Saturday, February 24, 2007

Urge to Merge Part 2

The merger of XM and Sirius has been compared to the attempted merger of EchoStar and DirecTv. Former FCC chairman, Powell, thinks that a merger is possible, but it will be incumbent upon XM and Sirius to explain why it is different from the EchoStar and DirecTV merger proposal. They have their work cut out for them.

Indeed, satellite radio was cited in the EchoStar/DirecTV merger as a means employed by the FCC to ensure competition. This could be the smoking gun that shoots down the merger:

This Commission has a long-standing policy of promoting competition in the delivery ofspectrum-based communications services and has implemented numerous measures to foster entry and ensure the availability of competitive choices in the provisioning of such services. For instance,in theDARS proceeding, the Commission established a licensing approach that provided for two DARS licensees because it determined that more than one DARS licensee was necessary “to ensure competitive rates, diversity of programming voices, and other benefits of a competitive DARS environment.”

We have started an initial look at the EchoStar and DirecTV attempted merger. There were 15,262 public comments filed over this. Let us repeat, 15,262 public comments. Expect the XM and Sirius merger to be no less controversial. The application alone was 1,132 pages. We haven't begun to look at it. The final order was 128 pages. The vote was 4-0 against it.

Chairman Powell said at the time, "The commission cannot confirm that this merger is in the public interest." He also called the cost to consumers "staggering."

The process took 13 months, before it was offically dead. GM and EchoStar filed their applications on December 03, 2001. By October 09, 2002, the FCC had established that the parties had not met the burden of proof that it served the public interest. At that time, the FCC gave the two parties 30 to ameliorate the competive concerns of the transfer. The price was too high. On December 10, 2002, the parties withdrew their applications. On January 10, 2003, it was officially dead. The FCC never denied the merger, but it was effectively killed with its ruling on October 09, 2002. On a positive note, Martin dissented in part to the original decision.

We believe the application can be approved. The question is, "At what cost?" XM and Sirius will have to address the anti-competive and anti-consumer concerns. In addition, they will have to appeased NAB and the WCS Coalition and the myrid of other groups that will come out of the woodwork. Expect price controls, niche programming commitments, the disappearance of the local traffic and weather channels, the lost of bandwidth, concessions on the repeater networks, and more lenient terms for the WCS band transmissions (which could reduce the quality of reception by satellite radio receivers). When it came down to it, the FCC did not reject the EchoStar/DirecTv merger; the bar was just raised too high.

Other fun facts: At the time, it was an $18.5 Million merger. Combined, the EchoStar and DirecTv had 18 million subscribers. It costs EchoStar $600 million for the break up fee and another $100 million in merger related expenses.

We are about half way through the 128 page Order rendered by the FCC. There is some really good stuff in there on the Relevant Market. Stay tuned for Part 3.

Additional comments:

We stated that satellite radio might be forced expand the niche programming and that they might be forced to give up one fo the satellite radio licenses in order for the merger to get approved. As it stands, they can't pack two pounds of content in a one pound bag without altering the quality of the service, much less expand the content offerings. Expanding the niche programming content is an angle that satellite radio should exploit. If they can win that argument, then giving up half the bandwidth should be out of the question. Hopefully, once content is consolidated, they will be able free up bandwidth. Let's hope they don't use the freed up bandwidth for video. We would prefer them to use it to improve the sound quality to near CD quality.

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