- The Washington Times - Monday, April 30, 2007

In 1997, the Federal Communications Commission established protocols enabling two, competing satellite radio companies to develop. Now, the emerging entities, XM and Sirius, want to merge and are making bold claims about the benefits to their listeners. Since this is a communications matter, the companies must obtain approval of the FCC as well as the federal antitrust authorities, the Justice Department in this case. Does a merger here make sense, even though this would be a two-down-to-one combination?

About a year ago, I was retained to consult with a manufacturer of generic-brand oral rinse (mouthwash) which had proposed to merge with its only major competitor. Since under a narrow interpretation of the relevant market this was a two-down-to-one merger, the Federal Trade Commission had quite properly issued a “second request,” tolling the merger while it examined the likely effects on consumers. My counsel to the firm was to go along, give the FTC the information it requested but supply reasons why the combination would have no adverse consumer impact. Aside from the fact the merged company would have to compete with several national brands, entry into the oral rinse market is very easy: You need a bottling machine, a little alcohol, a little flavoring, a little coloring, a lot of water, a modest sales force, and a physical distribution network. Free entry would police the market even if the national brands did not. “This ain’t rocket science,” I was fond of saying. After review, the FTC approved the deal.

But satellite radio is rocket science. You have to launch the “birds” — very expensive. You must possess the right broadcast and processing technologies, some of which are under patent protection. You must have a sophisticated distribution system to sell your services, as well as agreements with the suppliers of all the programs you wish to carry. The threat of entry is unlikely to do any policing in this market.

The policing question might be trumped if one of the companies were going out of business. But this is not the case. Sirius CEO Mel Karmazin recently told a House subcommittee: “We’re not making a failing company argument, and we’re not saying that if, in fact, our merger were not approved at the end of the day, we would not continue to go along and do business.”XM Chairman Gary Parsons reported, “The failing companies’ doctrine is not part of our fling. We don’t have to do this merger.”

So how do they assure consumers they won’t be injured? They say that if the merger is approved they will do two things. First, they will expand their offerings — each subscriber will get more programming than at present. Second, they will keep their prices where they are. But when pressed, neither company is prepared to promise subscribers of the merged firm will receive all the programming they now receive from their current vendor plus all the programming offered by the competitive vendor. (Howard Stern plus Oprah, for example?)

The promise with respect to price is also murky. Is it per subscriber? Per channel subscribed? Is it nominal or adjusted for inflation? Unanswered questions — and then, too, how would such promises be enforced?

Is there anything else, you ask? Yes. According to Mr. Karmazin, the relevant market isn’t just satellite radio, it’s over-the-air broadcasts, CD players, even iPods and other MP3s. This, of course, is an empirical question. But does it make sense that for most satellite radio subscribers these are interchangeable?

The FCC itself, in setting up the satellite system and insisting on competition, said, “Other audio delivery media are not, of course, perfect substitutes for satellite [radio].” By conventional Herfindahl index (HHI) measures, which the antitrust authorities rely upon to gauge such things, the increases in concentration, market by market, are quite beyond the Justice Department’s merger guidelines — which view post-merger HHIs above 1,800 with great suspicion. Even the largest radio markets have HHIs above that threshold, and smaller markets have HHIs twice as high.

But just on the face of it, would the threat of switching to broadcast radio or listening to an iPod really restrain the merged company from raising its prices? Would that keep it from cutting costs by reducing offerings? Would that keep the company on the edge of technological developments, leading to better, even more reliable service?

It stretches credulity to believe that a two-down-to-one merger in a market with no really good substitutes and where entry is very, very difficult would be in the public interest. Surely the federal agencies know that too.

James C. Miller III is former chairman of the Federal Trade Commission (1981-1985) and is a consultant to the National Association of Broadcasters.

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