Antitrust Institute Petition to Block Radio Merger Lacks Substance

The Antitrust Institute Wednesday filed a paper citing their reasons why the Department of Justice should sue to block the proposed merger of Sirius (SIRI) and XM (XMSR). The well written document hinges their stance on the fact that they feel that SDARS is a relative market, and that a broader definition of the competitive landscape should not apply.

The institute quotes an excerpt from Section 7 of the Clayton Act which states that a merger, “may be substantially to lessen competition, or tend to create a monopoly.”

According to the Institute, “Satellite Radio, Standing Alone Is The Relevant Market” under section 7 guidelines. While the Antitrust Institute can pose this argument, they offer very little in way of backing up their stance. Their stance is that satellite radio is in and of itself the relative market. Others feel that the audio entertainment landscape is full of competitors.

The Institute argues that Ipods, AM, FM, and Internet radio do not offer the nationwide coverage of satellite radio, the content of satellite radio, the features of satellite radio, or the ability to aggregate demand. Again, there is nothing to really support this statement by the institute. AM and FM are available on a national basis. Particular stations are not. Do people really care what station is delivering the content though? Is Beyonce’s latest hit different in San Francisco than in Boston? Does a consumer in Boston care what is playing in Boise? Is or is not Internet radio available on a national (in fact global) scale?

Just today we covered a story where CBS radio is advertising on their New York stations the online feed of one of their jazz stations in L.A. Internet radio for terrestrial radio is booming. These feeds generated well over $200,000,000 for terrestrial radio in 2006, and the revenue curve is still pointing sharply up. People indeed are listening to music online. The argument that these other forms of audio entertainment do not have the content that satellite radio has is another falsehood.

Look at I-Tunes. Where do you find Rush Limbaugh? Isn’t Rush available to a national audience? Look at all of the syndication that happens. Music is music. People are getting the same music on their iPods that they hear on terrestrial, the Internet or satellite.

Last, the Institute speaks of the ability to aggregate demand. SDARS represents 5% of the radio world. 50% of those exposed to SDARS do not stay. The ability to aggregate demand may increase a bit with a merger, but let’s be realistic. SDARS isn’t exactly on the minds of most audio entertainment consumers.

The Institute argues that there is no evidence to support that the other audio entertainment venues have the ability to constrain prices. BUNK. Once again, there is a 50% take rate for SDARS in the OEM channel. Half of those exposed do not care to keep the service. If prices were to rise, what would the take rate percentage be? This in and of itself shows market constraint.

Next look at retail. Retail sales were off to the tune of at least 30% in 2007. Consumers were not clamoring over the shelves at Best Buy to buy a SDARS receiver. Even with promotions offering discounted service, consumers were not adopting SDARS at a rate that they were a year ago.

The Institute speaks about the high cost of entering the satellite radio sector. Very true. It is quite expensive. However, there are solutions that have been demonstrated to be viable. Slacker has already demonstrated that they can update a users radio stations via leased satellite space. Additionally, the considerations are not limited to what exists today, but what is likely to exist going forward. Cell technology, which the institute neglected to mention (millions of iPhones have already sold), WiMax, and other technologies are being developed at a pace almost beyond imagination. The marketplace of the future needs to be considered.

The Institute states that there is “substantial evidence” that the merger will result in higher prices. Have they read the filings? Where is this “substantial evidence” they speak of? Have they viewed the A-La-Carte proposals? Did they fall for the “cost per channel is higher” argument? The Institute should step away from this and view it again. Look at what consumers do. Do they thinks that the average listener listens to all of the stations offered? Realistically people likely tend to listen to a dozen or so channels. With the merger they will be able to trim costs if they so desire.

The Institute claims that there is “substantial evidence” that there will be an increase in commercial time as a result of the merger. Again, where is this evidence? The companies have promised to keep commercial free music. They have also discussed increasing ad revenue on other channels for quite some time. Segments of the content are simulcasts of television shows. Does the institute want dead air when these shows go to commercial?

The Institute claims that there is “substantial evidence” that the merger will bring less innovation. Once again, why did they not cite this “substantial evidence”? These companies will continue to innovate. It will start with an A-La-Carte receiver and continue from there. Does the institute think that SDARS will sit back and be fat dumb and happy? That is terrestrial radio’s model that is now falling apart at the seams. The consumers are not going to sit back and remain with a service that does not innovate.

The Institute claims that there is “substantial evidence” that there will be reduced programming choices with a merger. Please forgive me for stating the obvious, but if I have Sirius now, and can add the best of XM, where is the reduction coming from? Again, satellite radio has to compete for the ears of consumers. If satellite radio offers less, consumers will go elsewhere.

The Institute claims that Sirius and XM may argue that the merger is benign because they will state that they do not compete with each other. Once again, where does this come from? Sirius and XM have always acknowledged that they compete. They have done so for years. They are not yet to the point of “poaching” subscribers from each other, and the obvious reason is that as a whole SDARS only has 5% of the market. There are plenty of consumers to try to win over without going after the other subscribers.

The Institute suggests a form of collusion must exist if Sirius and XM do not compete. Where do they see this? They have cut exclusive deals left and right. They have competed on every level. They had differing price points for a long time. The hardware of Sirius is priced higher than XM. Collusion is simply not there. This aspect of the Institute's argument is all over the map, and getting into conspiracy theories that make the JFK assassination look tame.

The Institute closes their argument by suddenly looking into the future and arriving at the conclusion that Sirius and XM will not innovate. Again, the innovation is driven because things are moving much faster than these think tanks want to consider.

The Antitrust Institute's paper is well written, but lacks substance. The arguments sound good in theory, but do not gel with reality. The Institute formulated a narrow market definition, and then filled in their argument from there. The correct way to look at the landscape is to look at what exists, what has the potential to exist, how consumers utilize the various mediums and then arrive at a market definition. The Institute simply went about this backwards, and that is obvious.

One last note……did the institute even bother to get consumer poll information prior to arriving at their market definition? It does not appear that they did.

Position - Long Sirius, Long XM

Comments

[Tie D:]

Agree or disagree with the proposed merger, it doesn't matter. Either way, it looks like no decision soon, if there are more filings to rule on.

2008 Feb 20 07:18 AM

[bosch1974:]

I am so tired of seeing your articles on Seeking Alpha! Everytime you post a new one it means...the merger is still not done. Ha!
If this does go through I'll be going back to satellite radio. If not, I'll just stick to my cd's. Wait a minute, that sounds like an alternative to me!

2008 Feb 20 10:12 AM

[simpsonic:]

I am listening to iTunes in my house right now. When I get into my car I may turn on the radio, or listen to my iPhone (through my tape player). My wife may then ask to put in her favorite CD, to which I reply, "heck no, let's listen to good OLD AM radio". To which she will reply, "Funny! How about XM?"... As I will answer, "Sorry, honey... We don't have an XM or Sirius player, because... I AM WAITING ON THE MERGER... to purchase one." (Please note no relationships have been harmed during this process, just broken hearts... for watching our government hold my investment in limbo, in turn not allowing me to spend my cash, which is affecting our local economy. Folks are getting paid off (if true) and the DOJ plays golf and twiddles their thumbs and says nothing about a new time line which allows the Bear Stearns to publish, "it's going to happen soon" statements, allowing stock manipulation.)

COME ON!!! ...still no news, no new timeline, and a bunch a restless LONG TERM investors to think that this is all for nothing, given that internet radio will soon be available everywhere... Think about it... when my iPhone can get my local DC101 station (or XM/Sirius) on my boat (over the internet - via AT&T) in Florida, why would I want to buy another receiver to carry around).

All "Paid for" Politics and No Justice!

2008 Feb 20 10:16 AM

[Edster:]

All investor and subscriber comments are right on. If the merger is not approved we will still have two satalite companies that have never posted a company profit since incorporation. And if the merger is to be denied there is no guarantee that either Sirius or XM will survive. And should one not survive you would then have what constitutes a monoply since there will be only one satilite company. Which is more desireable two companies two companies under one roof or no satilite company at all. Millions of subscribers to both Sirius and XM rely on satalite radio for their entertainment. May the FCC and Congresstional approval soon make their verdict. Approve or disapprove the merger and lets not keep millions of stock holders holding on to "hope".

2008 Feb 20 10:43 AM

[jfinwall:]

sirius will survive, xm will fall if no merger. In comes apple or microsoft with huge opportunities to buy sirius. Think about it.......
sat television in near future for cars. mlb nfl information central!

2008 Feb 20 11:53 AM

[jfinwall:]

nba too

2008 Feb 20 11:55 AM