Progress Snapshot
Release 3.4 February 2007

by Adam Thierer *

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Satellite radio competitors XM and Sirius have announced their intention to merge their companies in a $13 billion deal. The deal will face some obstacles at the Federal Communications Commission (FCC), but I think there are strong reasons for the agency to approve the deal immediately and unconditionally.

What are the consumer benefits that might arise from a satellite radio marriage? First and foremost, the survival of a vibrant and healthy satellite radio competitor is important to consumers.

I am a satellite radio fanatic. I've been an XM subscriber for many years now and currently have 3 subscriptions. (I had 4 subscriptions for about a year or so). One subscription is for my car, another is for my wife's car and the third is for a whole-house audio set-up that pumps music throughout my house. As a consumer, I want to see satellite radio continue to expand and innovate. But most of all I just want to make sure it survives.

I think this merger can help make that happen. Some might say the two companies will continue to do just fine on their own without a merger. But if you look at the financials, you know that's not true. Although both stocks grew steadily through October of 2004, they hit a plateau after that and then began a steady decline. And the cost of signing big name talent (Howard Stern, Oprah) and big sports leagues (NFL, MLB, Nascar) has added up to big-time debt. Merging the two companies could help bring those costs down over time by making those programs available to a broader subscriber base.

Meanwhile, the competition that satellite radio faces grows stiffer with each passing day. Hopefully the FCC will take all this competition into account when it reviews the merger proposal. At a minimum, the "relevant market" in this merger review should include all the potential sources of audible information / entertainment that are competing for our ears, including:

* free, over-the-air terrestrial radio broadcast stations;
* compact discs (or other stored media);
* iPods and MP3 players; digital music stores;
* podcasts;
* online file sharing;
* Internet radio stations and other services (such as Pandora);
* the "Music Choice" cable radio service; and
* other portable media entertainment / communications devices and services.

These are the DIRECT competitors that satellite radio squares off against. But, in a broader sense, satellite radio also faces many INDIRECT competitors that threaten its long-term survival, including: broadcast TV, cable TV, satellite TV, DVDs, video-on-demand, online newspapers, the endless array of magazines, Internet websites, search engines, computer software, video games, and so on. Although today's consumers frequently multi-task and consume several types of media at once, it is nonetheless true that all of these media technologies are vying for the scarce "attention share" of consumers. There are only so many hours in a day or dollars in the pocket for consumers to spread around.

For these reasons, it was always questionable whether the satellite radio sector could sustain two healthy competitors. For two satellite radio operators to thrive in such a fiercely competitive environment they needed to just be focused on one primary target: Terrestrial radio. Even then, it would be tough for two small firms to bust into the market and compete against these old broadcast giants.

For awhile, however, it appeared that it just might work. Both companies expanded channel capacity rapidly and signed an impressive roster of talent and sports leagues. Subscriber rolls grew steadily. But then came the iPod and the MP3 revolution. This has been a major diversion for satellite radio and it shows. Starting last year, some of the XM channels I listen to started running brief messages between songs to remind listeners why satellite radio was better than just listening to your own music collection. One of them went something like this: "The problem with your iPod is that you always know what's coming next." (It's actually a very good point. Satellite radio has introduced me to a world of new music I never would have found by listening to my MP3 player all day). But portable music represents a very serious threat to satellite radio. And once the iPhone and the Zune phone hit the market, satellite radio could be in even more trouble. So, hopefully this merger will ensure that satellite radio remains a vibrant competitor in our new media marketplace for years to come.

Another benefit of the deal is that by reshuffling channels and consolidating duplicative formats (after all, exactly how many classic rock channels do consumers actually demand!), the new merged entity can potentially re-dedicate some of the excess capacity to new formats or services. I think it's probably unrealistic for us to expect them to become a big wireless broadband pipe in the sky any time soon, but you never know what the future holds.

But this leads to what might be the biggest concern about the merger from a consumer perspective. The trickiest part of the deal will be the eventual transition to a single, integrated program line-up after the reshuffling of channels and consolidation of some duplicative formats. XM-Sirius will have to make sure that they accommodate existing users to ensure that they stick with the merged company. This means it will be essential for the new company to either (a) make sure all the old devices remain capable of receiving their signals or (b) subsidize the diffusion of new receiving devices for those consumers whose old devices no longer function properly. I'm assuming that they've already worked up a plan to do so since this will be crucial to getting the deal approved by regulators and also ensuring consumers (and shareholders) that everyone will continue to receive seamless service as the transition occurs.

If they can get the transition issues settled, then there's really only one point left to debate: What's the impact of all of this on the price of the new combined service? Honestly, I have no idea which direction prices will head after the deal is approved, but I hope this does not become a sticking point for merger approval. It's important to remember that satellite radio is a subscription-based service and that it depends primarily on those subscription revenues to pay for all that content they beam through the sky to us. We don't have any sort of inalienable right to 150+ channels of service at a certain price. If the cost of service goes up by a buck or two a month to pay for all this stuff, I think that's a small price to pay. And they wouldn't be able to raise prices much beyond their current $12.95 per month rate in light of the other competitors they face.

For these reasons, I think the XM-Sirius deal makes a great deal of sense. Regulators should approve the deal as soon as it is presented to them to ensure satellite radio remains a vibrant competitor in our modern media marketplace.

* Adam Thierer is a senior fellow and director of the Center for Digital Media Freedom at The Progress & Freedom Foundation. The views expressed here are their own, and are not necessarily the views of the PFF board, fellows or staff.