Proposed satellite radio merger: Boon for consumers or monopoly?

A photograph from a vehicle George Doty owned previously show his radio setup. He says he has the same setup in his current truck.
By Taylor Gandossy
CNN

(CNN) -- On his long commute to the office, George Doty snakes through Houston, Texas, accompanied only by the two satellite radios on the dashboard of his Chevrolet pickup truck and the hum of whatever he has playing.

A two-year subscriber to both Sirius Satellite Radio and XM Satellite Radio, Doty has the luxury of listening to a little bit of everything, which he says he does. "Depends on what mood I'm in, or what mood I want to get in," he said of the more than 300 radio channels at his fingertips.

Soon however, Doty may need only one satellite radio subscription.

Longtime satellite radio rivals Sirius and XM announced in February plans to merge. The notice sparked questions from their combined 15 million subscribers: will subscription rates go up? Will existing radios work? Will programming significantly change? (The answers, according to XM and Sirius: No, yes, no).

The announcement also ignited critics' cries of a possible monopoly in the satellite radio market.

By nearly all accounts, the merger would significantly help the two companies. Despite growing subscriber bases and big name celebrity programs, Sirius and XM confront high built-in costs and have yet to turn profits.

Combining would cut costs, promote diversity in programming and entice additional subscribers, the two companies say.

"We are absolutely convinced this merger will be in the best interest of consumers," Mel Karmazin, the chief executive officer of Sirius Satellite Radio, told Congress at a hearing about the merger in late February. "This merger will give consumers more choice at a lower price and, more importantly, less confusion."

Critics of the deal, including the National Association of Broadcasters, a trade association that represents thousands of traditional radio and television stations, contend that the merger would eliminate competition and create a monopoly.

"Here you have two companies who are trying to stand logic on its head by saying that monopolies will lead to better service, lower prices and better technology. And it just doesn't pass the laugh test," Dennis Wharton, executive vice president of NAB's media relations, said. "That's the primary reason that we're opposing this. Competition has worked better than monopolies."

The XM and Sirius merger will need approval from both the Department of Justice and the Federal Communications Commission, the governmental agency that regulates radio and television. The DOJ will determine whether the merger is anti-competitive, while the FCC will evaluate whether the merger is in the public's interest.

XM and Sirius said they hope to have the merger approved by the end of this year.

The FCC granted the two companies their licenses a decade ago under the condition that they never merge. FCC chairman Kevin Martin said the hurdle for approval would be "high."

Whether the merger will be approved depends largely on how the market for satellite radio is defined, industry observers said.

Do satellite radio stations compete only with other satellite radio stations? Or, as XM and Sirius claim, do such stations compete within a broader market, one comprised of traditional, or terrestrial, radio, as well as iPods, HD radio, Internet radio and other entertainment?

Gregory Sidak, the founder of Criterion Economics, L.L.C., an economic consulting firm in Washington and Cambridge, Massachusetts, says the latter argument evades the relevant anti-trust issues in the case. Sidak is also a visiting professor at Georgetown University's Law School.

"Does terrestrial radio or any other kind of product constrain the pricing decisions of XM and Sirius?" he asked. "That's the relevant anti-trust question."

Sidak argued that satellite radio is distinct in the papers he filed with the FCC on behalf of Consumer Coalition for Competition in Satellite Radio, a consumer group against the merger. The group, also known as C3SR, is supported by the NAB, according to one of Sidak's filings.

Sidak points to what he considers to be significant differences between satellite radio and other media, including the more permissive content rules the FCC allows for satellite radio.

"It's not very likely that so many customers would stop subscribing to XM or Sirius if they had to pay $.65 more a month," he said. If that's the case, he added, satellite radio is its own market. And "in this case, there are only two firms in the market."

"So they necessarily achieve 100 percent market share, a perfect monopoly."

Others say that view is narrow-minded. People use other products instead of satellite radio, said Thomas Hazlett, a former FCC chief economist. And although these products -- iPods, traditional radio, among others -- are not perfect replacements, it does not mean that they aren't choosing them over or in lieu of satellite radio.

Sirius and XM commissioned Hazlett - currently a law and economics professor at George Mason University -- to write a brief to the FCC on behalf of their merger.

The satellite companies echo Hazlett's point they are part of a diverse spectrum of technologies and products that were competing for listeners' ears and pocket books.

"Our share of that is in the 5 percent range. Internet radio's share of that is significantly greater than ours. Terrestrial radio's share of that is enormous," XM Satellite Radio chairman Gary Parsons told CNN. "And you tend to find that the profitability and power tends to follow the market share."

Hazlett also points to the NAB's vehement opposition to the merger as evidence that competition to satellite radio does exist. "If they honestly thought that satellite radio is in a different market, and people didn't substitute back and forth, then they wouldn't have a strong opinion on this," he said.

The NAB's Wharton, like Sidak, said that argument dodges the issue. "I guess we care because, why would you grant a monopoly to companies that are competitive and who say by their own admission that they're not failing...?" he asked.

Whether the merger is approved won't change Doty's opinion of the service. Regardless of the outcome, he says he won't go back to traditional radio. "Anybody who tries it just loves it," he said.