Thursday, March 01, 2007

Urge to Merge Part 7: Similarities and Differences

Sirius and XM would have us believe that their merger is altogether different from the EchoStar/DirecTv attempted merger. In some respects, they are correct. In some respects, they are not.

If we go back before satellite tv and before cable, the only choice was terrestrial, over the air TV. Then, along came cable. They drew from the terrestrial TV pool. Once they left the pool, they generally never came back. Then came satellite TV. They also drew from the terrestrial TV pool and also attracted cable customers, especially those previously served by low capacity cable systems. The terrestrial TV pool got smaller and smaller. In general, there is no overlap. Either one has terrestrial TV or one has cable or one has EchoStar or one has DirecTv. They each had their own piece of the pie.

The beginnings were similar. XM and Sirius had to draw from the terrestrial radio pool. So does internet radio, those that use MP3 players, iPods, and CD players. And cell phone providers will also draw from this pool. The difference here is the overlap. All of these services can overlap. One can climb out of the pool and listen to their favorite artist for a while on CD or their MP3 player and then dive back in to listen to the local weather, their favorite talk show host or morning show, or the local news. One might listen to internet radio or simulcast terrestrial at work and listen to terrestrial radio on the way home. The iPod is great if one is flying half way around the world or running or working out at the gym, but not so great if one is looking for fresh content. The choices are not mutually exclusive. One can have satellite radio and terrestrial and cell phone delivered content and CD's and podcast and.... Each service has its advantages, but they really don't substitute for each other.

Terrestrial is very distinct. It is mobile, local, and free. And they generally offer a single format, although this is changing with HD radio. It is hard to compete with free. It is also hard to compete with local. And it is hard to compete with mobile.

So, in this respect, XM and Sirius are correct. The conditions are different. But there are some similarities yet. In essence, XM and Sirius is a high capacity service that is competing, in some cases, with a low capacity market. In other cases, in the larger cities, they may be competing with a wide variety of formats, much like the DBS providers competed with low capacity and high capacity cable services. In few very areas, they are competing with no service. So, in some respects, they are competing with similar conditions to EchoStar and DirecTv when compared to terrestrial. XM and Sirius say that internet radio competes in these areas. The FCC has already ruled that internet radio is not mobile and therefore does not compete with terrestrial. Logically, the same will hold true for satellite radio. Even if it did, for it to be a substitute, one would have to have broadband access. If not, one would have to have a service that costs many times more than the subscription rate of satellite radio, then would have to have an internet subscription service on top of that, if they wanted to be commercial free. The same can be argued for cell phone provided content. The person would first need a cell phone, then one capable for providing the service, the right provider for the desired content, mostly likely an unlimited data package, good reception, a provider with national service, and so on.

Sirius and XM would also have us believe that they don't compete with each as much as they do with terrestrial. This is precisely the same argument EchoStar and DirecTv tried to make. The FCC quickly pointed out that their top packages were over 80% the same and that pricing structure was nearly identical. And then they were condemned by their own words in prior legal proceeding where they stated that they were each others main competition. Earlier, Parsons tried to make the case that they didn't compete with each by giving the example that nobody that buys a Cadillac with XM installed would pull out the XM receiver and install Sirius, nor would one replace a Sirius factory installed radio with an XM. They will be ripped if they try to make this argument before the FCC. XM and Sirius were obliged to make interoperable radios. They have made progress, but if they had lived up to the letter of the law, it would not have been necessary to change the hardware to change the service. If this were the case, yes, people would switch services if they liked one better than the other. So, in this respect, it is nearly an identical situation.

The bandwidth issue is nearly identical. As with EchoStar/DirecTV, the FCC will question if the combined companies will use their bandwidth as efficiently as if they were separate.

They both purport(ed) fantastic cost savings as a result of the merger.

EchoStar and DirecTv tried to make the point that they were national providers and that the competition was nationwide, yet their main competition was the local cable franchises. They tried to apportion the local providers with portions of nationwide competition, basically saying if one wanted better cable service one would be willing to move their household. They wanted to make it appear that there was competition were there was not. The argument didn't make any sense and the FCC rejected it. XM and Sirius are nationwide services, yet they want to argue that they compete with the local providers. This is another difference. The opposite is likely to happen here. The FCC will likely say they are a nationwide service and, therefore, only competes with other nationwide services.

Satellite radio is like a Porsche; there is no substitute. Cable was a substitute for satellite TV, terrestrial TV was not. This is another difference.

More to follow...







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