Saturday, February 24, 2007

Urge to Merge Part 3: Relevant Market

In the analysis of the relevant market for the EchoStar/DirecTv merger proposal, the FCC examined the product and geographic relevant markets.

The FCC used the Department of Justice (DOJ)/Federal Trade Commission (FTC) guidelines. The product market definition was cited as follows:

The Guidelines define the relevant product market as the smallest group of competing products for which a hypothetical monopoly provider of the products would profitably impose at least a “small but significant and non-transitory price increase,” presuming no change in the terms of sale of other products. In other words, when one product is a reasonable substitute for the other in the eyes of consumers, it is to be included in the relevant product market even though the products themselves are not identical. Thus, the relevant product market includes “all products ‘reasonably interchangeable by consumers for the same purposes.'"

In a similar test, the FCC asks the following:

In particular, in defining the relevant product market for merger analysis, one starts with the products supplied by the merging firms and ask whether a monopolist, supplying those products, would profitably impose "a small but significant and non-transitory price increase.” If the monopolist would not be able to impose such a price increase, then one adds in the next closest substitute to the products of the merging firms and repeats the experiment. The relevant product that results from this procedure depends significantly on the products with which one started.

From reading the above, one might quickly conclude that the relevant product market is satellite radio and only satellite radio. Certainly, if there was only one satellite radio provider, a significant price increase could be passed along to its customers. Sirius has already entertained the idea. XM has said that as time passes, the idea of a price increase becomes more valid. Without restrictions, one might conclude that a price increase is likely. In a previous post, we mentioned that price controls were a way in which the FCC might act to protect the consumer. This idea also surfaced in the EchoStar/DirecTv merger proposal. The preferred method by the FCC is not to use price controls but rather to use competitive forces. So, perhaps we erred in saying that price controls could be one of the prices that the providers would pay to make the merger happen.

The same case could have been made for satellite TV. How did the FCC rule? They accepted the applicant's definition of the product market, taking the broadest definition possible. They accepted that the product market was all Multichannel Video Programming Distribution (MVPD) services. That might bode well for satellite radio's case. However, there is a difference. All of the MVPD services are paid services. Terrestrial, over the air broadcast TV was not included in the relevant product market. Therefore, we don't think the FCC would consider terrestrial radio as part of the relevant product market. It's like bottled water versus tap water. Although tap water is a substitute for bottled water, tap water is always a choice that the consumer has. In other words, the consumer can choose to pay for bottled water and have tap water available essentially for free at the same time. A consumer might have satellite radio but still listen to terrestrial radio. It is not one or the other. The consumer does not have to choose tap water; it is readily available. For this reason, the FCC would not likely consider terrestrial radio in the relevant market. On the other hand, if they took a broad definition, they might consider iPods, MP3 players, content delivered by cell phone, and internet radio as part of the product market. It is like considering soft drinks, sports drinks, energy drinks, beer, and wine as part of the relevant market for bottled water. Perhaps this is a stretch, but this is essentially what the FCC did for the EchoStar/DirecTv proposed merger. It is our guess that iPods and MP3 players would be excluded in any case because they are not services and are only a means to content. The Apple service, iTunes, might well be included as an internet service.

In summary, there is precedence for the FCC accepting a broad definition for the product market, but it is unlikely to extend to cost-free services, such as terrestrial radio. If the FCC takes a narrow approach, the merger will be DOA.

DOJ identifies a relevant geographic market as the region where a hypothetical monopolist that is the only producer of the relevant product in the region would profitably impose at least a “small but significant and nontransitory” increase in the price of the relevant product, assuming that the prices of all products provided elsewhere do not change." This approach is consistent with the Supreme Court’s definition of the relevant geographic market as the region “in which the seller operates, and to which the purchaser can practicably turn for supplies.”

In the case of the EchoStar/DirecTv, the applicants argued that they were national in scope. It was argued by the opponents of the merger that the alternatives were all local. Although the FCC agreed that the applicants offered nationwide service, they ruled that the geographic market was local saying that "...consumers make decisions based on the MVPD choices available to them at their residences. Technically, the relevant geographic market, therefore, is the residence of each customer, since it would be prohibitively expensive for a customer to change his residence to avoid a 'small but significant and nontransirory' increase in the price of MVPD service." The geographic product area was defined for the purposes of the merger proposal as "franchise area of a local cable operator, since customers within the franchise areas have the choice between the incumbent franchised cable company and the two DBS providers."

The geographic market was important because the FCC divided it into 3 categories: "(1) markets not served by any cable system; (2) markets served by a low-capacity cable system; and (3) markets served by high-capacity cable systems."

As long as the FCC excludes terrestrial radio from the relevant product market, the FCC would conclude that the relevant geographic market is national in scope, since all the other alternatives are also national in scope and their are no local franchise area. However, if the FCC were to rule that terrestrial radio was included in the product market, the FCC might rule that the geographic market was local and would divide the market into similar categories as the FCC did the EchoStar/DirecTv merger proposal becasue they would be competing with the local radio stations. This would be bad news in our opinion. There is no doubt that terrestrial radio is the main competition for satellite radio, and, if included, would define the relevant geographic market. The converse is not true, however. Satellite radio barely shows up on the radar
as competition to terrestrial radio.

In the above case, what would the categories be if terrestrial radio were included? Satellite Radio TechWorld suggest that the categories could be divided into (1) markets not served by terrestrial radio; (2) markets served by at least one but less than two terrestrial stations; and (3) markets serves by more than two terrestrial stations. For those in the first category, they would have no comparable substitutes; therefore, the FCC would consider in anti-consumer and anti-competitive. We would like to reiterate that this is only if terrestrial radio were to be included in the relevant product market. We do not believe this will be the case.

After reflecting on how the FCC might define the geographic markets if terrestrial radio were included, we suggest that it might be (1) Markets not served by terrestrial radio; (2) markets underserved by terrestrial radio; and markets well served by terrestrial. In order for a terrestrial market to be considered well served, there would have to be several genres offered. At a minimum, there would have to be terrestrial stations that offer rock, country, news, sports, talk radio, religious programming, jazz, blues, urban, dance, French culture (?), classical, kids programming, comedy, and latin music in the geographic area. A geographic area would have to offer most if not all of these to be a substitute for satellite radio. Any area not offering a full complement might be considered underserved. We feel this definition might be more in line with how the geographic market was divided for the DBS providers. For instance, a low capacity cable channel really did not compete with satellite TV. Those areas where terrestrial radio does not offer a full complement of programming would be equivalent to a low capacity cable provider.

We feel that it would be a mistake for the satellite radio providers to push to have terrestrial radio as part of the relevant market. It isn't likely, in our opinion, that the FCC will accept terrestrial radio as part of the product market for satellite radio. In 2003, the FCC ruled that satellite radio was "not yet" a substitute for terrestrial radio. Their reasoning was that satellite radio was only a substitution for terrestrial radio for those that had it and there were too few subscribers presently. Today with 5% or so of the market (maybe 10% of the listeners?), satellite would likely still be considered too small as compared to terrestrial radio. For that matter, they also excluded internet radio, saying that terrestrial radio was a mobile service, while internet was tied to a PC and was therefore not mobile. The same is more or less true today. The same reasoning should apply to satellite radio and, therefore, internet radio would logically be excluded.

Stay tuned for Part 4 Market Participants.

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tim said...

I think they the (fcc) did just that when they made these comments

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.

Anonymous said...

Satellite DARS has the technological potential to serve listeners in areas of the
country that have been underserved. While, to some extent, DARS will compete with local radio,we anticipate that it will also complement terrestrial radio.

Adopted: March 3, 1997 Released: March 3, 1997)

Sat tv offers the same as cable (also a pay service)while there are no "free" tv services that can compete with cable nor Sat tv. Terrestrial not only competes with, it does its fair share of fighting against Satrad. Satrads prices compete with the free radio market. (thats price control right there) The NAB and Riaa are and will continue to be a big reason prices need to increase in the future no matter if 1,2 or 5 Satrad companies exist.