Rafi Mohammed

What's Going to Stand in the Way of the Sirius & XM Satellite Merger? You Guessed it...Price

Posted on March 6th, 2007 (0 Comments)

A few weeks ago, Sirius Satellite Radio and XM Satellite Radio Holdings announced an $11.4 billion “merger of equals.” Much like HBO pioneered decades ago, satellite radio’s business model focuses on offering original and commercial free programming to listeners that purchase a satellite radio and pay a monthly fee of $12.95 (both Sirius and XM charge the same monthly fee – it’s shocking they are not offering good, better, and best channel tiers like cable companies do). Both companies have created excitement by offering top notch talent…but that talent is costly! Sirius is paying radio personality Howard Stern $500 million (this figure does not include performance bonuses) for his services over five years. XM is paying $650 million over 11 years to broadcast Major League Baseball games. To date, Sirius has attracted 6 million subscribers and XM’s tally is at 7.6 million. But satellite radio’s financial performance has been staggeringly dismal. The combined companies lost $1.4 billion in 2004 and losses inched up in 2005 to $1.5 billion. Continuing this deepening red streak, Goldman Sachs estimates that in 2006 Sirius lost $1.1 billion and XM lost $658 million. Hoping to stop the financial hemorrhaging (and of course…”benefit customers”), Sirius and XM believe merging is their best next step to take.

With millions being spent to shepherd the merger past Federal regulators…care to venture a guess on what’s the key roadblock to a combined Sirius-XM? Yup…it’s all about PRICE. Since Sirius and XM are the only two companies providing satellite radio service – their merger would create a satellite radio monopoly. My old colleagues at the Federal Communications Commission as well as the Department of Justice will focus on what will happen to satellite radio subscriber prices if the Sirius-XM merger is approved.

Now you may be wondering, what kind of crystal ball will regulators use to “forecast” future prices if the companies merge? It all comes down to gauging how competitive the market will be after a merger. Suppose a market has 10 equal sized companies selling similar products. If two companies merge, the odds are that competition will remain healthy and prices will not be affected by the merger. Thus, the merger would be approved.

So…the goal for merger advocates is to make the “relevant market” as large as possible (i.e., include as many competitors as possible). A recent Wall Street Journal article by Amy Schatz and John R. Wilke (Sirius-XM’s Fate Hinges on Market Definitions, February 21) shows how creatively merger advocates push the envelope to maximize a “relevant market” size. When Coca-Cola tried to buy Dr. Pepper in the mid-80’s, its antitrust experts argued in court that the market should not be restricted to just soft drinks, instead the market should be expanded to include all drinkable liquids sold in the U.S., including water. (This aggressive market definition strategy is now known as the “Lake Erie defense”). The Coca-Cola/Dr. Pepper deal did not go through.

To avoid the dreaded “M” word (…monopoly), advocates of the Sirius-XM merger are arguing that in addition to satellite radio, the “relevant market” that regulators should focus on includes the traditional radio industry, iPods, and Internet radio. They argue that given the healthy competition in this large market, a merged Sirius-XM will not be able to raise prices and remain competitive. Get the picture…the larger and more competitive you make the market, the less threatening the merger seems.*

Two questions that I’d love your opinion on:

  1. Do you think the relevant market should include traditional radio, Internet radio, and iPods?
  1. I can understand governmental concern if a merger involves an essential product like milk. But do you think the government should worry about whether the price to listen to Howard Stern increases by a few bucks a month?

*In his testimony before Congress on March 1, Sirius’ CEO Mel Karmazin indicated that a merged Sirius-XM would agree to price controls for a maximum of four years.

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