8 Satellite Radio Merger Points

Jimmy Schaeffler of Carmel Group published an interesting article regarding the merger. Carmel Group did some initial studies on the merger, and I have in the past conversed with Mr. Schaeffler, and conducted an in depth interview based on his opinions. That article is available in the archives of Satellite Standard Group.

As with any opinion there are opposing points of view. In his article, Schaeffler offers a comparison between the wine industry and the satellite radio industry and draws a conclusion that the merger is not a good thing for consumers. In summary the article offers the following example of an event in the wine industry:

The 2-Buck-Chuck Test

“‘The 2-Buck-Chuck Test’ title comes from the remarkable wine product offered by vintner Charles Shaw, who, several years ago, began competing with the significantly higher-priced wines in the national market place by, for example, selling a bottle of quality cabernet for two dollars. The move was revolutionary because not only did Shaw sell a remarkable quantity of spirits, but the competition was forced to respond (and produce more value), and the consumer was treated to a stunningly valuable offering (which the consumer loves, I can assure you from talking with my friends in the wine industry). All three parts of this consuming cycle benefited, and the economic model called basic capitalism did best what it does best: It competed head-to-head and things improved.”

From this example Mr. Schaeffler goes to this:

“Satellite radio is really just a varietal among many other choices. And the problem there is that if you allow the XM (XMSR)-Sirius (SIRI) merger, it is the equivalent of allowing Gallo to purchase the sole remaining competitive cabernet sauvignon producer, leaving just one single maker of cabernet sauvignon. I drink what Gallo gives me (and only that).

I can still go out and purchase merlot, or a zinfandel, or really a lot of other red wines. But what if I just want to purchase cabernet sauvignon - or, in our example, satellite radio - and the merger means there is now only one maker and one choice of cabernet sauvignon … or satellite radio? Is that the best way to run an economy? You pick a business and simply eliminate competition by permitting mergers and telling consumers that other, different types of products or services are adequate substitutes (even if they are not)?

And what if the cost of getting into the cabernet sauvignon - or satellite radio - business is so great that it means, de facto, that no one else will enter and no other competitor for cabernet sauvignon or satellite radio will ever compete? Do you solve my problem by just telling me, well, go drink another type of red wine? Or do you solve my problem of no intra-industry satellite radio competition by telling me my only answer is to go through the hassle, the huge learning curve, and time and cost of downloading scores or hundreds of songs, and buying an expensive device that I don’t want? Or do you solve my problem by telling me to simply listen instead to ad-filled AM-FM broadcast radio?”

Now if I may, I would like to present the opposing argument:

1. Mr. Schaeffler states that, “satellite radio is really just a varietal among many other choices”. A correct statement. But, given the fact that satellite radio is just one variety of choice, the emergence of one satellite radio company or two would have had a similar impact. When satellite radio was first developed and launched, the choices were fewer. There was terrestrial radio, pre-recorded content on CDs and satellite radio. Now the landscape has changed dramatically, and some of those new competitors have had more success than satellite radio (such as iPods).

2. The merger is not the equivalent of letting Gallo purchase the sole remaining cabernet sauvignon. A varietal is a term used for differing wines made from the same grape variety. For the audio entertainment landscape, this would translate to the content being offered, not the method of delivery. The varietal is audio entertainment. FM, AM, HD, cellular, Internet, MP3, Slacker, and satellite are all methods of delivery from which consumers can access content. Essentially these methods of delivery are all focused on providing audio entertainment and information (the common product) to consumers. The merger of satellite radio still allows for many differing delivery methods that the consumer has a choice in, and in point of fact the consumer can get the same audio entertainment (the varietal) if satellite radio merged, OR, did not exist at all.

3. The argument of the cost of getting into the satellite radio business being cost prohibitive steps away from the varietal that the article is based on. The method of delivery in the initial phase of the article is not the issue. The cost of getting into the satellite radio business would equate to how Gallo, or any cabernet sauvignon company, chooses to deliver their product, not the product being delivered. In the case of audio entertainment, if I were to sit Mr. Schaeffler into a new Ford with SYNC, and play him Rush’s “YYZ”, he likely could not tell me whether it was delivered via AM, FM, HD, cell, CD, MP3, Slacker, XM or Sirius. Mr. Schaeffler could in fact hear YYZ on all of those mediums.

4. Mr. Schaeffler states (or implies) that other delivery mediums are not adequate substitutes. How does he draw this conclusion? Millions upon millions of MP3 players have been sold. Millions upon millions of terrestrial radios have been sold. Millions upon millions of cell phones have been sold. Satellite radio is a very small percentage of the audio entertainment industry (a bit over 4%). 50% of those that try satellite radio in their new car make the choice to NOT SUBSCRIBE. Are these people listening to road noise? Or are they more likely satisfied with a differing delivery method giving them their audio entertainment?

5. Mr. Schaeffler states that AM-FM is ad filled, and perhaps a this is something that dissatisfies consumers. The main difference between terrestrial radio from a consumer perspective is the commercials. With terrestrial the price of listening to audio entertainment comes in the form of commercials. Dollars do not change hands, but your time is taken away in the form of commercials. With satellite, you do not have to listen to commercials, but do have to part with some cash. It is a time vs. dollars issue. Whichever the consumer values more will be their choice.

6. Consumers are attracted to satellite, not because of how it is delivered, but because of what is delivered.

7. Terrestrial radio is available in many ways. In point of fact, nearly every car sold in the country has a terrestrial radio installed and that installation is subsidy free. I have yet to see a car that came with satellite radio and did not have a terrestrial radio. I have seen thousands upon thousands that come with terrestrial radio but do not include satellite.

8. The price point of free for terrestrial radio is part of what keeps satellite radio prices in check. If the OEM take rate was at 65% or more, then it would imply that consumers feel that satellite radio is so compelling that they have to have it. If a $12.95 price point only attracts half of those that get exposed to the service, how much room in upward price movement does satellite radio actually have?

Schaeffler points out some things to consider, but also makes some comparisons that are well off base. At the end of the day, we have satellite radio making up less than 5% of radio listening. Toss in MP3s, cells, Internet, etc., and there is no way that you can conclude that this merger creates a giant that is going to cause a shift that crushes other markets.

Position - Long Sirius, Long XM, No Position Ford, No Position wineries.

Comments

[Isaac, Rott...:]

Tyler, good article.

Now, Mr Schaeffler is/was paid by NAB, so we may not question his objectivity as a researcher/analyst.

His 'ping-pong' report effort was adamant proof.

Second, in an almost classical erred way Mr S confuses medium and message. He must have read somewhere that 'the message is the medium' and optimistically followed that line of thinking.

He chose to base his article on a fundamentally wrong supposition: the delivery method and went on to use an embarrassing parrallel to the wine industry.

Maybe Mrs. Schaeffler presented him with the idea whilst complaining about the $ 2 to $ 3 pricerise?

He shot himself in the foot and did not do NAB a favour with the article. KISS is not always right.

2008 Jan 25 09:30 AM

[Joe in Tall...:]

Thus far, what has NEVER been mentioned in any SIRI-XMSR merger article is that there is another HUGE potential/overlooked competitor in the near future -- the auction sale next year of the old analog TV spectrum. In addition to future owners of these signals using it for digital tv broadcasts and long-distance Wi-Fi will be some owners who choose to use it to broadcast MUSIC and other content. Hello?! Isn't anyone picking up on this?
The broadcast distance/range on this spectrum is comparable to AM and FM radio -- in some cases further. Future home and automobile radios/tv tuners will include music and video from this spectrum as well.
I say again, "Hello? Is anyone listening?"
All the more reason for this merger to be approved, bsides the obvious one that people who don't want the service simply don't have to sign-up/pay for it.

2008 Jan 25 10:46 AM

[Newgate:]

How about economy of scale? The merger eliminates much wasteful duplicity.

2008 Jan 25 12:42 PM

[Wow - WTF?:]

What amazes me is how Mr. Schaeffler can have such an impressive resume but be so idiotic. His argument is a total apples and oranges comparison.

This is my favorite part of his letter. . .
"Moreover, with just one satellite radio competitor in the satellite radio market, don’t ever expect the radio equivalent of 2-Buck-Chuck to ever come from that new monopoly satellite radio behemoth. Why would the merged XM-Sirius organization ever think of bringing out its own 2-Buck-Chuck when it no longer has to?"

Wow, what a bonehead! Hey Jimmy, did you hear about a-la-carte programming? There's your 2-Buck-Chuck!

Do some research before you start spewing your BS! With 2 SAT RAD companies prices went UP! 3 years ago XM raised their prices $3/month to match Sirius at $12.95 (www.usatoday.com/money...), so your argument is void!

The market will determine the price. If the price gets too high for you then don't buy it! Listening to satellite radio, like drinking Cabernet Sauvignon, is a luxury, not a necessity. No one is forcing anybody to subscribe to (or drink) anything.

Good point on the 700 MHz spectrum Joe - before you know it we will all have internet in our dashboard, opening up even more competition.

Excellent Article Tyler!

2008 Jan 25 01:16 PM