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Any Shot of XM-Sirius Merger?
January 27, 2007

After compiling data and developing arguments for the government review of EchoStar’s effort to purchase DirecTV during the 2002-03 time frame, I see many similarities -- and some notable differences -- comparing a possible merger between the satellite-radio duopolists, Sirius and XM. That said, it’s a good time to vent some ideas and analysis. This comes especially in light of recent company and government dialogues suggesting that the satellite-radio rivals want to combine to create a single U.S. satellite-radio monopoly.

One of the filings in the proposed EchoStar-DirecTV merger in 2002-03 involved a so-called ping-pong chart. This graphic indicated one of the party’s competitive responses to the other's when it came to things like retail promotions, customer incentives and many other marketing efforts to attain and retain subscribers.

Not unlike the EchoStar-DirecTV competition -- which that ping-pong chart proved was quite significant -- the same type of hyper-competition exists between the U.S. satellite-radio rivals, XM and Sirius. To hear the aggressiveness as the two talk about the other’s efforts can almost be comical at times.

Then merge that reality with the Federal Communications Commission’s core DNA, which is a single mission statement supporting three key motivations: competition, diversity and localism. As the FCC has found in the DirecTV-Dish rivalry, the fact that Sirius and XM compete so vigorously pours fuel upon the FCC’s “competition is good” mantra. In fact, section 170 of the FCC’s Digital Audio Radio Service (DARS) rules states, “Even after DARS licenses are granted, one licensee will not be permitted to acquire control of the other remaining satellite DARS licensee. This prohibition on transfer of control will help assure continuing competition in the provision of satellite DARS service.”

This is not to say that the FCC would not change rule 170. But what it does say is that the FCC, if nothing else, gives market dynamics involving competition the benefit of the doubt, which is probably appropriate in a free-market economy. To take that competition away will probably require a full set of remarkable new dynamics. Those dynamics would include not only both companies’ financial dynamics hitting a long-term dead end (not likely), but also a significantly different lobbying and political agenda in Washington, D.C.

Even if the 2008 presidential elections bring in a new administration, most doubt whether that would make much difference. That is because the real lobbying force in Washington, the National Association of Broadcasters, is as equally positioned to support Democrats as it is Republicans. And the NAB does not like satellite radio.

The Department of Justice’s Antitrust Division would still be expected to see the competitive arena as a rather limited one, where XM and Sirius -- and only XM and Sirius -- compete as a product/service. This would mean the DOJ would still not recognize MP3 devices, HD terrestrial radios and Internet radios as competition to satellite radio, at least not until each has a defined service and significant competitive base. That change is still years away. 

And finally, another political note puts an additional crimp on any plans Mel Karmizan or Gary Parsons may have to possibly bring their companies together, despite the obvious advantages that come from the economies of scale and power of one competitive force. Politics and the law are huge creatures of precedent. If, anytime in the near future, the powers that be in D.C. were to OK a proposed Sirius-XM merger, they would also have to give much more significant and perhaps lasting consideration to two huge potential future nightmares based on the same precedent: changing the rules on media ownership and readdressing the proposed merger of DirecTV and EchoStar.

Which means we’re just about right back where we started. Go figure.

Jimmy Schaeffler is chief service officer and senior analyst at The Carmel Group, a Carmel-by-the-Sea, Calif.-based telecom, computer and media conference organizer, publisher and consultancy. He can be reached at (831) 643 2222 or at jimmy@carmelgroup.com.

Posted by Jimmy Schaeffler on January 27, 2007 | Comments (0)