Tuesday, January 16, 2007

Urge to Merge Part 1

There has been a dearth of news lately on satellite radio. Even our friends at the Coalition have been quiet. Out of profound boredom, we too would like to comment on the merger speculation. As much as we would like to pretend otherwise, the FCC will never let it happen. The FCC put "safeguards" in place to ensure that it never happens. When the merger rumors first surfaced, the attempted DirecTV/EchoStar merger immediately came to mind. And, indeed, the FCC recently quoted this merger proposal as a guideline that they might use regarding satellite radio. The merger, of course, was denied.

The rules and policies for satellite radio were established in the FCC's "Report and Order Memorandum Opinion and Order and Further Notice of Proposed Rulemaking", adopted and published on March 3, 1997. This is THE key document governing satellite radio. The key paragraph is located under "Safeguads", paragraph 170. It is noteworthy that it is under "Safeguards".

170. Transfers. We note that DARS licensees, like other satellite licensees, will be subject to rule 25.118, which prohibits transfers or assignments of licenses except upon application to the Commission and upon a finding by the Commission that the public interest would be served thereby. Even after DARS licenses are granted, one licensee will not be permitted to acquire control of the other remaining satellite DARS license. This prohibition on transfer of control will help assure sufficient continuing competition in the provision of satellite DARS service.

True, anything that man puts together can be torn asunder, but in this case, the FCC made itself very clear. The reasoning behind this decision can be found under "Specific Frequency Assignments and Satellite DARS Competition". The two key paragraphs are listed below:

77. Although spectrum constraints limit us to licensing just two satellite DARS systems at this time, our licensing approach nonetheless provides the opportunity for a competitive DARS service. Our goal is to create as competitive a market structure as possible, while permitting each DARS provider to offer sufficient channels for a viable service. In the Notice, we pointed out that "satellite DARS will face competition from terrestrial radio services, CD players in automobiles and homes, and audio services delivered as part of cable and satellite services," and asked whether these delivery media, coupled with fewer than four DARS providers, could ensure an effectively competitive audio services market.

78. Other audio delivery media are not, of course, perfect substitutes for satellite DARS. These media and satellite DARS all differ with respect to the programming menu (terrestrial radio can provide local programming and satellite DARS cannot), the sound quality, the cost of equipment, and the presence or absence of a subscription fee, but they all can provide music. The availability of these media, terrestrial radio in particular, varies across populated areas. Given our conclusion that satellite DARS can provide new and valuable service to the public, and given the overall competitive environment within which it will operate, we are satisfied that licensing two satellite DARS providers will serve the public interest. We agree with commenters, that there should be more than one satellite DARS license awarded. Licensing at least two service providers will help ensure that subscription rates are competitive as well as provide for a diversity of programming voices. The two DARS licensees will compete against each other for satellite DARS customers and will face additional competitive pressure from the other aural delivery media mentioned above. Accordingly, eligible auction participants may acquire only one of the two licenses being auctioned. One license will be for the use of spectrum between 2320 and 2332.5 MHz and the other for 2332.5 though 2345 MHz.

The key point in paragraph 77 is that the FCC recognized the competition from free radio, CD's, and cable and satellite services when they made the rules. In one of Parsons' recent addresses he thought that satellite radio would be considered in the broader context. He gave the example that no one would ever remove a factory installed XM radio and install a Sirius radio, or visa versa. His point was that Sirius and XM are not each others main competitor. It is free radios, iPods, etc; therefore, satellite radio would be considered in the broader context. It was a very good point and it is all true. However, and it a big however, the FCC also manadated interoperability. If satellite radio had lived up to the spirit of this mandate, there would be interoperability. The customer could easily change services on a factory install. They would be competitors. The FCC would no doubt take the view that if there is no competition, it is the fault of satellite radio. The argument is likely to fall on deaf ears.

In paragraph 78, the FCC goes on to say, "We agree with commenters, that there should be more than one satellite DARS license awarded. Licensing at least two service providers will help ensure that subscription rates are competitive as well as provide for a diversity of programming voices. The two DARS licensees will compete against each other for satellite DARS customers and will face additional competitive pressure from the other aural delivery media mentioned above." The FCC recognized that it was important to have at least two satellite radio providers in order to keep the rates reasonable and to provide a diversity of programming. On what grounds could the FCC justify abandonning this policy? The only argument that the FCC might consider is that if a merger isn't granted, both satellite radio providers will fail. Is this the motivation for the merger?

In addition, XM does not appear to be disposed to the idea of a merger. Sure, they will entertain the idea. They have to. The recent bylaw changes, no doubt, came about because of the merger pressure. The bylaw changes, in effect, prevent a shareholder coup. Otherwise, the idea of a merger could have been forced upon XM's management. Now, the effort has to be much, much more organized and planned. Sirius could short circuit the process and offer an insane amount for XM. They made this gamble with Stern and it seems to have worked out for them. Might Sirius take another gamble? Could XM's management refuse $50, $60, or more a share? Add to that that Karmazin has said that he would never again work anywhere where he wasn't top dog. We can't see XM's management relinquishing control to Karmazin.

Outside the FCC, the greatest impediment might be time itself. Even if the FCC were disposed to entertain the idea of a merger, it would take a minimum of eight months to get approval and likely closer to a couple of years. In a couple of years, satellite radio will either be doing very well or will have gone down the tubes. If it is doing well, a merger is not necessary. If they fail, oh well...

There would be concessions too, concessions that would minimize the value of the merger. A streamlined satellite radio provider with twice the bandwidth could be a potent force in the entertainment business. They would likely be challenged to give up the spectrum of one or the other. A new competitor could enter. There are two other entities permitted to hold satellite radio licenses. The WCS Coalition would likely try to force them to give up all the medium and high powered repeaters, diminishing the quality of service. The NAB certainly would not want to see a stronger satellite radio competitor. They would seek concessions to diminish the effectness of the merger. They would no doubt target the weather and traffic channels.

Then there is the latest group that just formed that intends to oppose the merger for exactly the same reasons given in the FCC Report and Order. It wouldn't surprise us to see a national organization behind this group, although we agree with their intentions from a consumer point of view.

Merger? It ain't gonna happen.

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homer985 said...

Very well written, Bert. Let me add to your discussion here paragraph #33 --

33. There is uncertainty inherent in any attempt to predict the impact of satellite DARS on the terrestrial radio industry. The technologies, structure, and regulation of the communications industry are changing dramatically. Developments in the next decade may significantly change the market for both satellite DARS and terrestrial broadcasting. Although opponents of satellite DARS have not shown that it will have a sudden and dramatic adverse impact on terrestrial broadcasting, we cannot entirely rule out the possibility of a major adverse impact. We emphasize that we remain committed to supporting a vibrant and vital terrestrial radio service for the public. Accordingly, we will continue to monitor and evaluate the potential and actual impact of satellite DARS, particularly in small radio markets, so that we will be able to take any necessary action to safeguard the important service that terrestrial radio provides.

My opinion on this is that the NAB may use this to their advantage. If they can demonstrate that the DARS market is beginning to hurt terrestrial and that a combined DARS license could be very harmful to the terrestrial radio market -- then they could use this to their advantage to encourage the FCC to safeguard terrestrial radio from it.

Great blog -- keep up the great work.

Bert said...

Thanks, Homer.

It's an ominous provision. It essentially says that if satellite radio becomes too popular, the FCC will throttle it back. For NAB, that is like having a "Get out of jail free" card.

There is another ominous provision that you likely know much about, the public service obligations. That's another thing that the NAB could use against satellite radio:

93. While we are not adopting additional public interest programming obligations at this time, we reserve the right to do so. Licensees are specifically on notice that the Commission may adopt public interest requirements at a later date. If additional public interest obligations are found to be warranted, one option would be to adopt rules similar to those Congress enacted for DBS providers, including a 4-7% set-aside of capacity for noncommercial educational and informational programming. Another option would be to hold satellite DARS licensees to a `promise vs. performance' standard.

The NAB's position was cited as, "NAB states that imposing public interest obligations on DARS providers will, to some extent, compensate for the loss in local programming that it claims will inevitably result from implementing the service." The organization would like nothing more than to have this or the "promises v. performance" standard applied to satellite radio.

Anonymous said...

Concerned about the possibility of an XM-Sirius satellite radio merger? Want to learn more about the consumers’ perspective? Want to blog with XM and Sirius subscribers? Check out www.c3sr.org - the Consumer Coalition for Competition in Satellite Radio ("C3SR") website and blog. Through the participation and support of subscribers and volunteers, C3SR – the only consumer group in existence today solely dedicated to advocating on behalf of satellite radio subscribers – is committed to opposing the creation of a monopoly in satellite radio, and ensure continued consumer choice and competition.