Sunday, February 25, 2007

Urge to Merge Part 4: Market Participants

Here we will consider the market participants as the FCC considered in the EchoStar/DirecTV merger proposal. The FCC included the present entities that competed in relevant market as well as the future or uncommitted entrants likely to enter the relevant market "within one year and without expending significant sunk costs of entry and exit in response to a small but significant and non-transitory increase in price."

If the FCC were to take the broadest view of the relevant market, including terrestrial radio, the market participants would be huge, including every local market. In the narrowest of views, it would only be satellite radio. We expect the FCC to exclude terrestrial radio for the reasons given in a previous post. In the narrowest of views, the merger is DOA and no further consideration is needed. However, we would expect, based on the EchoStar/DirecTv merger proposal, that the FCC would take a broader definition to include internet radio and content delivered by cell phone as part of the relevant product market. The FCC might also include WiMax and WiFi. WiFi and in particular WiMax is a growing threat to satellite radio, although neither will offer nationwide service anytime soon. It is debatable whether these could really compete with satellite radio within 12 months of merger, so we will exclude them here. Then there is Qualcomm's MediaFlo and Crown Castle's Modeo. Both of these services compete more with satellite TV than satellite radio and they are both wholesalers, as we understand it, so we think they would likely be excluded as a market participant. The iPods and MP3 players as well as CD players are possibilities, but being a means to content and not a paid services, we expect these to be excluded. We tend to dump HD radio along with terrestrial radio. This could prove to be erroneous. HD radio could offer similar features as satellite radio such as program associated data and telematics. Although the service is free, there is a barrier to entry, the cost of the receivers. One could argue that the development of HD radio was accelerated due to the introduction of satellite radio. It was terrestrial radio's response to satellite radio. However, we think that the FCC will say that it is an extension of terrestrial radio and therefore excluded. As far as another satellite radio goes, there are two more entities that are permitted to hold a satellite radio license. There is no way that either of these could provide a competitive service within 12 months nor is there any indication that they would be willing to spend the required capital to compete with other providers based a small price increase.

In summary, the market participants would appear to be internet radio and cell phone delivered content, more or less the same as the anticipated relevant product market.

In the EchoStar/DirecTv merger proposal, the FCC almost seemed to second guess itself on the relevant product market. In the applicant's market participant analysis, they only considered DBS providers and cable providers and not the entire MVPD market that the FCC accepted as the relevant product market. The satellite radio providers have to be careful here, else they could have their relevant product market defined as only satellite radio. A merger of the only two providers in a relevant product market creates a monopoly. A monopoly will not be approved.

Bear with us. These posts relate to what satellite radio has in order to get the merger approved. Ultimately, it comes down to the public welfare. Somehow, the public has to benefit from the merger.

Stay tuned for Urge to Merge Part 5: Market Concentration/Barrier to Entry

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