ABA Panel Divided on Implications of Satellite Radio Merger
Opinion on whether the Department of Justice’s approval of Sirius’ take over of XM will change the way mergers are scrutinized depends on whether you liked or disliked the outcome. At an American Bar Association panel Wednesday, proponents said they believe the merger won’t affect future merger analyses, while opponents believe it will.
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The approval is part of an effort by the Justice Department’s antitrust division “to rewrite the (merger) guidelines on a case-by-case basis without saying that is what is going on,” said Gregory Sidak of Criterion Economics. Criterion did work for the NAB-supported Consumer Coalition for Competition in Satellite Radio, a vocal opponent of the merger.
The merger received a lot of attention but the analysis “was in line with past merger investigations,” said Ketan Jhaveri of Simpson, Thacher & Bartlett, which worked for Sirius: “I don’t think it has implications for merger policy going forward.”
By agreeing with satellite radio that it competes with all forms of audio entertainment, DoJ changed the market definition, said Charles Biggio of Wilson, Sonsini, Goodrich & Rosati, which worked for several parties, including the HD Radio Alliance. Using the audio-entertainment definition, terrestrial broadcasters should be able to argue for a lifting of the station cap, Biggio said.
While David Meyer, deputy assistant attorney general of the antitrust division, said DoJ didn’t factor in the financial health of Sirius and XM pre-merger, Jhaveri said that before the merger, “neither company had ever made a profit.” This was unlike what would be expected in a duopoly situation. “You would have expected the duopolies to make a good profit or at least a lousy cent,” he said.
DoJ ignored the affect the merger would have on program quality, Sidak argued. When satellite radio was first introduced, it was marketed as commercial-free, but now Sirius CEO Mel Karmazin wants to make 10 percent of Sirius XM’s revenue from advertising. Since advertising will be most attractive on programming that can only be found on satellite radio, such as Howard Stern, that programming quality will be diluted with the insertion of advertising, Sidak said. “The issue here wasn’t the price so much as the quality of the product,” he said.
Competition between the satellite radio rivals isn’t the point, the point is getting people to “pay for radio,” Jhaveri said. If signing Stern had allowed Sirius to raise its subscription price, it would have done that before seeking to take over XM, but it didn’t, he said. Terrestrial radio is still free, so signing Stern didn’t allow for a price increase but it did bring new subscribers, he said. “Growing the subscriber base is the only option” for satellite radio revenue growth, he said.
If DoJ had taken the case to court, some trends in merger analysis could have been settled, argued Sidak, but Meyer disagreed. “We would have lost that case. We don’t think it is a good use of resources or desirable to bring a case to lose it,” Meyer said. If DoJ thought the merger was bad but couldn’t prove it in court, it could have waited for the FCC to act since the commission “is operating under a different standard of proof,” Biggio said. Meyer defended DoJ’s final decision.
New technologies are bound to change the landscape in the future and DoJ had to examine the emerging trends to see whether post-merger, Sirius XM would be a monopoly, Meyer said. The expected emergence of wireless Internet tipped the scales for the department, he said. The ability of “any number of providers working through the Internet channel” to bring audio into cars would have affected the satellite radio providers, he said.
It’s hard for the government to be able to understand how consumers will react to new consumer devices and how those consumers will act going forward post merger, Biggio said. “The agency operates with an information deficit” in this area, he said.
Sidak, who noted he usually is defending merger proposals not opposing them, leveled his harshest criticism toward the FCC. Its process amounts to “rent extraction,” he said. There should be a review of the commission’s conditions process, he said, which he called “highly political” with “a lot of horse trading that the parties may not be privy to.”
Sirius XM told DoJ it would be able to realize “hundreds of millions of dollars in efficiencies,” Jhaveri said. Karmazin Tuesday told the Merrill Lynch conference that Sirius would realize at least $425 million in synergies (CD Sept 10 p5). Gaining these efficiencies makes “it possible for the company to be a more viable competitor to terrestrial radio,” Jhaveri said.
Meyer cautioned future merger applicants that hiring an efficiency consultant, as Sirius did, doesn’t necessarily help their cause for approval since, in the case of XM and Sirius, many of the efficiencies are realized from going from two providers to one. “Parties could save a lot of money on programming if they didn’t have to negotiate exclusivity,” he noted.