius capability, and not everyone can afford it.

If these are not permitted to merge, then the prospect of either or both companies ending up in Bankruptcy Court seems a likely outcome and then we could be faced with the death of satellite radio as a business.

Virginia Virtucon has it exactly right:

It would be a grave mistake to take the narrow view that the only competition that XM and Sirius face comes from one another.  Consumers have a multitude of options — traditional free FM and AM stations, iPods/MP3 players, Internet radio, etc.  XM and Sirius are looking to merge in order to survive in this competitive environment.  Would the government rather have only one satellite radio company because one went bankrupt or only have one because the two existing ones merged to form an even better combined service?  Would they rather have NO satellite radio because XM and Sirius drove each other into the ground trying to compete?

Frankly, I don’t think the FCC should be involved in this matter at all, but since they are they need to do the right thing. Let the market decide and approve the merger.