[Senate Hearing 110-1201]
[From the U.S. Government Publishing Office]
S. Hrg. 110-1201
XM-SIRIUS MERGER AND THE PUBLIC INTEREST
=======================================================================
HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
APRIL 17, 2007
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
DANIEL K. INOUYE, Hawaii, Chairman
JOHN D. ROCKEFELLER IV, West TED STEVENS, Alaska, Vice Chairman
Virginia JOHN McCAIN, Arizona
JOHN F. KERRY, Massachusetts TRENT LOTT, Mississippi
BYRON L. DORGAN, North Dakota KAY BAILEY HUTCHISON, Texas
BARBARA BOXER, California OLYMPIA J. SNOWE, Maine
BILL NELSON, Florida GORDON H. SMITH, Oregon
MARIA CANTWELL, Washington JOHN ENSIGN, Nevada
FRANK R. LAUTENBERG, New Jersey JOHN E. SUNUNU, New Hampshire
MARK PRYOR, Arkansas JIM DeMINT, South Carolina
THOMAS R. CARPER, Delaware DAVID VITTER, Louisiana
CLAIRE McCASKILL, Missouri JOHN THUNE, South Dakota
AMY KLOBUCHAR, Minnesota
Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Lila Harper Helms, Democratic Deputy Staff Director and Policy Director
Christine D. Kurth, Republican Staff Director and General Counsel
Kenneth R. Nahigian, Republican Deputy Staff Director and Chief Counsel
C O N T E N T S
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Page
Hearing held on April 17, 2007................................... 1
Statement of Senator Dorgan...................................... 2
Statement of Senator Inouye...................................... 1
Statement of Senator Klobuchar................................... 45
Statement of Senator Lautenberg.................................. 3
Statement of Senator McCaskill................................... 53
Statement of Senator Stevens..................................... 3
Statement of Senator Thune....................................... 51
Witnesses
Bank, David, Managing Director, Media and Broadcasting Equity
Research Analyst, RBC Capital Markets.......................... 37
Prepared statement........................................... 38
Karmazin, Melvin Alan ``Mel'', CEO, Sirius Satellite Radio....... 4
Prepared statement........................................... 5
Kimmelman, Gene, Vice President, Federal and International
Affairs, Consumers Union; on behalf of Common Cause, Consumers
Union, Consumer Federation of America, Free Press, and Media
Access Project................................................. 20
Prepared statement........................................... 22
Sohn, Gigi B., President and Co-Founder, Public Knowledge........ 29
Prepared statement........................................... 31
Withers, Jr., W. Russell, President, Withers Broadcasting
Companies; on behalf of the National Association of
Broadcasters................................................... 10
Prepared statement........................................... 11
XM-SIRIUS MERGER AND THE PUBLIC INTEREST
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TUESDAY, APRIL 17, 2007
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 10:05 a.m. in
room SR-253, Russell Senate Office Building. Hon. Daniel K.
Inouye, Chairman of the Committee, presiding.
OPENING STATEMENT OF HON. DANIEL K. INOUYE,
U.S. SENATOR FROM HAWAII
The Chairman. This morning the Committee considers issues
related to the proposed merger of the two satellite radio
operators of the United States, XM and Sirius. While satellite
radio is relatively new, it has grown rapidly. Today XM and
Sirius provide audio entertainment services to more than 13
million Americans. These subscribers listen to satellite radio
primarily while driving in their cars but some also listen in
their offices, homes and on portable devices. Despite such
successes, Sirius and XM now argue they should be permitted to
merge into a single satellite radio provider, a result that was
explicitly prohibited when the FCC adopted service rules in
1997.
In the eyes of satellite radio operators, such a
restriction is out of date given the availability of
programming via alternatives like dish over-the-air radio, MP3
players and other means of receiving audio entertainment. But
to merger opponents, that argument rings hollow; in their view,
satellite radio offers a unique collection of nationwide
programming that as a whole cannot be effectively replicated.
As such, these alternatives complement rather than compete with
satellite radio. Thus to merger opponents, a satellite radio
monopoly puts at risk the benefits of low priced and high
quality service that only accrue from competing service
providers.
This morning's hearing presents us with an opportunity to
test these claims. While we welcome this discussion, I believe
that the merger proponents in this case have a steep hill to
climb. Indeed, given the public interest in promoting
competition and maximizing a diversity of media outlets, we
should be skeptical of claims that new technologies necessarily
change the equation and provide competition sufficient to
restrain monopoly power.
With that, I look forward to hearing from today's
witnesses.
STATEMENT OF HON. BYRON L. DORGAN,
U.S. SENATOR FROM NORTH DAKOTA
Senator Dorgan. Mr. Chairman, thank you very much. Thank
you for allowing me to briefly make a statement now. I hope I
can get back in time to ask some questions today. This is, I
think, a particularly good panel. This is a very important
topic. And Mr. Chairman, I believe it was last week I pointed
out that there, in my judgment, has been precious little
antitrust enforcement in this town for a long long time, not
just this Administration but the previous Administration and
beyond. Satellite radio is an appropriate hearing subject. It
is a wonderful new service for consumers. I happen to be a
subscriber so I listen to satellite radio, enjoy it, appreciate
the offering it provides to the American consumers.
You mentioned in your opening statement that the licenses
granted to two companies, Sirius and XM, nearly a decade ago,
included a caveat that they not merge. They are now coming to
us saying that a few short years later they wish to merge. I do
not support the merger. I believe that merger by definition
means less competition and where you had two competitors, you
will have one company. I think it means less competition, more
concentration. Mr. Chairman, you and the ranking members and
others on this Committee know that I've spent a lot of time
being very concerned about the concentration in broadcasting,
television, radio, the galloping concentration in both areas,
concentration with respect to newspapers, and that which we
see, hear and read in this country is unfortunately these days
controlled by a very few people. I'm very concerned about
concentration. This is but one more step in those areas.
If I am back in time I will ask some questions. I had a
chance to meet with Mr. Karmazin yesterday. He is a very able
executive in that industry. I very much appreciated the
opportunity to visit with him. But I do think there are a
couple of important questions, one is the impact on the
consumer of a merger in which competition is eliminated. And
second, I will put up a chart that shows with respect to both
XM and Sirius the content that they are providing. And because
they are providing that content, I suppose, is one of the
reasons that I and other subscribers are paying for that
service every month. But one of the questions and one of the
criticisms has been, what are they paying for all of this
content?
I know that from published reports Oprah is getting $55
million, but as you know from all of the rest of these, it's I
believe Dale Earnhardt, Willie Nelson, Richard Simmons, Quincy
Jones, Eminem, Snoop Dogg, Ellen Degeneres, Barbara Walters,
and the list goes on and on. I think it would be important to
understand, what are the contracts with respect to all of this
content. Has that provided some tightening and pinching with
respect to the revenues of two companies that then wish to
become one?
We have I think a good panel and I appreciate that this
hearing is timely and I think it's also very important. This is
an important public policy question. I come down on the side of
opposing the merger. Mr. Chairman, thank you.
The Chairman. Thank you very much,
Senator Dorgan. The Vice Chairman, Senator Stevens.
STATEMENT OF HON. TED STEVENS,
U.S. SENATOR FROM ALASKA
Senator Stevens. Thank you, Mr. Chairman. I apologize for
being slightly late. I made the mistake of agreeing to make two
appearances before this hearing. I'll cut it down to one next
time. But I do think that this proposed merger between XM and
Sirius presents an opportunity for us to learn more about this
concept of audio entertainment. And we spent a great deal of
time establishing a digital transition to assist public safety,
and to create new broadband opportunities and there is a
transition now obviously in radio.
I'm sure you've had, the same as I have had, some
complaints from local broadcasters who have news, sports,
weather and additional programming that they believe could be
subject to harmful competition, that they can't survive with
regard to this type of paid national satellite radio services.
I appreciate the proponents of the merger visiting with me and
my staff before this hearing. I still don't know the answer to
this question. I look forward to trying to understand it better
in this hearing, and I do know that we all want to know what's
going to happen to the consumers in our own states, so I look
forward to any comments that might be made about this and the
impact of this on rural America. Thank you.
The Chairman. Thank you very much.
This morning we have five witnesses. I'm sorry.
Senator Lautenberg?
STATEMENT OF HON. FRANK R. LAUTENBERG,
U.S. SENATOR FROM NEW JERSEY
Senator Lautenberg. Thanks, Mr. Chairman. The hearing is an
important one and we are going to determine a lot about
listening habits and fairness and equity with our consumers,
and I listen to satellite radio and enjoy it. But there is no
free lunch, obviously. It's a business. And the rise of
satellite radio has offered a new and very powerful way to
increase consumer choice for audio entertainment. But we have
got to make sure that as satellite radio's audience increases,
that consumers are not forced to face fewer choices and higher
prices. We always talk in our country about the value of
competition and what it does for product development and
pricing. Now, if XM and Sirius merge, the combined company
would provide service for nearly 14 million customers across
the country.
But we have got to make sure that service after the
proposed merger would be a consumer benefit, not just to the
satellite radio companies themselves. Consumers must be able to
have the service from both networks without having to invest in
costly new equipment, without paying monthly rates far higher
than the current established rate, $12.95. And it's interesting
to me how the two companies of interest were able to strike a
price that was so perfectly, as we say, in tune, to use the
vernacular.
We have also got to consider the merger's potential effect
on free radio and local coverage. And as a former businessman,
I understand the desire of the two satellite radio companies to
grow their businesses. And they offer a product of great
interest. But we've got to make sure that the principal
interest is that of the public, and that consumers have more
options and fairer pricing for the products. So, Mr. Chairman,
thanks very much for doing this. It's a very important subject
and I look forward to the testimony of our distinguished
witnesses.
The Chairman. I thank you very much, Senator. And as I was
saying, this morning we have a panel of five great experts. Mr.
Mel Karmazin, Chief Executive Officer of Sirius Satellite
Radio; Mr. W. Russell Withers, Jr., President, Withers
Broadcasting Companies; Mr. Gene Kimmelman, Vice President for
Federal and International Affairs, Consumers Union; Ms. Gigi
Sohn, President and Co-Founder, Public Knowledge; Mr. David
Bank, Managing Director and Equity Research Analyst for RBC
Capital Markets. And may I first recognize Mr. Karmazin.
STATEMENT OF MELVIN ALAN ``MEL'' KARMAZIN, CEO,
SIRIUS SATELLITE RADIO
Mr. Karmazin. Good morning, Chairman Inouye and Vice
Chairman Stevens, and members of the Committee. I appreciate
this opportunity to talk to you today about the Sirius-XM
merger and the benefits it will bring to consumers and the
competition we face in the audio entertainment market. Prior to
our announcement on February 19th, our board met many times
with our advisors and we were told that in order for this
merger to be approved, we would have to demonstrate two things,
and you know Senator Dorgan and Senator Lautenberg said it. We
need to demonstrate that this is good for consumers, and number
two, that we have to demonstrate that it's not anticompetitive.
So I'm here to talk to you today about why these benefits
of our merger are good for consumers and not anticompetitive.
This Committee has a distinguished history of examining how
changes in the media landscape affect consumers. So let me
begin by summarizing the consumer benefits of our merger that
we recently enumerated in our FCC filing.
We are confident that a combination of Sirius and XM is a
big win for consumers. And here is why. Today Sirius and XM
each provide consumers with one package for our service at
$12.95. Consumers who want programming from both services, such
as the NFL from Sirius or Major League Baseball from XM, must
buy two radios, and also must have two subscriptions totaling
$25.90 a month.
After the merger, the company will offer a programming
package that offers the best of both services at a modest
premium just over $12.95, which is what the consumers today pay
for one service. In addition, the new company will offer new
lower priced packages with fewer channels combining music,
entertainment, sports, information and more, at a price below
$12.95.
So in the area of pricing, I just described that the new
company will offer a new package costing less than $12.95 and a
premium package that will cost modestly above $12.95, but below
$25.90. No subscriber, no subscriber will pay more for the
service that they now have. Today, consumers of both companies
can block certain adult programming. The new company will
provide a credit so that nobody will subsidize or pay for adult
content that they don't want. Also to Senator Lautenberg's
point, no consumer will have to buy a new radio. The radios
that they currently have will not be obsolete, so lower prices,
more choices for consumers demonstrate that the merger is in
the public interest. All of the commitments are more than just
words. We are prepared to at the appropriate time discuss with
each of the regulators a guarantee as to how these points that
I've mentioned can be conditions of our merger.
Now I'd like to turn briefly to the subject of competition.
That's the second issue that the regulators are going to have
to deal with. The audio entertainment market is a fiercely
competitive, rapidly expanding market, and we are a very small
piece of it. Satellite radio, XM and Sirius only have 3.4
percent of the audio market. Terrestrial radio remains the 800
pound gorilla in our market with nearly 14,000 radio stations,
230 million listeners--that 230 million listeners compares to
our 14 million subscribers combined--and receivers that are in
virtually every car, clock radio and home stereo in America.
Given our small share in a market brimming with competition
and innovation, much of it free and universally available, our
merged company will have to provide great service and pricing
to continue to grow our business. To appreciate the intense
competition in audio entertainment today, consider the
extraordinary changes that have taken place in the 10 years
since our licenses were granted. In 1997, there was no HD
radio. Today there are over 1,100 radio stations providing
coverage and Wal-Mart is selling HD radios. There was no
Internet radio, and Internet radio is fast becoming aggressive
in an area of WiFi. No iPods. There were no iPods in 1997 or
MP3 players; nor were there any entertainment capable mobile
phones.
Today all of these technologies not only compete with
satellite radio, they also have backing from very resourceful
companies with substantial positions. The rapid change in
innovation, a very strong ubiquitous and free competition, and
the small market share that Sirius and XM have together argues
forcefully that our merger will not constrain competition. To
the contrary, competition will require Sirius and XM to
maintain both quality and affordability in order to maintain
our growth.
In closing, we believe that a Sirius and XM merger will be
good for consumers, offering more choices and better pricing.
At the same time we believe that the audio entertainment market
is robust, competitive, and teeming with innovation and will
remain so after our merger. I look forward to answering your
questions. Thank you very much.
[The prepared statement of Mr. Karmazin follows:]
Prepared Statement of Melvin Alan ``Mel'' Karmazin, CEO,
Sirius Satellite Radio
Mr. Chairman,
Good morning. Thank you, Chairman Inouye, Vice Chairman Stevens,
and members of the Senate Committee on Commerce, Science, and
Transportation. I am grateful for the opportunity to talk with you
today about how the merger of Sirius Satellite Radio and XM Satellite
Radio will provide extensive consumer benefits and continue to promote
competition in audio entertainment.
I am Mel Karmazin, the Chief Executive Officer of Sirius. Before I
came to Sirius in 2004, I was president of Viacom and, before that,
president of CBS. I have spent almost 40 years in radio, and just about
my entire working life in the broadcast industry.
With me here today is Gary Parsons, the Chairman of XM. Gary is a
veteran of the communications business and a leader in the world of
satellite radio. Gary and I are both looking forward to working
together to create an exciting new company. Gary's leadership and
talent are crucial to the future of radio. Gary, together with XM's CEO
Hugh Panero, built XM into the success it is today. I should point out
that XM has the largest digital radio facility of its kind in the
country, and is headquartered right here in Washington, D.C., where the
combined company will continue to have a significant presence.
I would like to talk today about some of the important benefits
consumers will see as a result of the proposed merger. I also plan to
discuss the extensive competition that satellite radio faces from a
range of players in the audio entertainment market. As I will explain,
this intense competition will remain after the merger is consummated.
I. A Sirius and XM Merger Will Generate Concrete and Significant
Benefits for Consumers
The Combined Company Will Offer Consumers More Choice at Lower
Prices: Today, Sirius and XM each provide consumers one service
offering at one price--$12.95 per month. Consumers have only a limited
ability to tailor their service, and those seeking programming from
both Sirius and XM must subscribe to both services for a combined
payment of $25.90 per month. The merger of Sirius and XM will enable
the combined company to enhance these offerings through:
Better pricing. The merger will allow us to lower prices.
Consumers who want fewer channels than currently offered will
be able to select one or more packages of channels for less
than $12.95 per month. These packages will include an
attractive mix of music, news, informational, sports,
children's, and religious programming.
More choices. Sirius and XM customers will be able to access
certain popular, previously exclusive programming of the other
provider for a modest premium over what they are paying now.
Still more choices. When interoperable radios are
commercially available, consumers who want to have access to
the complete offerings of both companies will be able to do so
on a single device for significantly less than the current
price of $25.90.
Empowering consumers. While customers of both companies
currently have the option of blocking adult programming, the
combined company will provide customers a credit if they choose
to do so.
Despite the speculation to the contrary, the combined company will
not raise prices. After the merger, consumers who want to continue to
receive substantially the same channel lineup of either Sirius or XM
may continue to do so at the same price--$12.95 per month.
The Combined Company Will Be Able To Provide Consumers More Diverse
Programming: Sirius and XM currently provide a wide range of
commercial-free music channels, exclusive and non-exclusive sports
coverage, news, talk, traffic and weather, and entertainment
programming. However, there is significant overlap and redundancy in
the channel line-ups of Sirius and XM. For example, 12 identical
channels are available on both Sirius and XM. A further 75 channels
overlap by genre--providing substantially similar programming.
In the long-term, the combined company will be able to consolidate
certain redundant programming. The result ultimately will free capacity
for more diverse offerings that are not currently available on either
company's system, including expanded non-English language programming,
children's programming, and additional programming aimed at minority
and other underserved populations. Notably, this additional capacity
also may allow the combined company to provide additional programming
related to public safety and homeland security.
The Merger Will Help Accelerate Deployment of Advanced Technology:
The combined company will be able to offer consumers access to advanced
technology sooner than would otherwise occur. In particular, the
marriage of the companies' two engineering organizations will ensure
better results from each dollar invested in research and development.
As a consequence, the combined company will be able to improve on
products such as real-time traffic and rear-seat video. In addition,
the combined company will be able to introduce new services, such as
enhanced traffic, weather, and infotainment offerings; more rapidly and
with greater capabilities.
The Merged Company Will Be Capable of Commercializing Interoperable
Receivers, Providing Greater Customer Choice and Convenience, While
Also Protecting All Receivers on the Market Today: This merger will
neither interrupt nor affect customers' use of their existing radios.
After the merger, current subscribers may choose to continue to receive
substantially similar service at the same price over their existing
satellite radio. While no radio will become obsolete as a result of the
transaction, we fully expect the merger to stimulate the development of
new interoperable, highly portable, low-cost, and user-friendly
devices.
The Merger Will Create Operational Efficiencies and Safeguard the
Future of Satellite Radio: Satellite radio is a highly capital-
intensive and expensive business. Sirius and XM each have invested over
$1 billion in their initial in-orbit satellites and over $5 billion
each in their businesses overall, and both continue to report
significant operating losses. For the year ended December 31, 2006,
Sirius reported a net loss of $1.1 billion while XM reported a net loss
of $719 million. Both companies continue to report enormous operating
losses. The proposed merger will allow Sirius and XM to achieve large-
scale operational efficiencies that will help ensure that satellite
radio can remain a strong, effective, and innovative audio
entertainment provider. Importantly, significant portions of the
savings achieved through the merger will be shared with customers
immediately and in the long-term through lower prices and improved
service offerings.
* * * * * * *
Each of these important benefits is directly tied to the proposed
merger and cannot be realized without it. I also would like to make
clear that these commitments are more than just words offered to
appease regulators. We view each of these benefits as a ``win-win''
that will make good business sense for Sirius-XM. At the same time that
we will be able to save our customers money and offer them more
attractive services, we will be strengthening our merged business. As I
will explain in more detail below, satellite radio competes intensely
with free terrestrial radio and a host of other audio entertainment
providers. The key to getting more subscribers will not be to widen the
price gap between free and what satellite radio charges. Instead, it
will be to offer consumers a better value. We are prepared at the
appropriate time to discuss each of the issues with regulators and to
guarantee these benefits as a condition of our merger approval.
II. A Sirius and XM Merger Will Enhance Not Harm Competition
A. Satellite Radio Is a Small Part of a Highly Competitive and Ever-
Expanding
Market for Audio Entertainment
The market for audio entertainment in the United States is robustly
competitive and rapidly evolving. Sirius and XM compete directly and
intensely with a host of other audio providers for consumer attention.
As a result, although satellite radio has proven to be an appealing and
popular new product, its market penetration remains quite limited. A
recent Arbitron study found that Sirius and XM account for just 3.4
percent of all radio listening, spread out among the approximately 300
channels that the two companies currently offer. To provide the
Committee with a sense of the fiercely competitive state of today's
audio entertainment market, I would like to take a few moments to
provide some details concerning some of our more salient competitors.
Terrestrial Radio: By any measure, ``over-the-air'' AM/FM radio is
the most dominant form of audio entertainment. This is not surprising,
given the ubiquity of the service: AM/FM radio is offered free of
charge to all consumers and comes as a standard feature in virtually
every vehicle, home stereo, and clock radio sold to U.S. consumers.
Nearly 14,000 radio stations exist nationwide. Approximately 230
million Americans choose to listen to terrestrial radio each week. And
much of the content available over terrestrial radio mirrors that
provided by satellite radio.
HD Radio: The broadcast industry has made significant strides in
rolling out digital services, and HD Radio technology is now spreading
rapidly. Just last month, HD Radio received a substantial boost from
the FCC. The agency issued an implementing decision that not only
enables radio stations to broadcast higher quality digital
entertainment, but also permits them to offer multiple streams of
programming and data services over their existing channels.
Significantly, the Commission's decision also allows radio broadcasters
to provide digital subscription services on an experimental basis. This
flexibility surely will intensify the competition between AM/FM radio
and satellite radio, not only for listeners but also for subscription
dollars.
Through the HD Digital Radio Alliance--a consortium of broadcasters
that includes almost all major players, including Clear Channel
Communications, CBS, and ABC Radio--the terrestrial radio industry has
committed hundreds of millions of dollars to promoting this technology.
That investment already has had proven effects. Approximately 1,200 HD
Radio stations are already on the air, and hundreds more have licensed
HD Radio technology.
In addition, the availability of HD Radio receivers is steadily and
rapidly increasing. A year ago, there were only four or five HD Radio
models available and the lowest price was $599. Now there are 30
manufacturers of radios and price points under $200. HD Radio is now
available on all new BMW vehicles and in RadioShack stores. Wal-Mart,
the Nation's largest retailer, recently announced plans to sell HD
Radio receivers. Statements and materials from the HD Digital Radio
Alliance clearly position HD Radio as a counterpoint to satellite
radio.
Internet Radio: Internet radio is another formidable and fast-
growing player in the audio entertainment market. A 2006 Arbitron study
found that weekly listenership to Internet radio had increased 50
percent in just 1 year, and now approaches one in five Americans among
key demographic segments. In one survey, 34.5 percent of Americans aged
15-24 mentioned online streaming as a primary source of music
consumption in 2006 (up from 9.7 percent in 2004). Internet radio
broadcasts have no geographic limitations and can provide listeners
with radio programming from around the country and the world. Several
Internet radio services, including Yahoo! LAUNCHcast and Pandora, allow
users to create their own radio stations based on their listening
preferences.
Internet radio, like HD Radio, is becoming a source for mobile
audio entertainment as well. Slacker, a service unveiled just weeks
ago, allows users not only to customize their music channels, but also
to listen to them on portable devices, including in their cars; the
service includes a free, advertising-based version as well as a
subscription option. Various Internet radio offerings are already
available on mobile phones, and Internet radio is expected to become
widely available on portable devices, including car radios, by 2008.
iPods and Other MP3 Players: MP3 players, such as iPods, also
compete with satellite radio for listeners. More than 116 million MP3
players have been sold. Like other audio competitors, MP3 players are
highly mobile. There are now a variety of accessories available to play
MP3 players in cars, through the vehicle's FM radio or tape deck. In
addition, Apple recently announced that it has teamed with Ford,
General Motors, and Mazda to provide iPod integration across the
majority of their brands and models. With the addition of these models,
more than 70 percent of 2007-model U.S. automobiles are expected to
offer iPod integration. Many MP3 players also can be connected to
online music subscription services, such as Real Network's Rhapsody,
Napster 2.0 and Yahoo! Unlimited.
Mobile Phones: Mobile phones represent yet another significant and
expanding means of enjoying audio entertainment. Approximately 75
percent of all Americans currently own a mobile phone, and the
possibility of content delivery has not been lost on wireless carriers.
Several major carriers are now offering audio entertainment options,
and subscribers are taking advantage of them in dramatically growing
numbers. For example, Sprint currently offers over 50 channels of radio
and streaming video that subscribers can access via their devices for a
monthly fee as well as music download capabilities for a one-time fee.
AT&T and Verizon Wireless provide similar services. Approximately 23.5
million wireless subscribers currently own phones with integrated music
players. This demonstrated consumer interest in music-capable handsets
likely will skyrocket in a matter of months when AT&T and Apple make
the Apple iPhone available for sale.
In addition, a number of other companies and consortiums have
announced plans to deliver broadcast audio and video content through
mobile phones and other wireless devices. Three companies--MediaFLO
USA, HiWire, and Modeo--have acquired nationwide or near-nationwide
spectrum to deliver audio and video content through existing wireless
service providers and are in the process of implementing, testing, and
launching service. A joint venture of Sprint and several cable
companies is implementing a similar mobile entertainment platform.
The above list is by no means exhaustive. To be a competitor,
businesses and technologies need not be exact copies of one another.
There are numerous other audio entertainment options available today as
well as a constantly growing array of choices in the works. Moreover,
it is clear that these providers view themselves as being in direct
competition with each other. In public filings and statements, various
members of the radio broadcasting industry have emphatically stated
that they compete directly with satellite radio and other forms of
audio entertainment--a view that is underscored by the fervent
opposition they expressed toward the pending transaction before the ink
on the merger agreement was even dry. By the same token, Sirius and XM
have listed a wide range of audio entertainment competitors in their
SEC filings.
Just by way of example, NAB recently explained in the context of
the FCC's ongoing media ownership proceeding that ``local radio
stations compete for listeners with other forms of audio delivery
offering an almost unlimited array of content. iPods and other MP3
players, music services, podcasting and the Internet streaming of U.S.
and foreign radio stations literally provide content from around the
world to listeners in each local radio market in America.'' Such
statements remove any doubt concerning the diversity and multiplicity
of options available in the audio entertainment market today.
B. Given the Widespread Competition in the Audio Entertainment Market,
the Merged Company Will Not Have the Ability to Harm Existing
Competitors or New Market Entrants
In an attempt to cast doubt on the merits of a Sirius-XM merger,
some broadcasters now appear to be reversing course and questioning
whether satellite radio fully competes with AM/FM radio and other audio
services. Pointing to differences between various audio services, some
even try to make the case that satellite radio is a market onto itself
and, therefore, that the proposed merger will create a ``monopoly''
that will have the ability and incentives to harm competition and
consumers. Of course, this artificially narrow characterization
conflicts with the expansive audio market that broadcasters publicly
have described elsewhere.
But broadcasters cannot have it both ways. As the industry's own
prior statements make clear, the fact is that the market for audio
entertainment is highly competitive now, and it will continue to be so
after a Sirius-XM merger.
Given the realities of today's audio entertainment landscape, there
is no legitimate basis for concern that this merger will enable the new
company to charge ``monopoly'' prices or otherwise harm consumers or
competitors. In reality, a combined satellite radio provider will be
unable to exercise market power, let alone dominate the market.
As explained above, although satellite radio has proven to be an
appealing and popular new product, it accounts for only a small slice
of the audio entertainment market. The combined company will serve only
a minor fraction of the consumers who purchase or use audio
entertainment services. Given that Sirius and XM together account for
only about 3 percent of all radio listening, we will have every
incentive to offer prices that will attract more subscribers, not drive
them away.
In addition, customers can and do easily substitute other audio
entertainment options for satellite radio, and this will continue to be
the case after the merger. Indeed, many of the existing options are
potentially more appealing and less costly to consumers. For example,
AM/FM radio, as well as HD Radio, currently offers much of the same
content as satellite radio for free to all consumers. And the
ubiquitous nature of AM/FM radios provides consumers with broad
exposure to the programming of broadcasters. The merged company's
prices will continue to be constrained by these inescapable facts.
Similarly, online music subscription services and podcasting enable
consumers to replicate most of the content and the user experience
available through satellite radio. Moreover, Internet radio is capable
of offering more variety and choice than any other option, and allows
listeners to have substantial control over content selection and
information about artists.
As a further illustration of the substitutable nature of various
audio services, several audio providers actively have been expanding
their capabilities so that their services more closely resemble
satellite radio. For example, terrestrial radio has increased its
format options while reducing commercials. HD Radio provides higher-
quality sound that is comparable to satellite radio, as well as
expanded genres and music formats. New automobiles increasingly come
with input jacks that can be used to connect MP3 players or factory-
installed iPod integration kits, similar to satellite radio. Likewise,
vehicles soon will support Internet radio and music over mobile phones.
Given the existing and emerging capabilities of a range of audio
entertainment services, it is not surprising that consumers routinely
avail themselves of multiple options. In addition, many users of newer
services, such as MP3 players and satellite radio, continue to rely on
terrestrial radio. These factors will continue to exist, and to impact
the behavior of satellite radio and other market participants after the
merger.
Finally, aside from this existing, vibrant competition, entry by
new competitors and expansion of current services will remain viable
notwithstanding the pending merger. New wireless networks are already
under construction, which will support mobile audio services via
devices such as mobile phones and Internet radio over WiFi and WiMAX.
In addition, there appears to be little limit to the growth of Internet
radio and podcasting. Other types of spectrum also are available that
are capable of supporting services comparable to satellite radio. For
example, audio entertainment services similar to satellite can be
deployed using the frequencies allocated to the Wireless Communications
Service. Indeed, this spectrum originally was identified for satellite
radio, but was reallocated pursuant to congressional mandate. The FCC
could authorize audio entertainment services using spectrum
alternatives without regard to a satellite radio merger.
III. Conclusion
Chairman Inouye, Vice Chairman Stevens, and members of the
Committee, the audio entertainment market today is vibrant,
competitive, and innovative, and every indication is that it will be
even more so in the future. We believe that the combination of Sirius
and XM will be good for consumers as it will intensify this
competition, expand the choices for consumers, and reduce prices. We
appreciate this opportunity to share our views with you, and I look
forward to answering any questions you may have.
Thank you.
The Chairman. Thank you very much, Mr. Karmazin. May I now
recognize Mr. Withers.
STATEMENT OF W. RUSSELL WITHERS, JR., PRESIDENT,
WITHERS BROADCASTING COMPANIES; ON BEHALF OF THE
NATIONAL ASSOCIATION OF BROADCASTERS
Mr. Withers. Good morning, Chairman Inouye, Vice Chairman
Stevens, and members of the Committee. My name is Russ Withers.
I'm the owner of Withers Broadcasting Companies, which operates
30 local radio stations and six television stations in seven
states, including Missouri and West Virginia. I'm testifying
today on behalf of the National Association of Broadcasters,
where I serve as Vice Chairman of the Radio Board and a member
of the Executive Committee. And I'm here to voice opposition to
the proposed merger of this country's only two nationwide
satellite radio companies, XM and Sirius.
Satellite radio is a national radio service that provides
hundreds of program channels to listeners across the country.
There are only two such services and they compete against each
other in the national marketplace. The undeniable fact is that
XM and Sirius want government permission to take two
competitive companies and turn them into a monopoly. When the
FCC allocated spectrum to Sirius and XM in 1997, it
specifically ruled against a single monopoly provider.
The Commission foresaw the dangers of a monopoly. It
explicitly licensed more than one provider to ensure
intramarket competition and to prohibit one satellite radio
provider from ever acquiring control of the other, and there is
no reason to change that position now. Currently, Sirius and XM
occupy the entire 25 megahertz of spectrum allocated by the FCC
for nationwide satellite radio service. With the new monopoly
and a merged entity, they will continue to control this entire
block of spectrum, preventing any new entrant from offering
national satellite radio service and competing against their
new monopoly.
These companies have claimed that no one should worry about
this monopoly because local radio competes against XM and
Sirius. Let's be very clear on this point. Radio broadcasters
do not compete in the national market of the satellite radio
companies, but XM and Sirius do compete in the local radio
markets, markets that I operate in every day, markets like Cape
Girardeau and Sikeston, Missouri. Local radio stations can only
broadcast within their FCC defined coverage area. Local
broadcaster signals are not nationwide, and they are not
subscription-based. The national availability of satellite
radio sets it apart from local broadcasters.
I operate in small and medium markets like Bridgeport and
Clarksburg, West Virginia, where we are the voice of the
community in times of emergency. In West Virginia this week it
was the flood warnings; in Illinois and Missouri for the last 2
weeks it's been the tornado alerts. We are the voice of unique
connection to our listeners that no other medium provides. XM
and Sirius, by contrast, offer a prepackaged bundle of
national, mobile, digital audio channels. KGMO in Cape
Girardeau delivers outstanding local news, sports, and
entertainment. Consumers, however, would never consider my
station's local programming a comparable product to Sirius' 133
channels or XM's 170.
A local radio station's programming is clearly not a
substitute for the array of services offered by XM and Sirius.
Services like XM and Sirius compete with each other and no one
else in the national satellite radio market. In fact, a recent
FCC report and analysis on satellite market conditions shows a
very healthy and competitive national satellite radio market.
Following U.S. Department of Justice merger guidelines, the FCC
defines the market participants as two providers: XM and
Sirius. The report also finds the geographic aspect of this
market to be national, subscription, and offering nationwide
licensed choices. These are inherently different
characteristics and services than that of local radio
broadcasters.
I can understand why XM and Sirius would want a monopoly.
But that does not mean that it is in the public interest. XM
and Sirius by their own admission are not failing companies.
Their current highly leveraged position is due to extraordinary
fees paid for marketing and on-air talent, including the $500
million contract that Sirius awarded to Howard Stern and the
$83 million bonus paid to him just last year.
But even with these costs, XM and Sirius have made clear
that they can succeed without a merger. For these reasons and
others, local broadcasters strongly oppose a government
sanctioned monopoly for satellite radio. Thank you.
[The prepared statement of Mr. Withers follows:]
Prepared Statement of W. Russell Withers, Jr., President, Withers
Broadcasting Companies; on behalf of the National Association of
Broadcasters
Good morning Chairman Inouye, Vice Chairman Stevens, and Committee
Members, my name is W. Russell Withers, Jr. The Withers Broadcasting
Companies own and operate 30 local radio stations and six television
stations in seven states. I am a member of the Board of Directors of
the National Association of Broadcasters (NAB), on whose behalf I am
testifying today. NAB is a trade association that advocates on behalf
of more than 8,300 free, local radio and television stations and also
broadcast networks before Congress, the Federal Communications
Commission and other Federal agencies, and the courts.
My message this morning could not be simpler. The proposed merger
to monopoly of XM Radio and Sirius Satellite Radio must be rejected. A
monopoly in satellite radio would clearly harm consumers by inviting
subscription price increases, stifling innovation and reducing program
diversity. This monopoly would also jeopardize the valuable free over-
the-air, advertiser-supported services provided by local radio
stations. Free, over-the-air broadcasters are currently investing in
new technologies, including digital audio broadcasting, which will
enhance their stations' competitiveness and ability to serve local
communities and audiences. All local stations ask is for a fair
opportunity to compete in today's digital marketplace on a level
playing field.
To Preserve a Fair and Level Competitive Playing Field, a Government-
Sanctioned Satellite Radio Monopoly Must Be Rejected
Local radio stations are embracing the future by investing
significant financial and human resources in new technologies,
including high definition (HD) digital radio and Internet streaming, so
that we can continue to compete in a digital marketplace and improve
our service to local communities and listeners in myriad ways. For
example, HD radio offers crystal-clear audio; the ability to air
multiple free over-the-air programming streams; and the capability to
offer additional services, including wireless data enabling text
information such as song titles and artists or weather and traffic
alerts. All local broadcasters ask is for the opportunity to compete in
today's digital marketplace on a fair and level playing field. The
proposed merger to monopoly of XM Radio and Sirius Satellite Radio must
accordingly be rejected.
Plainly stated, XM and Sirius are asking the government to grant
them the sole license to the entire 25 MHz of spectrum allocated to
satellite radio service. That is a state-sanctioned monopoly with an
absolute barrier to entry by any other competitor. Currently, XM
carries over 170 channels of audio programming, and Sirius offers over
130 channels. A combined satellite radio entity would thus control
approximately three hundred channels of radio programming in every
local market in the United States, without any realistic check on its
ability to assert market power. Even the largest cities, such as New
York and Los Angeles, do not have anywhere close to 300 terrestrial
radio stations, and smaller communities have a mere fraction of this
number of stations, which, of course, are not all controlled by the
same entity.
The drawbacks of a monopoly in any industry are clear. Monopolists
have the ability to raise consumer prices with little constraint, to
discriminate, and to otherwise engage in anti-competitive practices.
They need not compete with other providers to offer top-quality
services. Monopoly providers do not respond quickly to consumer wants
and needs; as a result, innovation suffers. In short, there is no
reason to grant the proposed merger to monopoly in the market for
national, multichannel mobile audio programming services.
The XM-Sirius Merger Will Create a Monopoly in the Marketplace
XM and Sirius claim that they would not be a monopoly if they
combined, but just one more competitor providing audio services. The
companies would have Congress, regulatory agencies and consumers ignore
the fact that a merged XM-Sirius would be the only licensee of all
satellite radio spectrum; ignore the fact that no other entity can
enter the satellite radio market; and ignore the fact that they would
be able to use their monopoly power to the detriment of local free
over-the-air radio stations, which must sell advertising based on the
numbers of listeners they attract. There is no doubt that the effect of
the proposed combination ``may be substantially to lessen competition,
or to tend to create a monopoly'' in the provision of satellite radio
services, contrary to antitrust law.\1\
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\1\ Section 7 of Clayton Act, 15 U.S.C. 18.
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Local stations do not compete in the national market for the
multichannel mobile audio services offered only by XM and Sirius.
Broadcasters' signals are not nationwide, do not move from one
geographic area to another, and are not available only by subscription.
Free over-the-air programming, unlike satellite radio programming, must
primarily depend on commercial advertising. Even utilizing digital
technology, local stations can offer only a few multicast programming
streams, in comparison to the hundreds controlled by XM and Sirius.
As a subscription service with hundreds of channels, satellite
radio can also offer highly specialized channels that broadcasters who
must ``sell'' their audiences to advertisers would be economically
unable to offer. Sirius, for instance, offers an ``Elvis Radio''
channel airing all Elvis Presley all the time, while XM has a channel
devoted solely to movie soundtracks. In addition, broadcasters do not--
and cannot under existing law and regulation--air certain content
offered by subscription satellite radio, particularly content that
would invite indecency complaints and enforcement actions. XM, for
example, offers a number of channels labeled ``XL'' that frequently
feature explicit language; these channels include hard rock, heavy
metal, punk and hip-hop music and uncensored comedy. Sirius also has a
number of ``uncut'' and ``uncensored'' channels, including hip-hop,
comedy, talk (such as Howard Stern), and Maxim, Cosmo and Playboy
radio. For all these reasons, local terrestrial radio broadcasting is
not a substitute for national multichannel satellite radio, and
consumers regard these services as distinct.
Indeed, when initially authorizing satellite digital audio radio
service (DARS) in 1997, the FCC itself recognized that satellite radio,
with its national reach, offers ``services that local radio inherently
cannot provide.'' \2\ For example, unlike local terrestrial radio
stations, satellite radio can provide continuous service to the long-
distance motoring public and to persons living in remote areas. XM has
stated that its nationwide service can reach nearly 100 million
listeners age twelve and older who are outside the 50 largest Arbitron
radio markets (with the largest number of radio stations). XM also
estimates that, of these 100 million listeners, 36 million live outside
the largest 276 Arbitron markets and that 22 million people age twelve
and older receive five or fewer terrestrial radio stations.\3\ Unlike
even the most powerful terrestrial radio stations, which can still only
reach a mere fraction of American consumers over-the-air, satellite
radio can reach all listeners across the country with vastly more
channels than any single terrestrial broadcaster. Other media industry
observers have agreed that ``[s]atellite radio is a national
platform,'' thereby clearly differing from locally-licensed and
locally-oriented terrestrial broadcast stations.\4\ Simply put, only XM
and Sirius compete in this national, multichannel mobile radio market,
and they are proposing to create a monopoly in that market.
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\2\ Establishment of Rules and Policies for the Digital Audio Radio
Satellite Service, 12 FCC Rcd 5754, 5760-61 (1997) (Satellite DARS
Report & Order).
\3\ XM Satellite Radio, Inc., Annual Report (SEC Form 10-K) at 2
(March 15, 2001).
\4\ Katy Bachman, Buyers: Size Not Enough for Sirius-XM Merger,
Media Week (Feb. 26, 2007) (quoting Matt Feinberg, Senior Vice
President of Zenith Media).
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From the point of view of a local broadcaster, I think it's clear
that only XM and Sirius compete in this market for national
multichannel radio services. Assume, for instance, that the merged XM-
Sirius were to raise its subscription rate a small amount, such as 5
percent. After this price increase, would XM-Sirius lose so many
customers to other providers such as my local stations that the price
increase would be unprofitable for the combined company? If not, then
free over-the-air radio and other audio services are not substitutes
for satellite radio and do not compete in the same market as providers
of satellite radio services.
Given the substantial differences between a nationwide,
multichannel subscription audio service and local, advertiser-supported
over-the-air radio service, it is highly unlikely that a consumer
currently subscribing to satellite radio would drop their subscriptions
and substitute other audio services for satellite DARS if the price of
satellite radio were to increase by a small but significant amount,
such as 5 percent or even five to ten percent. After XM in 2005 raised
its monthly price from $9.99 to $12.95 (a nearly 30 percent increase),
the company continued to experience significant and rapid subscriber
growth.\5\
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\5\ See Testimony of David A. Balto before the U.S. Senate
Committee on the Judiciary, The XM-Sirius Merger: Monopoly or
Competition from New Technologies at 4 (March 20, 2007).
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The parties to the proposed merger have certainly not shown that
terrestrial radio or other audio technologies such as iPods would have
a constraining effect on the ability of a combined XM-Sirius to raise
prices. In fact, Sirius CEO Mel Karmazin stated in January that Sirius
was ``open'' to higher pricing; that Sirius believed there was
``elasticity in our price point;'' and that price increases are ``a
good option for us.'' \6\ If Sirius believed that it could successfully
raise its subscription prices, even in the face of competition from XM,
then clearly a combined XM-Sirius would feel little if any competitive
restraints in increasing subscriber fees. Indeed, Mr. Karmazin has
pointed out that in Canada where Sirius has a ``significant lead in
satellite radio,'' their service is ``priced at a higher price point.''
\7\ This confidence in the ability of satellite radio providers to
increase their prices without losing subscribers shows that satellite
radio is the relevant product market for any antitrust analysis.
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\6\ Citigroup 17th Annual Entertainment Media & Telecommunications
Conference (Jan. 10, 2007), webcast available at http://
investor.sirius.com/medialist.cfm.
\7\ Id.
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Other evidence suggests that demand for satellite radio services is
highly inelastic and would not be significantly lessened by increases
in subscriber fees. For instance, there is an extremely low ``churn''
rate among satellite radio subscribers.\8\ This indicates that other
audio services are not regarded by consumers as effective substitutes
for satellite radio.
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\8\ See, e.g., Howard's Way; Satellite Radio, The Economist (Jan.
14, 2006) (churn rate of dissatisfied customers who drop the service is
barely 1.5 percent a month for Sirius, which is among the lowest for
any subscription business).
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It is also instructive to note that when analyzing the comparable
proposed merger of EchoStar and DIRECTV, the only two providers of
satellite television services, the FCC tentatively defined the relevant
market as ``no broader than the entire MVPD [multichannel video
programming distribution] market.'' However, the FCC found that the
product market in question ``may well be narrower than that,'' and
might include only the two national satellite television providers,
excluding multichannel cable operators as well as local terrestrial
broadcast television stations.\9\ Similarly, local terrestrial radio
stations should not be regarded as competing in the marketplace for
nationwide multichannel satellite radio services.
---------------------------------------------------------------------------
\9\ EchoStar Communications Corp., 17 FCC Rcd 20559, 20609 (2002).
---------------------------------------------------------------------------
Perhaps most significantly, just last month the FCC treated
satellite DARS as a separate market in a report to Congress on
satellite competition.\10\ The FCC defined this market as a
``national'' one, consisting of ``satellite audio programming provided
to persons within the United States for a fee.'' FCC Satellite Report
at 55-56. Clearly, local radio stations are not participants in this
market for national audio programming provided for subscription fees.
Consistent with the FCC's analysis, a number of analysts have recently
concluded that XM and Sirius are the only participants in the national
multichannel mobile radio market.\11\
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\10\ See First Report in IB Docket No. 06-67, FCC 07-34 at 55-57
(rel. March 26, 2007) (FCC Satellite Report).
\11\ See, e.g., Criterion Economics, LLC, Expert Declaration of J.
Gregory Sidak Concerning the Competitive Consequences of the Proposed
Merger of Sirius Satellite Radio, Inc. and XM Satellite Radio, Inc. at
8-33 (March 16, 2007) (Criterion Economics Report); The Carmel Group,
White Paper, Higher Prices, Less Content and A Monopoly: Good for the
Consumer? The Proposed Sirius-XM Merger, Its Harmful Impact on
Consumers, Content Providers and Performing Artists at 3-6 (April 2007)
(Carmel White Paper).
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In sum, it is clear that the proposed merger of XM and Sirius would
substantially ``lessen competition'' or ``tend to create a monopoly''
in the market for nationwide, multichannel mobile audio programming
services, contrary to the Clayton Act. As explained in detail below, a
XM-Sirius merger would further violate FCC rules and precedent,
congressional policy and established antitrust case law; would result
in significant competitive harms without any corresponding public
interest benefits; and would reward companies with a history of rule
violations by granting them a monopoly in the provision of nationwide
multichannel audio services.
The Proposed Merger Violates FCC Rules And Precedent, Congressional
Policy and Judicial Decisions
The FCC expressly declined to allow a monopoly when it originally
allocated spectrum for satellite radio service in 1997. It chose not to
permit a monopoly satellite radio service because ``licensing at least
two service providers will help ensure that subscription rates are
competitive as well as provide for a diversity of programming voices.''
Satellite DARS Report & Order, 12 FCC Rcd at 5786. And, I note, the
agency was assuming at that time that each provider would control about
50 channels, not the 300 channels that a united XM-Sirius would have
today.
Ironically, the FCC in part based its decision to require multiple
satellite radio providers on arguments presented by Sirius. During the
FCC's consideration of how many different satellite radio providers it
should authorize, Sirius (then called CD Radio) argued strenuously that
multiple providers were necessary to ``assure intra-service
competition,'' including price competition, and to guarantee a
diversity of program offerings.\12\ Given these competitive concerns,
Sirius explicitly stated that no satellite radio provider should ever
be permitted to combine with another provider. See CD Radio Comments at
18. Now, only a few years later, Sirius apparently sees no problem with
allowing the satellite radio service to become monopolized by a single
provider with control over the entire national market.
---------------------------------------------------------------------------
\12\ CD Radio Comments in IB Docket No. 95-91, at 17.
---------------------------------------------------------------------------
But in fact it would be entirely inconsistent with the pro-
competitive satellite radio licensing scheme created by the Commission
to now allow XM and Sirius to combine into a monopoly enterprise. At
the urging of the parties, including Sirius, the Commission in 1997
explicitly prohibited any such future merger by determining that,
``after DARS licenses are granted, one licensee will not be permitted
to acquire control of the other remaining satellite DARS license.''
Satellite DARS Report & Order, 12 FCC Rcd at 5823. There is no basis
for reversing that decision now.
In a parallel case in 2002, the Commission refused to permit a
merger of the only two nationwide Direct Broadcast Satellite (DBS)
licensees, EchoStar and DIRECTV. In rejecting this proposed merger, the
Commission found in a unanimous vote that the combination would
undermine its goals of increased and fair competition in the provision
of satellite television service. The agency also found that the claimed
benefits of efficient spectrum use were outweighed by substantial
potential public interest harms that might result from the transaction,
including reduced innovation, impaired service quality and higher
subscription prices. The Commission further stressed that the merger
would eliminate a current viable competitor from every market in the
country and would result in one entity holding the entire available
spectrum allocated to the DBS service.\13\
---------------------------------------------------------------------------
\13\ See EchoStar Communications Corp., 17 FCC Rcd 20559, 20562,
20626, 20661-62 (2002) (EchoStar/DIRECTV Merger Order).
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For precisely the same reasons, XM and Sirius should not be
permitted to create a monopoly that would eliminate a viable competitor
from every market across the country and that would control all the
spectrum allocated to a nationwide satellite service. Such a merger
would likely ``increase the incentive and ability'' of the parties ``to
engage in anticompetitive conduct.'' EchoStar/DIRECTV Merger Order, 17
FCC Rcd at 20662.
Beyond violating FCC rules and precedent, such a government-
sanctioned monopoly would clearly also be inconsistent with
congressional policy favoring competition over monopoly, as expressed
in the 1996 Telecommunications Act, and with long-standing enforcement
of the antitrust laws. Indeed, the courts have held that even mergers
to duopoly are, on their face, anticompetitive and contrary to the
Federal antitrust laws.\14\ Without question, a merger to monopoly
would be anticompetitive, inconsistent with antitrust principles and
contrary to judicial decisions.\15\ Or, to quote Sirius CEO Mel
Karmazin, ``it would be great if there was a monopoly, but the second
best thing is a duopoly.'' \16\
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\14\ See, e.g., FTC v. H.J. Heinz Co., 246 F.3d 708 (D.C. Cir.
2001); FTC v. Cardinal Health, Inc., 12 F. Supp. 2d 34, 66 (D.D.C.
1998).
\15\ See, e.g., FTC v. Staples, Inc., 970 F. Supp. 1066, 1081
(D.D.C. 1997) (enjoining merger of two competing office supply
superstores where the merger would have left only one superstore
competitor in 15 metropolitan areas and only two competing superstores
in 27 other areas).
\16\ See http://blog.fastcompany.com/archives/2007/03/14/
mel_karmazins_greatest_hits.ht
ml?partner=rss, quoting Mel Karmazin from Advertising Age (April 11,
2005).
---------------------------------------------------------------------------
XM and Sirius Will Be Able To Exercise Virtually Unlimited Market Power
in the Closed National Radio Market, to the Detriment of
Consumers, Programming Suppliers and Other Audio Service
Providers
The harms that would result from this proposed merger would be
numerous and obvious, affecting content suppliers, consumers and other
providers of audio services. Monopoly status would clearly enable the
merged company to exert greater leverage over programming suppliers,
who would be unable to play Sirius and XM off each other to obtain
access to a satellite radio provider on favorable terms. If this merger
is approved, the united XM and Sirius will be able to dictate price to
programming suppliers on a ``take it or leave it'' basis.
Eliminating competition in the national mobile radio market would
also greatly reduce incentives for the combined XM and Sirius to
innovate, to the clear detriment of consumers. A monopolistic market
structure is inevitably less innovative than a competitive one, and the
consumers of satellite radio service will accordingly fail to benefit
from innovations such as new programming services and technical
improvements. An examination of the past programming and marketing
initiatives of XM and Sirius demonstrates how consumers have benefited
from competition between them.\17\ Given the evident incentives for
competitors to innovate, it is hardly surprising that, when declining
to approve the EchoStar/DIRECTV merger, the FCC found that the
satellite television merger ``would likely reduce innovation and
service quality.'' EchoStar/DIRECTV Merger Order, 17 FCC Rcd at 20626.
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\17\ For example, in 2004 after Sirius and the National Football
League executed a seven-year agreement for carriage of NFL games, XM
partnered with Major League Baseball in an 11-year agreement for
carriage of baseball games. Similarly, in 2004 Sirius announced its
deal with Howard Stern shortly after XM announced the return of ``shock
jocks'' Opie & Anthony. Just a few days apart in 2005, XM announced a
new women's talk channel, and Sirius announced the launch of the
Cosmopolitan-branded women's channel. In early 2006, XM announced
coverage of Big East college basketball and football, while Sirius
announced the coverage of every game of the NCAA basketball tournament.
Numerous other examples of competing programming initiatives can be
cited. Similar competitive actions and reactions can be seen in the two
companies' introduction of their first portable devices; in the
launching of their ``family discount'' and ``preferred plan'' for
additional subscriptions at discounted rates; in reaching agreements
with various automobile manufacturers and rental car companies for the
installation of their satellite radios; and in other promotional
efforts.
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Perhaps most obviously, monopoly status would permit a merged XM-
Sirius to raise subscription fees. Without the presence of a similarly-
situated, direct competitor, a satellite radio monopolist could raise
rates without any realistic competitive check on its actions. The FCC
previously rejected the EchoStar/DIRECTV merger due to concerns that
consumers were ``likely to suffer'' harms from the ``higher prices
likely to result'' from the proposed satellite television combination.
EchoStar/DIRECTV Merger Order, 17 FCC Rcd at 20626. The courts have
similarly stopped mergers to monopoly on the grounds that such mergers
would allow the combined company ``to increase prices or otherwise
maintain prices at an anti-competitive level.'' FTC v. Staples, 970 F.
Supp. at 1082.
Beyond resulting in rate increases for consumers, the XM-Sirius
monopoly would also likely reduce program diversity. As explained by
the Commission when authorizing XM and Sirius, competing satellite
radio providers would each have incentives to diversify their own
program formats, thus providing valuable niche programming. See
Satellite DARS Report & Order, 12 FCC Rcd at 5762. Without such
competition, program diversity would likely be adversely affected, with
consumers losing music and talk formats, especially niche ones.
There is also the very real risk that a combined XM-Sirius will use
its market power to force content providers (including providers of
highly valued sports programming) to deal only with them, to the
detriment of consumers and other distributors of audio programming,
including local radio stations. If the merger is approved, it may only
be a matter of time before the American public can listen to their
favorite baseball or college football team by paying whatever monopoly
rents a combined XM-Sirius chooses to charge. We've seen it happen with
cable television, and given the obvious incentives, there is every
reason to expect the same thing to happen here. In sum, in a monopoly
environment, satellite radio subscribers would pay higher prices for
less diverse and less innovative programming.
Beyond harming programming suppliers and consumers, a satellite
radio monopoly would also have the incentive and the opportunity to
engage in anticompetitive practices against other audio service
providers, especially local radio broadcasters. For example, after a
satellite monopoly restructures (unbundles) its program offerings, as
promised, we can expect, based on press reports, that the monopoly will
attempt to accelerate the acquisition of new subscribers by offering
them a lower-cost point of entry--likely a basic advertiser-supported
tier with fewer channels offered for less than the current $12.95 per
month. On its face, such a plan may not sound bad, but of course no
introductory price would be locked in and a monopoly provider could
easily raise this price at a later time to increase profits at the
expense of consumers.\18\
---------------------------------------------------------------------------
\18\ The combined XM-Sirius could also easily raise rates on other
packages of programming, including ones most similar to the programming
being offered today.
---------------------------------------------------------------------------
Furthermore, the merger parties' announced intention to pursue
advertising revenue is plainly problematic when one considers the
monopoly status of the merged satellite radio operator. With monopoly
rents from subscription service, the satellite radio monopoly would
have the incentive and ability to cross subsidize its advertiser-
supported channel offerings using the monopoly rents from subscription
service, likely resulting in unfair competition in the form of
predatory, cut-throat pricing in national advertising markets. In
addition, the satellite radio monopoly would not stop at national
advertising. The extensive terrestrial repeater networks of Sirius and
XM, when combined under common control, would offer substantial
opportunities for entry into local advertising markets by a satellite
radio monopoly. The rates for local advertising could be set
artificially low with cross-subsidization from monopoly subscription
fees. The valuable free, over-the-air service provided by local radio
stations--which is entirely advertiser-supported--would be jeopardized
by these developments. Ultimately, listeners and local communities
would be the losers, as important services, including local news and
emergency information, are eroded by a lack of advertising revenues to
support them.
A merged XM-Sirius could moreover maintain any supra-competitive
subscription prices or predatory behavior toward other audio service
providers because satellite radio is a closed market. No other entity
can enter the national multichannel audio service market. The FCC has
not authorized any other licensees to provide satellite DARS. Even in
the highly unlikely event that the FCC would in the future allocate
additional spectrum to this service to permit entry by new satellite
providers, this entry would clearly be insufficient to mitigate the
anticompetitive effects of the proposed merger. For example, the
Department of Justice requires that, for potential entry to be
considered, it must generally be achieved within 2 years.\19\ This is
extremely unlikely in the case of satellite radio, as it took XM and
Sirius nearly 4 years from the grant of spectrum by the FCC to
commercial availability, including the technically challenging step of
launching satellites. Other entry barriers are also very high,
including the capital costs (such as the costs of multi-million dollar
satellites), programming acquisition costs, and subscriber acquisition
costs. Therefore, the threat of entry by other entities will be
completely ineffective in constraining short-term (or even long-term)
price increases or other anticompetitive behavior by the combined XM-
Sirius.
---------------------------------------------------------------------------
\19\ See U.S. Department of Justice & Federal Trade Commission,
Horizontal Merger Guidelines at 25-26 (April 8, 1997) (DOJ Merger
Guidelines).
---------------------------------------------------------------------------
The anticompetitive effects of the proposed merger are thus
enhanced by not merely high, but practically insurmountable, barriers
to entry. The courts have consistently rejected mergers where the
merging parties were unable to show that reduced competition caused by
the merger would be ameliorated by competition from new entrants that
could come into the market.\20\
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\20\ See, e.g., FTV v. Heinz, 246 F.3d at 717; FTC v. Staples, 970
F. Supp. at 1086-87; FTC v. Swedish Match, 131 F. Supp. 2d 151, 170-71
(D.D.C. 2000).
---------------------------------------------------------------------------
No Marketplace or Business Conditions Justify the Risk of Monopoly
There is no need to risk all these harms to consumers, content
suppliers and other audio service providers by creating a national
monopoly. Satellite radio is still in its early stages of development.
And neither XM nor Sirius is a failing company.
From an economic perspective, the classic ``shut down'' analysis
demonstrates that a firm will exit an industry when its average
variable cost exceeds price, which implies that the last unit sold
makes a negative contribution to the firm's margins. When applied to XM
and Sirius, there is no basis to conclude that either company is ready
to exit the industry. A review of reports by equity analysts
demonstrates that Sirius and XM are currently earning positive margins
on their last subscribers. Moreover, as satellite radio penetration
rates increase, average variable costs will decrease and thereby
generate even larger margins. Thus, there is no basis in economic fact
for a failing-firm argument. See Criterion Economics Report at 3-4; 43.
A very recent analysis by the Carmel Group concluded that ``there is no
liquidity crisis on the horizon for satellite radio'' and that ``both
Sirius and XM have enough cash to support their current business
models.'' Carmel White Paper at 4-5.
In fact, Sirius and XM do not believe they will go out of business
if the merger does not occur. Sirius CEO Mel Karmazin has publicly
stated that he is ``optimistic'' about the company's future whether or
not the merger takes place.\21\ In a recent filing with the Securities
and Exchange Commission, XM disclosed a set of questions-andanswers
regarding the merger prepared for and distributed to its employees. I
quote: ``Can Sirius and XM succeed as stand-alone companies if the
merger is not approved by regulators?--YES. That said, we believe a
merger is the preferred option for Sirius and XM, our shareholders and
customers . . . .'' Of course Sirius and XM would prefer not to compete
with one another, and would prefer to reap the benefits afforded by
monopoly status. What company wouldn't? That's why the United States
has and enforces antitrust laws.
---------------------------------------------------------------------------
\21\ Maxwell Murphy, Karmazin Talks Sirius-XM Pact on Stern Show,
Dow Jones News Service (Feb. 26, 2007).
---------------------------------------------------------------------------
Claims that XM and Sirius are weak or failing businesses based on
their levels of debt and expenses must be viewed skeptically. It is
true that XM and Sirius have had some extraordinary expenses--like the
nearly $83 million in stock that Sirius awarded to Howard Stern in
January, on his first anniversary on satellite radio. Indeed, the high
costs of locking-up national and regional programming, especially
sports programming, on an exclusive basis accounts for a great deal of
the cost overhead. But should companies expect a government bailout for
questionable business decisions? And the fact that XM and Sirius
experienced losses in the past as they first launched their businesses
has little bearing on either company's ability to make positive
earnings going forward.\22\ Just last month, the FCC reported that the
two satellite radio providers had high growth rates for both
subscribers and revenues and that revenues per user have begun to rise.
FCC Satellite Report at 180.
---------------------------------------------------------------------------
\22\ Criterion Economics Report at 46-47 (finding that ``both
Sirius and XM are expected to realize positive earnings in 2007'').
---------------------------------------------------------------------------
Changes in the audio marketplace do not justify this merger either.
These changes have encouraged local radio stations to enhance their
competitiveness by converting to digital audio broadcasting and by
utilizing the Internet for streaming and podcasting. But the
introduction of new audio products has not prompted terrestrial radio
broadcasters to ask for an unjustified government licensed and
sanctioned monopoly. For all the reasons described above, monopolies
are inherently bad and should not be permitted.
XM and Sirius Have a Long History of Violating FCC Rules
The government cannot and should not rely on any promises that a
united XM and Sirius, as a government-sanctioned monopoly, will not
cause harm to consumers or other audio service providers. Their past
behavior in a number of instances shows otherwise.
First, when initially authorizing satellite radio, the FCC adopted
a rule on receiver interoperability that was designed to promote
competition by enhancing consumers' ability to switch between satellite
providers. Satellite DARS Report & Order, 12 FCC Rcd at 5796. Despite a
clear FCC directive that their satellite radio systems must include ``a
receiver that will permit end users to access all licensed satellite
DARS systems that are operational or under construction,'' \23\ no such
device is available to consumers today. While both companies certified
nearly 10 years ago that they would comply with this pro-competition,
pro-consumer requirement, neither XM nor Sirius markets a consumer-
friendly interoperable device.
---------------------------------------------------------------------------
\23\ 47 CFR 25.144(a)(3)(ii).
---------------------------------------------------------------------------
Second, both XM and Sirius have violated FCC rules governing the
production and distribution of their receiver equipment,\24\ which are
designed to ensure that these types of devices do not interfere with
broadcast radio stations or other licensed spectrum users. As a result
of XM and Sirius producing and distributing receiver equipment that
violates--and in a number of cases very greatly exceeds--FCC limits on
the power levels for such equipment, many listeners to terrestrial
radio stations experience ``bleedthrough'' and receive the XM or Sirius
signal without warning through their radios. As has been widely
reported, the FCC has received many complaints from both commercial and
noncommercial listeners who suddenly hear uncensored and unwelcome
satellite radio programming on their car radios.\25\ Local radio
stations concerned about this interference to their services have
forwarded numerous listener complaints to the FCC.
---------------------------------------------------------------------------
\24\ 47 CFR Part 15.
\25\ See, e.g., ``A Mystery Heard on Radio: It's Stern's Show, No
Charge,'' New York Times, January 26, 2007 at A17.
---------------------------------------------------------------------------
Third, both XM and Sirius have routinely and regularly violated FCC
technical rules in connection with their special temporary authority to
use terrestrial repeaters. For years XM operated more than 142
repeaters (or 18 percent of all its repeaters) at unauthorized
locations and at least 19 of its repeaters without any FCC
authorization at all. Even after confessing and seeking the agency's
forgiveness for its violations, XM to our knowledge currently continues
to operate at least four of its repeaters without any FCC
authorization. Also troubling is XM's confession that for years it has
operated more than 221 terrestrial repeaters (or 28 percent of all its
repeaters) at unlawful power levels. In mid-February, the FCC issued a
Letter of Inquiry to XM about its unlawful repeater network. Sirius has
engaged in comparable and other technical violations in connection with
its terrestrial repeaters, constructing at least 11 of its repeaters at
locations different from what they reported to the FCC, including one
in Michigan that is 67 miles away from its reported and authorized
location.
Against this backdrop of rule violations, allowing XM and Sirius to
merge, contrary to previous FCC decisions and decades of communications
policy and antitrust law, would be, at the least, unjustified and
unwise. Granting these companies a monopoly would likely further
embolden them to pay even less attention to the rules of the road and
to consumer welfare in the future.
The Proposed XM-Sirius Merger Will Generate No Public Interest Benefits
and Should Be Summarily Rejected
Without question, XM and Sirius will be unable to meet their burden
of proof demonstrating the high level of public interest benefits to
even consider granting a government-sanctioned monopoly. As an initial
matter, ``[e]fficiencies almost never justify a merger to monopoly or
near monopoly,'' such as the proposed XM-Sirius merger.\26\
---------------------------------------------------------------------------
\26\ FTC v. Heinz, 246 F.3d at 720, quoting Department of Justice
Merger Guidelines, 4.
---------------------------------------------------------------------------
In declining to approve the comparable EchoStar/DIRECTV merger, the
FCC explained that where ``a merger is likely to result in a
significant reduction in the number of competitors and a substantial
increase in concentration, antitrust authorities generally require the
parties to demonstrate that there exist countervailing, extraordinarily
large, cognizable, and non-speculative efficiencies that are likely to
result from the merger.'' EchoStar/DIRECTV Merger Order, 17 FCC Rcd at
20604 (emphasis added). The courts have similarly stressed that proof
of extraordinary efficiencies is required to rebut the presumption that
a merger in a concentrated market (such as the current duopoly market
for satellite radio service) will be anticompetitive. See, e.g., FTC v.
Heinz, 246 F.3d at 720-21. Claims of greater efficiencies must be
verifiable through evidentiary showings that are ``more than mere
speculation and promises about post-merger behavior.'' Id. At 721.
And not only must the parties proposing such a merger show that
very significant efficiencies would result, they must show that these
efficiencies ``would lead to benefits for consumers.'' \27\ The courts
have rejected insufficiently documented claims from merger parties that
cost savings resulting from efficiencies would actually be passed on to
consumers in the form of lower prices.\28\ Common sense further
suggests that a monopolist such as the merged XM-Sirius would have
little or no incentive to pass on cost savings to consumers. Thus,
unsubstantiated claims about any consumer benefits flowing from the
large cost savings that would supposedly result from the XM-Sirius
merger are woefully inadequate to justify a combination reducing
competition in a concentrated market. In fact, analysts have expressed
considerable doubt that XM and Sirius would even be able to cut the
claimed billions in costs by merging, let alone pass these cost savings
onto consumers. An examination of the companies' cost structure
(especially their long-term programming commitments) shows that
achieving these cost savings will be ``very difficult and will take a
long time, if it can be done at all.'' \29\
---------------------------------------------------------------------------
\27\ United States v. Franklin Electronic Co., Inc., 130 F. Supp.
2d 1025, 1035 (W.D. Wis. 2000).
\28\ See, e.g., FTC v. Swedish Match, 131 F. Supp. 2d at 172; FTC
v. Staples, 970 F. Supp. at 1090.
\29\ Michael Rapoport, ``Cost-Cutting Claims Raise Static for
Satellite Radio Deal,'' Chicago Tribune (March 4, 2007) (citing
analysts from Wachovia Securities and Oppenheimer & Co., who were
highly skeptical about the ``synergies'' claimed by XM and Sirius).
---------------------------------------------------------------------------
Moreover, to be considered in justifying a merger, claimed
efficiencies must be ``merger-specific''--that is, they must be ones
that neither firm could achieve independently. If the claimed
efficiencies are not merger-specific, then ``the merger's asserted
benefits can be achieved without the concomitant loss of a
competitor.'' FTC v. Heinz, 246 F.3d at 721-22. Claims that the merger
will allow XM and Sirius to market equipment allowing customers to
receive signals from both companies are not merger-specific; \30\ there
is nothing preventing them from undertaking such a project today except
for the fact that they prefer to retain customers on the basis of sunk
costs in equipment. Similarly, claims that the combined XM-Sirius will
provide customers a credit if they choose to block adult programming
are not merger-specific because XM and Sirius could provide these
credits to their customers today if they wished.
---------------------------------------------------------------------------
\30\ See Frank Ahrens, ``In the Same Orbit, but on Different
Planets,'' Washington Post, Feb. 21, 2007 at D01 (``Karmazin said a
merger would lead to savings by eliminating duplications in programming
and operations,'' and that the ``companies plan to design equipment to
let customers receive signals from both companies, which use different
satellite technologies'').
---------------------------------------------------------------------------
Clearly, XM and Sirius will fail to meet their heavy burden of
demonstrating the efficiencies and consumer benefits of their proposed
merger to monopoly. Rather than producing ``extraordinarily large,''
beneficial efficiencies, the merger, if approved, would seriously
impair marketplace competition and cause real harms to consumers. There
is no reason to approve a merger that would violate FCC rules and
precedent, as well as congressional policy, and would grant a state-
sanctioned monopoly to non-failing companies with a long track record
of breaking the rules.
Even if the parties agreed to price regulation to ensure that
satellite radio customers do not pay more (for some period of time)
after the merger than they did before, such a condition does not
justify approval of the proposed merger. Courts have rejected mergers
despite the merging parties' promises not to raise prices, observing
that ``the mere fact that such representations had to be made strongly
support[ed] the fears of impermissible monopolization.'' FTC v.
Cardinal Health, 12 F. Supp. 2d at 67. If XM and Sirius feel obliged to
make promises not to raise their subscription rates, this clearly shows
that they expect to have the market power to do so following a merger.
Permitting a merger based on pricing conditions moreover disregards
the very reason the antitrust laws apply to mergers--to ensure that
markets are structured in a way to promote competition. The notion that
a competitive market structure, which has produced healthy competition
between XM and Sirius, should be replaced by a monopoly provider
subject to price regulation is antithetical to the purpose and
foundation of the antitrust laws and to congressional policy favoring
competition over regulation, as expressed in the 1996
Telecommunications Act. The antitrust enforcement agencies have in the
past refused to condition merger approval on price regulation because
they are not ``price-regulatory'' agencies, ``compliance is difficult
to monitor,'' and ``competition is the proper driving force for pricing
decisions.'' \31\
---------------------------------------------------------------------------
\31\ Mary Lou Steptoe & David Balto, Finding the Right
Prescription: The FTC's Use of Innovative Merger Remedies, 10 Antitrust
16 (Fall 1995).
---------------------------------------------------------------------------
In fact, the FCC did not believe that a national pricing plan was
an appropriate solution to the competitive harms likely to be caused by
the proposed EchoStar/DIRECTV merger. Even assuming such a plan could
be an effective remedy for competitive harms (which the FCC found
unlikely), the FCC concluded that the pricing plan was inconsistent
with the Communications Act and with regulatory policy favoring the
replacement of regulation with competition, especially facilities-based
competition. EchoStar/DIRECTV Merger Order, 17 FCC Rcd at 20663.
Because the XM-Sirius merger would ``totally eliminate what appears to
be a very healthy level of intramodal competition among the two-
facilities based'' satellite radio providers, it should be rejected,
just as the FCC declined to approve the EchoStar/DIRECTV merger even
with pricing conditions. Id. Regulation is just not a substitute for
competition.\32\
---------------------------------------------------------------------------
\32\ See, e.g., Nat'l Society of Professional Engineers v. U.S.,
435 U.S. 679, 695 (1978) (antitrust laws reflect Congress' judgment
that ``competition will produce not only lower prices, but also better
goods and services''); Standard Oil v. FTC, 340 U.S. 231, 248 (1951)
(``The heart of our national economic policy long has been faith in the
value of competition.'').
---------------------------------------------------------------------------
Conclusion
Local broadcasters fully support vigorous competition on a fair and
level playing field. Free, over-the-air radio stations are embracing
the future by transitioning to digital broadcasting so as to remain
competitively and financially viable and better able to serve their
listeners and local communities. Congress should assure the maintenance
of a competitively level playing field by clearly and expeditiously
expressing its opposition to the proposed satellite radio merger to
both the Department of Justice and the FCC.
For all the reasons I discussed in detail above, the proposed
merger of Sirius and XM is simply anticompetitive. The creation of a
monopoly in the closed national satellite radio market would injure
consumers and programming suppliers, and impair the ability of other
audio service providers to compete and to serve listeners. Because it
would create a monopoly in violation of the antitrust laws, this
proposed merger should be summarily rejected.
The Chairman. Thank you very much.
Mr. Kimmelman?
STATEMENT OF GENE KIMMELMAN, VICE PRESIDENT,
FEDERAL AND INTERNATIONAL AFFAIRS, CONSUMERS
UNION; ON BEHALF OF COMMON CAUSE, CONSUMERS UNION,
CONSUMER FEDERATION OF AMERICA, FREE PRESS,
AND MEDIA ACCESS PROJECT
Mr. Kimmelman. Thank you, Mr. Chairman. Vice Chairman
Stevens, Senator Dorgan, Senator Lautenberg. On behalf of
Consumers Union, the print and online publisher of Consumer
Reports, I appreciate the opportunity to testify this morning
in opposition to this proposed merger. Consumers Union's major
goal for the policies related to media and mergers in the media
sector is to have Congress continue to provide clear direction
and promote regulatory action that will prevent efforts to
consolidate media in ways that puts too much power in the hands
of too few owners in this important sector of our economy.
The XM-Sirius proposed merger is just one small example of
our concerns in these sectors, as Senator Dorgan outlined
earlier. It may not be that important in the overall market
sense, but is enormously important from the perspective of the
logic that's being provided by XM and Sirius to propose this
merger, and to urge acceptance of this merger. Our concern is
that that logic could open a floodgate of very dangerous
consolidation across much more important media properties.
Mr. Karmazin's pricing premises and logic reminds me of
almost the same siren song that we heard in 1984, you may
recall, when the cable industry came to you and said deregulate
us because we compete with broadcast. We are small, we are very
little in that market, and we have no incentive to raise our
rates because we have to take on these big broadcasters, so
please let us go. And they controlled themselves for 2 years
and then, you may recall, from 1986 until you stepped in again
in 1992, rates skyrocketed and anticompetitive behavior was
flagrant. This is not a time to repeat that mistake.
Let me explain why I think there are some special
attributes of this proposed merger that remind me of that
behavior. Is there a broadcast audio market that includes
satellite radio? Well, think about why people might buy XM or
Sirius. People who are mobile. People who travel a lot, not
just in the local community. They lose their local broadcast
signals as they travel outside of their home territory or town.
People who want a lot of baseball, a lot of NFL football,
basketball, but not just their home team. They want a national
package. Their local broadcaster can't offer that. IPods don't
offer that. MP3 players don't offer that. They want unique
niche programming that in any one market can't be supported by
local broadcasts with advertiser support.
There is not a big enough market, but if you take small
pieces, small communities around the country, there can be a
national market for it. There is a unique need for probably 14
to 20 million consumer households here being served only by two
companies that now seek to merge into one.
Now, is there complementarity? Is there overlap? Sure.
People listen to their AM/FM radio, CDs in their cars. They
listen to prerecorded music in conjunction with local broadcast
radio, but it cannot serve these other needs. It does not and
cannot. So they are similar in a few ways but not in the
fundamental way that antitrust policy or competition policy has
to address to protect consumers. And certainly this merger
cannot and shouldn't be allowed to satisfy the FCC's original
mandate that there are two satellite radio licensees competing
against each other. We shouldn't go back on that original
promise. So there is a large segment of the consuming public
that could be horribly harmed by this.
But really most importantly, I urge you to consider how the
logic of comparing iPods, MP3 players and satellite radio would
implicate other media transactions. Does that logic lead to
more consolidation of television broadcasters? Of cable
companies? Of newspapers and broadcast outlets? That's what we
fear. It's hard to distinguish, from our perspective, the logic
being applied to this proposed merger and those transactions
that we know are waiting in the wings.
So in conclusion, we urge you to continue to promote more
competition and diversity in media ownership, ensure that
Federal agencies, competition and public interest agencies,
reassert these strong principles and establish market
guidelines that will prevent consolidation of media into the
hands of a few dominant players. Unfortunately, this merger is
just that type of consolidation. Thank you.
[The prepared statement of Mr. Kimmelman follows:]
Prepared Statement of Gene Kimmelman, Vice President, Federal and
International Affairs, Consumers Union; on Behalf of Common Cause,
Consumers Union, Consumer Federation of America, Free Press, and Media
Access Project
Common Cause,\1\ Consumers Union (CU),\2\ Consumer Federation of
America (CFA),\3\ Free Press (FP),\4\ and the Media Access Project \5\
urge the Congress, the Federal Communications Commission and antitrust
authorities to hold the line against the growing threat to an
increasingly homogenized and concentrated media sector: mergers that
concentrate ownership in too few hands. The XM-Sirius Radio merger
exacerbates longstanding concerns regarding excessive concentration in
the media market and the effects of concentration on programmer access
and consumer choice. But concerns regarding this merger extend beyond
general media consolidation: based on the evidence available today, the
proposed transaction is a merger to monopoly in a distinct product
market that threatens to increase consumer costs, reduce consumer
choice and impede competition. Simply put, this merger is not in the
public interest.
---------------------------------------------------------------------------
\1\ Common Cause is a nonpartisan nonprofit advocacy organization
founded in 1970 by John Gardner as a vehicle for citizens to make their
voices heard in the political process and to hold their elected leaders
accountable to the public interest. Now with nearly 300,000 members and
supporters and 36 state organizations, Common Cause remains committed
to honest, open and accountable government, as well as encouraging
citizen participation in democracy.
\2\ Consumers Union is a nonprofit membership organization
chartered in 1936 under the laws of the state of New York to provide
consumers with information, education and counsel about goods,
services, health and personal finance, and to initiate and cooperate
with individual and group efforts to maintain and enhance the quality
of life for consumers. Consumers Union's income is solely derived from
the sale of Consumer Reports, its other publications and from
noncommercial contributions, grants and fees. In addition to reports on
Consumers Union's own product testing, Consumer Reports with more than
5 million paid circulation, regularly, carries articles on health,
product safety, marketplace economics and legislative, judicial and
regulatory actions which affect consumer welfare. Consumers Union's
publications carry no advertising and receive no commercial support.
\3\ The Consumer Federation of America is the Nation's largest
consumer advocacy group, composed of over 280 state and local
affiliates representing consumer, senior citizen, low-income, labor,
farm, public power an cooperative organizations, with more than 50
million individual members.
\4\ Free Press is a national, nonpartisan organization with over
350,000 members working to increase informed public participation in
crucial media and communications policy debates.
\5\ Media Access Project (MAP) is a 35-year-old non-profit tax
exempt public interest media and telecommunications law firm which
promotes the public's First Amendment right to hear and be heard on the
electronic media of today and tomorrow.
---------------------------------------------------------------------------
The proposed merger of the only two satellite subscription radio
companies should raise a red flag for both antitrust officials and
communications regulators whose job is to promote competition and
consumer choice in the marketplace. Not only were XM and Sirius
prohibited from merging as a condition of getting their licenses to use
the public airwaves to deliver their services, but also, as
demonstrated by the enormous growth of satellite subscription radio
service over just a few years, this service is, in fact, a distinct
product and could develop into a vibrant competitive market absent the
merger. We believe the companies who seek to merge so soon after they
began competing and offering consumers innovative new services; so soon
after they demonstrated that subscription radio is attractive to
consumers and could be more so with consumer-friendly pricing and
improved equipment interoperability; and in total disregard of the
licensing conditions they accepted in order to use public resources,
carry an enormous burden to demonstrate why public officials should
abandon all normal rules associated with competitive markets and
spectrum licensing to allow this merger.
XM and Sirius have not met that burden. Therefore, the Department
of Justice (DOJ) and Federal Communications Commission (FCC) should
reject this merger unless and until XM and Sirius present clear-cut
facts demonstrating how any of its purported benefits to consumers
offset its anti-consumer and anti-competitive harms.
The Danger of an Overbroad Market Definition
This merger raises the most fundamental issues in antitrust law and
poses a substantial threat to consumers and competition policy
generally. In order to exercise their responsibility under the
competition laws, the Federal agencies must start from the assumption
that the XM-Sirius merger is a merger to monopoly--a merger between the
only two firms in the market for national subscription radio service. A
proper definition of the relevant product market proves that assumption
to be true. But an overbroad definition in this instance would create a
devastating precedent for all media competition policy going forward.
The merging parties claim that the merger does not create a
monopoly: the existence of cross-platform and intermodal competition
means that all forms of distribution of audio content are
interchangeable, even those that function merely as storage devices,
and must be included in the market definition.\6\ They assert that
national subscription radio service competes, directly and indirectly,
with a variety of partial substitutes. Through this overbroad market
definition, the merging parties claim that they represent two small
fish in a large ocean, rather than the only two fish in a small pond.
Such an overbroad definition would have disastrous consequence for
consumers of satellite radio as well as both for antitrust and public
interest oversight in all media markets generally. By allowing the only
two companies selling a specific type of media product to merge on the
basis of erroneous claims of cross-platform or intermodal competition,
the fundamental basis on which all public interest regulation of
broadcast media rests is destroyed.
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\6\ ``Testimony of Mr. Mel Karmazin, Chief Executive Officer,
Sirius Satellite Radio Regarding Competition and the Future of Digital
Music, before the Antitrust Task Force of the House Judiciary
Committee, February 28, 2007, SEC filing XX, FCC filing XX.
---------------------------------------------------------------------------
Concern about the danger of too broadly defining the product market
is shared across the ideological spectrum. Gregory Sidak, former Deputy
General Counsel of the FCC and Economist to the Council of Economic
Advisers in the Executive Office of the President under the Bush
Administration, argues:
``Broadcasting is more heavily regulated than other media. The
FCC has justified that heavier regulation (and lower First
Amendment protection) on the basis of four factors: the
pervasiveness of broadcast speech, the scarcity of broadcast
spectrum, the governmental interest in preserving viewpoint
diversity over the airwaves; and the traditional goal of
fostering localism in broadcasting. If, however, all aurally
delivered media are totally indistinguishable from each other--
as XM and Sirius claim--and this merger is permitted to proceed
on that basis, then it will have been approved on a rationale
that would make the inferior First Amendment state of
broadcasting untenable. All content and structural regulation
of the broadcast industry would be constitutionally
indefensible.''
Scott Cleland, who describes himself as ``a fervent and principled
advocate of free markets and competition'' reaches the same conclusion
with respect to the antitrust laws:
``If the DOJ and the FCC endorse and enable an obvious
government-created duopoly to become a monopoly, they would
move the goal posts so far from existing precedent that they
could not legally justify blocking any merger in the future . .
.
. . . If the DOJ or the FCC approved this obvious attempt of
monopolization, it would be open season on Federal antitrust
competition policy.'' \7\
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\7\ Scott Cleland, ``XM-Sirius merger is anti-competitive: The
Emperor Has NO Clothes,'' Precursor Watch, at 1.
The importance of understanding the broad implications of the
theory that has been offered to justify this merger becomes even more
apparent when we consider the position of the National Association of
Broadcasters (NAB) on the merger. While the NAB argues in this case
that the market should not be defined to include cross-platform and
intermodal competition, in the media ownership proceeding ongoing at
the FCC, the NAB argues exactly the opposite--a position we have flatly
rejected and which is not supported by the evidence.\8\ If antitrust
authorities accept XM-Sirius' overbroad definition of the mobile
listening market, little foundation remains for rejecting NAB's
overbroad definition of the media market generally.
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\8\ See Comments of Consumer Federation of America, Consumers
Union, and Free Press, In the Matter of 2006 Quadrennial Regulatory
Review--Review of the Commission's Broadcast Ownership Rules and Other
Rules Adopted Pursuant to Section 202 of the Telecommunications Act of
1996, MB Docket No. 06-121, October 23, 2006.
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Merger to Monopoly
Careful market structure analysis, rigorously applied in all
circumstances--media ownership, merger review, and public interest
oversight--shows that the overbroad definition of the market offered by
XM-Sirius is simply wrong. Thus, as both Sidak and Cleland note, the
broad definition of the product and geographic market that XM-Sirius
and their supporters \9\ use is so obviously flawed that an unbiased
analysis will easily conclude that the merger violates both the Sherman
Act and the 1934 Communications Act as a merger to monopoly. The
product and geographic market characteristics of satellite radio are
easily identifiable and quite distinct from other mobile and stationary
audio products. It is national, mobile, programmed radio entertainment.
There are two, and only two, entities providing such a service. The
alternatives the companies contend are substitutes do not possess this
set of characteristics and therefore cannot be said to compete directly
with the service. The two services deliver, and require consumers to
purchase, huge bundles of well over 100 channels of programmed music,
news and entertainment--programming that is nationally available.
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\9\ In congressional testimony, the only public interest group to
support the merger has been Public Knowledge, see ``Testimony of Gigi
B. Sohn, President, Public Knowledge, Satellite Radio Regarding
Competition and the Future of Digital Music, before the Antitrust Task
Force of the House Judiciary Committee, February 28, 2007; ``Testimony
of Gigi B. Sohn, President, Public Knowledge Regarding The XM-Sirius
Merger: Monopoly or Competition from New Technologies,'' Senate
Committee on the Judiciary, Subcommittee on Antitrust, Competition and
Consumer Rights, March 20, 2007.
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We call to the Committee's attention the testimony of David Balto
before the Senate Judiciary Committee.\10\ Mr. Balto, a former and
long-time attorney at the Department of Justice and the Federal Trade
Commission who counts among his credits litigation in opposition to
mergers such as Staples/Office Depot, Time Warner/Turner, and Time
Warner/AOL, examined the economic characteristics of the product that
satellite radio companies sell. He cautioned that ``[s]imply because
certain products seem similar to the products being offered by the
merging parties does not mean they are in the same relevant product
market.'' \11\
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\10\ Testimony of David A. Balto regarding The XM-Sirius Merger:
Monopoly of Competition from New Technologies, Senate Committee on the
Judiciary Subcommittee on Antitrust, Competition and Consumer Rights,
March 20, 2007, at 1.
\11\ Id.
---------------------------------------------------------------------------
Mr. Balto compared the XM-Sirius merger to the proposed Staples/
Office Depot merger, which was blocked by the courts, noting that the
court concluded that the relevant product market was the ``superstore
market'' not the market for office supplies generally. The relevant
product market was properly defined not just by the products being
offered, but by the overall shopping experience. The same appropriate
analysis applied to the XM-Sirius merger will produce a similar result.
Using a similar analysis, Balto concluded that satellite radio is a
distinct product:
``Although certain parts of the satellite radio package can be
acquired through other audio outlets, including web-based
radio, digital media services, and terrestrial radio, no other
service ofers the complete variety of audio entertainment
options offered by satellite radio.''
The relevant market characteristics Mr. Balto identifies are:
Aggregating demand: Satellite radio has the breadth and
depth of programming because it can aggregate demand unlike
other forms of audio entertainment;
Ubiquitous service: Satellite radio follows you everywhere.
Satellite radio travels with the person, assuring the same
level of sound quality or content wherever you are;
Product variety: Satellite radio offers a far greater number
of stations than terrestrial radio or even HD radio;
Diverse formulated programming: Satellite radio formats
program content to provide diversity, introduce listeners to
new music and new forms of entertainment;
Unregulated content: The content of satellite radio is not
regulated. This permits a wide variety of product offerings to
satisfy consumer demand; satellite radio is not regulated or
constricted by the rules of the FCC.\12\
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\12\ Balto, at 5.
Evaluating the market alternatives according to Mr. Balto's
criteria, it becomes clear why he came to the conclusion he did. The
touted competitors are not competitors in any meaningful sense. There
are distinct differences in product offerings, quality, listener
experiences, mode of delivery, and regulation. None of the competing
services and platforms shares the core characteristics of satellite
radio. Each lacks one or more of the core defining characteristics of
satellite radio: national service; programmed service; and mobile
service.
Terrestrial Radio
Product and market differences created by the varying licensing
regimes for satellite and terrestrial radio must be considered when
evaluating whether these entities are competitors. Entry into the
satellite Digital Audio Radio Services (SDARS) market is restricted by
the need to have a license to broadcast at frequencies that enable the
service to be provided nationwide. During questioning at the Senate
Judiciary Committee hearing last month, Sirius CEO Mel Karmazin
conceded that it was unlikely that another satellite-based competitor
would enter the market because of the high barriers to entry. Perhaps
because of those barriers and the need to ensure competition existed,
the original SDARS licenses were issued by the Federal Communications
Commission under strict conditions that the two entities are not
allowed to merge.
Differences in Federal licensing requirements also demonstrate the
clear distinction between satellite radio and terrestrial radio. First,
the different restrictions on the licenses demonstrate the market
differences. Broadcast licenses require the service to be offered free
of charge, requiring advertiser support. Local radio stations adjust
their content to the audiences that the advertisers want to reach.
Satellite radio licenses allow the licensee to support the service
through subscription fees, offering largely commercial-free radio--a
distinction that Sirius, in particular, widely promotes.\13\ Second,
satellite radio travels with the listeners no matter where they are,
operating in a national market. But terrestrial radio is a local
product; stations vanish as the listener crosses market boundaries.
Third, broadcast licenses are subject to public interest obligations,
while satellite services are not. As Greg Sidak noted, the licensing
differences allow for different market segmentation between the two
services.\14\ Terrestrial radio will never be able to provide some of
the programming currently offered on satellite not only because of
content restrictions,\15\ but also because its licensing requirements
limit it to a small geographic market, preventing it from aggregating
demand for the types of specialized programming offered on satellite
radio. Thus programming on satellite radio tends to be more specialized
and more diverse than that of terrestrial radio.
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\13\ Sirius states ``The biggest difference is that Sirius has 100
percent commercial-free music free channels. What this means for you is
that we offer you music the way it should be and the way the artist
intended it: without a single commercial interruption. Our music
programming also has a breadth and depth of programming basically
unavailable on regular radio. We play songs that you know and love, and
many songs that we know you will love when you hear them for the first
time. We also have hundreds of exclusive live interviews and
performances you won't hear anywhere else and produce many interesting
and engaging live talk shows in our national broadcast studios.'' XM
promotes on its website the availability of 69 commercial-free music
channels.
\14\ Expert Declaration of J. Gregory Sidak Concerning the
Competitive Consequences of the Proposed Merger of Sirius Satellite
Radio, Inc. and XM Satellite Radio, Inc., March 16, 2007, p. 6.
\15\ For example, XM currently offers Laugh Attack, promoted as
``Uncensored Comedy;'' and Opie and Anthony, two radio personalities
whose former on-air performances resulted in FCC fines. Both XM and
Sirius offer Playboy Radio, and adult entertainment premium channel.
Sirius offers Raw Dog Comedy, which provides uncensored comedy; Maxim
Radio, promoted as ``Girls, comedy, sports, music: Maxim Radio is the
best thing to happen to men . . . since women!;'' and Howard Stern, the
shock jock whose performances have resulted in FCC fines. Moreover,
both services offer out of market sporting events unavailable on
terrestrial radio: Sirius offers the NFL channel and XM offers the MLB
Channel.
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Thus, while it may be true that satellite competes with terrestrial
radio in local terrestrial radio markets, terrestrial radio does not
and cannot compete with satellite radio in its relevant market--the
national market. Indeed, XM's tag line is ``Beyond AM. Beyond FM. XM.''
\16\ The emergence of HD radio does not change the analysis. In several
important ways HD radio is an extension of terrestrial radio. It may
solve the quality problem of terrestrial radio, but it carries the
other weaknesses (as a competitor to satellite) forward. HD radio is
still broadcast to a small local market. It is still subject to content
regulation. It also has substantial consumer equipment costs, which
traditional terrestrial radio does not. It may expand the capacity of
an individual broadcaster a little, but the capacity of local radio
still is minuscule compared to that of satellite radio providers.
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\16\ www.xmradio.com.
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MP3 Players
iPods and other content storage devices require consumers to
access, choose, and download individual selections; they do not provide
programmed services. Though they have substantial capacity, the
capacity pales by comparison to that of satellite radio. As Mr. Balto
demonstrated, the cost of that limited capacity is expensive: ``an iPod
with 1,000 songs would have approximately $1,000 worth of content or
approximately six and a half years of the cost of an XM monthly
service.'' \17\ Moreover, the iPod requires affirmative consumer action
to access music; it lacks the programmed characteristics of satellite
radio where music and information is pushed out to the listeners,
exposing them to new content at the flip of a switch. Moreover, the
diversity of programming and the capacity of the system which has
enabled satellite radio to develop narrowly targeted niche programming
lowers the cost of learning about new music. Listeners can go to the
genre they're interested in, programmed by a DJ who reflects their
tastes, and hear an array of old and new content without commercial
interruption. Thus, satellite radio becomes a complement for the iPod
(assuming the iPod service provider has the desired song in its
library). For example, having heard a new song on Sirius's eclectic
channel ``Sirius Disorder,'' the listener can download it to an MP3
player. Moreover, today, most MP3 players are used for listening to
music. They do not generally deliver today programmed non-musical live
content: news, sports, talk and other entertainment, which constitutes
a substantial part of the programming content on satellite, 40 percent
in the case of Sirius. In addition, content from satellite radio is
delivered in real time; the listener does not download then listen to
it later whenever they want as with iPods and other MP3 players and
satellite radio. Finally, the mere fact that both MP3 players are
mobile is not sufficient for these products to be substitutes. The
merging parties could not with a straight face suggest that built-in CD
players function as a substitute: the iPod is a similar device, only
with greater storage capacity: it allows consumers to take music and
other content they have already purchased and play it in their cars.
---------------------------------------------------------------------------
\17\ Balto, at 6.
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The growth in subscribership and revenues for Sirius and XM, based
on their SEC 10-5 filings, reinforce the uniqueness of satellite
radio's product offerings. Between 2005 and 2006, satellite radio
subscribership rose from 9.3 million to 13.7 million--a nearly 50
percent increase. And combined revenue grew by nearly 100 percent.
These data are not consistent with a market that competes with the
burgeoning market for mobile digital listening devices.
Internet Radio
Internet radio suffers from many of the same problems as
terrestrial radio. Much Internet radio is just a redistribution
platform for terrestrial radio, which does not break the fundamental
constraints of terrestrial radio. The business model still rests on
advertising targeted, and content tailored, to the local market for
which the terrestrial station holds a license. To the extent that some
content is geographically specific (i.e., a home town baseball team)
Internet distribution may make it accessible to out-of-market
listeners, but it is difficult for the distributor to monetize that
broader audience. As a locally based advertising model, aggregation of
demand is not possible. Thus, programming that requires a large
national audience will be beyond the scope of terrestrial radio
rebroadcast over the Internet.
Internet radio that is not based on the output of terrestrial
broadcast radio (e.g., music services offered by cellular carriers)
suffers several problems. Its quality is questionable and its price is
high. And both types of Internet radio also have yet to solve the
problem of getting into automobiles, which is the primary market for
satellite radio. Even as a stationary alternative, the product is
limited by the need for access to broadband, wireless or wireline.
Thus, it suffers from bandwidth constraints and substantially higher
equipment and service costs. Satellite radio, on the other hand, is
ubiquitously available to every consumer at significantly lower monthly
costs.
As demonstrated above, the relevant product market for this merger
is satellite radio itself. Thus, despite their contentions, the only
alternative for XM is Sirius Radio; the only alternative for Sirius is
XM. The merger is a merger to monopoly--a type of merger that is
antithetical to the competition laws and perhaps the worst offense
against the basic principle that competition is the consumer's best
friend. There is no circumstance more disturbing from the point of view
of the antitrust laws and the Communications Act than a merger within a
distinct product market that takes the number of competitors from two
to one. That will be the result if regulatory and antitrust authorities
accept the erroneous, overbroad market definition.
The False Promise of Bank Shot Competition in Disciplining Prices
If this merger is approved on the basis that different audio
platforms are available, consumers will lose: the track record of
intermodal competition disciplining anticompetitive abuse is poor at
best. ``Bank shot competition''--the claim that partial or poor
substitutes that are fundamentally different than the target product
serve as competitors--has failed to protect consumers in similar
situations. The result of relying on such competition in both merger
and regulatory reviews has been rising prices and stagnation.
Cable television provides an appropriate example. In the 1980s,
Federal policymakers claimed that cable TV competed with over-the-air
broadcasting. Based on that understanding, the FCC deregulated cable
systems in communities with three or more broadcast signals. Cable
rates subsequently skyrocketed. By the late 1980s, the failure of this
intermodal competition to discipline cable pricing was so obvious that
the FCC proposed to increase the number of over-the-air stations
necessary to represent effective competition to six. Seeing the results
of this failed policy, Congress re-regulated cable in the early 1990s,
and intervened in the market to help DBS satellite compete against
cable (another form of intermodal competition).
In the decade after the Telecommunications Act of 1996, which
largely deregulated cable rates, intermodal competition between cable
and satellite failed to discipline cable rate increases. Average
monthly cable bills have doubled since the 1996 Act. In short,
intermodal competition from neither over-the-air TV nor from digital
satellite distribution has disciplined cable rates. The former had more
limited channel capacity; the later had greater channel capacity. It
did not matter. The empirical evidence from the cable market is clear.
Only head-to-head competition of products within the relevant market
delivers clear relief from anti-consumer, anti-competitive pricing.
In the satellite radio service product space, we face a similar
configuration of products. Congress, regulatory agencies and antitrust
authorities should not be misled into believing that traditional
broadcast radio, digital Internet distribution and mobile handheld
devices, like iPods, that allow consumers to store and play music from
their own collections or from online music sites, will discipline
prices any more than broadcast television, downloadable videos, DVD
players, Digital Video Recorders and direct broadcast satellite have
disciplined cable prices. The contention that the purported substitutes
will discipline prices is even more suspect when one considers that the
cost of satellite radio service has increased since the products were
launched several years ago despite the presence of other mobile radio
distribution systems. Free terrestrial radio and iPods have been around
for a while, but their existence has not prevented increases in
satellite radio pricing practices. There is no reason to believe that
it will do a better job if a satellite radio monopoly is allowed to
come into existence.
The merging parties argue that consumers will be better off with a
benevolent monopolist than they would be with two competitors. In this
ultra-short term view, competition is defined as wasteful, since
redundant facilities lie unutilized. The monopolist can serve everyone
while using fewer resources and the monopolist promises not to abuse
the market power that would result. But without the stick of meaningful
competition, the cost savings simply will not be passed through to the
consumer. Indeed, the increase in market power will allow the post-
merger monopoly to raise rather than lower prices.
The merging parties promise, in the short-term, not to raise prices
for the services that consumers now receive. It is a hollow promise
that fails to address the real harms of the merger. Time-limited price
freezes today for yesterday's services fail to address the added costs
to consumers over time that result when competition is absent. In
addition, a short term price freeze does not compensate for the price
declines that might otherwise occur if the two competitors continue to
compete. In the absence of a merger, it is not clear why prices should
not eventually fall below $12.95/month for existing services as
increasing subscribership drives down costs. In addition, with the loss
of two head-to-head competitors, consumers will suffer from the gradual
price creep that will likely occur over time, as in the monopolistic
cable industry. Gradual increases, though less noticeable, have a
dramatic adverse impact on consumers over time. A five to 10 percent
annual increase over a period of years takes a significant bite out of
the consumer's wallet, as any long-time cable subscriber will attest.
Consumer Choice Denied
XM and Sirius assert that a significant benefit of the merger is
greater consumer choice. A careful analysis demonstrates that such
choice is badly circumscribed, comes at a cost, and is insufficient to
compensate for the loss in choice consumers have now: the ability to
choose services from two competitors.
First, XM and Sirius contend that eventually consumers will be able
to receive content offered on both systems and in the short term,
consumers will be offered some of the content offered on the other
competitors system but unavailable from their current service. For
example, subscribers currently able to get only the NFL or NLB channels
will be able to purchase both. Note, however, that the purported
increased choice will come at a cost. The merging parties do not claim
to offer those additional channels at the same cost of existing
services. The parties offered concession to hold prices near current
levels not only does little more than freeze pricing for yesterday's
services, that promise does not apply to new packages that include the
combined services of the two companies. In fact, it is very likely that
the ``merger benefits'' of combining these offerings will require
consumers to pay much more than $12.95/month to receive premium
channels. It is also reasonable to expect that to get those premium
channels, consumers would likely be required to ``buy-through:'' to
receive the premium channels at additional cost, consumers may be
required to first buy the large basic package.
Second, despite XM and Sirius claims that channel capacity is not a
limiting factor, significant concerns exist that to make those
additional programming options available, the services will have to
drop existing channels, including non-duplicative offerings, reducing
consumers' choice, or alternatively degrade audio quality.\18\ Channels
with specific DJs consumers once enjoyed may be unavailable. In that
case, there is little consumer benefit to the merger and substantial
costs in terms of lost channel choice. And when dual platform receivers
ultimately become available, enabling consumers to receive all channels
from both providers, it is unclear what they'll cost and whether the
parties will offer them to consumers at reduced or no cost.
---------------------------------------------------------------------------
\18\ Charles Babington, ``Radio Deal Could Face Technical
Difficulties,'' Washington Post, Mar. 19, 2007, at D1.
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Third, the merging parties assert that they'll offer consumers
greater choice by offering specialty tiers or give them the ability to
opt-out of channels and deduct the cost of those channels from their
bill. This choice, however, could be available today. But instead,
consumers in the satellite radio space are afflicted by the very same
pricing practices that afflict cable consumers. Not only are prices
high, but also the consumer is offered only large bundles of channels
over which they have no choice. Consumer choice and consumer
sovereignty are denied. In a product market where the marginal
production cost of adding subscribers is almost zero, the bundling
strategy is largely anti-consumer.\19\
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\19\ The marginal production costs are certainly every low, if not
zero, but we are told that the marginal transaction costs (i.e.,
customer acquisition costs) are high. However, it appears that this
problem is a function of the bundling strategy. Having set such a high
threshold price, the companies are forced to market aggressively to a
much narrower market segment.
---------------------------------------------------------------------------
This merger promises to make matters worse, with large capacity
systems joining to create larger consumer bundles at higher prices. The
offer to give consumers greater pricing flexibility is not accompanied
by promises that consumers won't be forced to buy-through to get
specialty bundles, nor by assurances that the ``cost'' deducted from
consumers for ``opt-out'' channels will actually reflect the cost of
the programming for that channel. The cost to Sirius of Howard Stern's
channel, which some listeners may find objectionable, is arguably
higher than the cost of a music channel, where production costs are
substantially lower. The merging parties' concession not only fails to
provide the real channel-by-channel choice consumers demand, it is
unlikely to provide any meaningful cost benefits.
The purported choice benefits simply do not compensate for the real
choices consumers will lose: the choice between two head-to-head
competitors. Today, consumers who want different options have the
ability to switch providers, albeit at significant switching costs. But
that possibility forces the two providers to continue innovating,
improving their services, developing differentiating features like
package flexibility, and competing on price. Because this is a unique
product market, once the competition is eliminated, the primary driver
of innovation and progress in both programming and technology--
competition in the market--will be eliminated. Innovation will slow to
the pace preferred by the monopolist.
In addition, the merger harms independent content producers, DJs,
artists and personalities who now have two competitors to play off one
another when negotiating for carriage or ``air-time.'' As we have seen
in cable, concentration in distribution reduces access for content
producers. Proposals made by some that, as a condition of the merger,
some capacity should be reserved for independent non-commercial
channels \20\ may promote limited content diversity, but it does not
compensate for the loss of bargaining power that independent commercial
content producers will suffer when faced with the market power of a
single distributor. At the end of the day, the loss of choice for
content producer translates into fewer choices and less program
diversity for consumers.
---------------------------------------------------------------------------
\20\ See e.g., Sohn, supra note 9.
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While the merging parties assert the benefit of the merger is
greater consumer choice in channel programming offered by both parties,
there has been little focus on the fact that it is the parties' own
practices that have denied consumers this choice in the past. Despite
requirements by the FCC and the terms of their own patent dispute
settlement to develop and provide interoperable radios that would have
allowed consumers to switch providers without switching equipment, the
companies have failed to meet that commitment. Claims by XM and Sirius
that they were required only to ``develop'' the radio, but not to take
steps to ensure it was commercially available provides little comfort
to consumers denied greater switching choice nor should it ease
criticism that these parties sought to comply with only the narrowest
interpretation of the commitment. Instead of promoting consumer choice,
the merging parties have forced consumers to invest in equipment that
works with just one service, and once so invested, their choice is
reduced. Today, we are asked to recognize choice benefits of a merger
between two parties who have made concerted decisions to deny consumers
choice that would otherwise have been available.
For policymakers inclined to accept the notion that consumers are
better off with one rather than two satellite radio providers, we
recommend that the spectrum occupied by one of the current licenses be
divested and made available for other consumer services. If all the
Nation needs is one satellite radio company, why not auction half of
the XM-Sirius spectrum for other commercial uses? Surely a free-market
auction would enrich the Federal Treasury with plenty of money to
compensate satellite radio subscribers for any sunk equipment costs,
offer consumers new broadband or other wireless services, and still
enable Sirius and XM to combine their best offerings with substantial
channel capacity.
Conclusion
A satellite radio merger to monopoly is about an avalanche of
mergers. There was a key moment a decade ago when the Department of
Justice decided that a large monopolist is no worse then two smaller
monopolists and allowed the Bell Atlantic/NYNEX merger to go forward.
That decision opened the door to a wave of mergers that doomed head-to-
head competition in telecommunications. The old telephone monopoly was
recreated as two huge geographically distinct monopolies that rarely,
if ever, compete.
A satellite radio merger to monopoly will perform a similar
bellwether function. If the agencies with oversight adopt a loose
definition of products and markets and allow a merger to monopoly on
the basis of intermodal competition, then a tsunami of mergers could
ripple through the digital space at the worst possible moment. The
firms that have declared their undying hostility to the open flow of
products in the digital economy (broadcasters, telephone/cellular
companies, cable companies), will now be empowered to capture and
stifle the alternatives, under the premise that every media and
telecommunications product competes with all others and that new
technologies and services will come along to protect the consumer in
any case. That relief, however, will be slow and insufficient because
the competitive core of the digital economy will have been damaged and
the critical terrain of the digital economy will be controlled by
entities that have the same anti-competitive, anti-consumer objectives
as the merging parties in this case.
We urge the Congress to tell the FCC and antitrust authorities to
put the brakes on the proposed XM-Sirius merger unless and until
significant questions on competition and consumer impacts are fully
addressed and satisfactorily answered. It is time to hold the line
against the greatest threat to a competitive and diverse media: mergers
that concentrate ownership in too few hands.
The Chairman. I thank you very much, Mr. Kimmelman. And now
may I recognize Ms. Sohn.
STATEMENT OF GIGI B. SOHN, PRESIDENT AND CO-FOUNDER, PUBLIC
KNOWLEDGE
Ms. Sohn. Thank you, Chairman Inouye, Vice Chairman
Stevens, and other members of the Committee for inviting me
here today. The proposed merger invites a dilemma for public
interest advocates. On one hand, the only two providers of
satellite radio services which have vigorously competed over
the past 5 years are seeking to consolidate, raising questions
about the impact on prices and choice for consumers. On the
other hand, this competition has left both companies weakened
in a world where other multichannel music entertainment and
information options are increasingly popular.
The salient question is this: How will consumers be better
off? I believe that if the merger passes antitrust scrutiny,
one strong company that is subject to conditions that protect
consumer choice, promotes diverse programming and keep prices
in check will best serve consumers. The antitrust questions
raised here are very complex and ultimately depend on
information to which Public Knowledge does not have access.
Despite the availability of an increasingly wide variety of
radio, wireless, mobile and multichannel music services, it is
unclear how consumers would react if satellite radio prices
were raised. Data on how and why consumers choose to spend
their money on satellite radio would be helpful in making that
determination.
And I must say, I don't agree with my friend and
colleague's comparison of this merger to the cable industry
looking at broadcasting in 1984, because a lot of people get
cable and DBS to get their over-the-air stations. They see it
as a necessary complement. It is not the case here. The markets
are very different, so I just caution the Committee that that
1984 comparison has some holes in it.
Even if the merger survives initial antitrust scrutiny,
significant competitive concerns remain. Therefore, the merger
should be approved only if it is subject to the following three
conditions. First, the new company should make available tiered
program choices. For example, the company can make available a
music or sports tier, which would cost less than subscribing to
the entire service. Second, the new company should ensure
programming diversity by making available 5 percent of its
capacity for noncommercial programming over which it has no
editorial control. This would resemble a requirement for DBS
providers. Third, the new company should be prohibited from
raising the price for its new consolidated programming package
for 3 years.
In addition, policymakers should determine whether the new
company should divest all or some of its extra spectrum it will
have after the merger. There are several reasons why we believe
that a properly conditioned merger would be in the public
interest. First, consistent reports and slowing subscribership
at both companies make it less likely that they will take a
chance on alternative programming and programming that meets
the needs of the underserved. A combined subscriber base would
allow the new company to distribute the fixed cost of the
satellite system across a larger consumer base, reducing cost
per subscriber and enabling new programming and lower prices.
Second, consumers would gain access to channels they could not
receive unless they subscribe to both services. Third,
eliminating new and diverse programming.
I'll conclude by raising two other concerns. First, Public
Knowledge opposes any merger condition involving limits on the
ability of consumers to record satellite radio services. This
would amount to repealing the Home Audio Programming Act which
specifically protects a consumer's ability to record digital
music. Two, local programming. Broadcasters opposition to this
merger is hypocritical given their own regulatory efforts to
consolidate. And I must say, it's interesting how the
broadcasters always bring all of the folks who have 30 stations
and 20 stations. I just can't believe that large group owners
like Clear Channel with 1,200 stations do not compete
nationally. You have to look at syndicated programming to see
whether there is an integration of demands. You don't look at
the guy that owns 30 stations, you look at the people that own
1,200 and 1,300 and 1,400 stations, and with content and other
regulatory restrictions, is itself anticompetitive. There is no
reason why today any media service should have a government
granted monopoly over local programming.
Senator Lautenberg, you asked about what the public
interest is. The public interest is in more local programming,
not less. And if you allow satellite radio to provide local
programming you'll have that. Regardless of the current
satellite radio company's intent to provide local service,
others should not be barred from doing so. While broadcasters
talk about a ``level playing field'' their supported
programming limits an opposition to paying the same performance
fees to artists that all other radio services pay, and reveal
the industry's desire for government sanctioned competitive
advantage. I look forward to your questions.
[The prepared statement of Ms. Sohn follows:]
Prepared Statement of Gigi B. Sohn, President and Co-Founder,
Public Knowledge
Chairman Inouye, Vice Chairman Stevens, and other members of the
Committee, my name is Gigi B. Sohn. I am the President of Public
Knowledge, a nonprofit public interest organization that addresses the
public's stake in the convergence of communications policy and
intellectual property law. I want to thank the Committee for inviting
me to testify on the proposed merger of XM Satellite Radio and Sirius
Satellite Radio.
Introduction and Summary
The merger of XM Satellite Radio and Sirius Satellite Radio
presents a dilemma for public interest advocates. On the one hand, the
only two providers of radio services via satellite, who have vigorously
competed over the past five and a half years, are seeking to
consolidate, immediately raising questions about the impact on prices
and choice for consumers. On the other hand, this vigorous competition
has led to a spending war for new and better programming, leaving both
competitors weakened in a world where Internet radio, HD radio, cable
radio and other multichannel music, entertainment and information
services have become increasingly popular.
Some will say that XM and Sirius' current financial state is a
problem of their own devising--that a service that was intended largely
to provide an alternative for the strict playlists and over-
commercialization of broadcast radio spent lavishly and foolishly on
radio personalities and major league sports. They will also say that
allowing a merger is a government ``bail-out.'' I agree with both of
these statements. But I do not believe that that is where the focus
should be.
Instead, the salient question for policymakers is this: if this
merger is simply denied, will consumers be better off? Given the
financial state of both companies, the slowing growth of their customer
base and the increasing competition in the marketplace, it appears
likely that in the absence of a merger, both services will continue to
limp along instead of investing in new and diverse programming. Might
it not be better for consumers to permit the merger under conditions
that provide expanded programming and pricing choice, along with
temporary measures to keep prices in check? After a great deal of
discussion with my public interest colleagues, former regulators and
antitrust experts, I believe that the latter is the best course.
Thus, the XM and Sirius Satellite radio merger should be approved
only if it is subject to the following three conditions:
the new company makes available pricing choices such as
tiered programming.
the new company makes 5 percent of its capacity available to
non-commercial educational and informational programming over
which it has no editorial control.
the new company agrees not to raise prices for its combined
programming package (as opposed to each individual company's
current programming package) for 3 years after the merger is
approved.
Two other points warrant mention here. The first is our strong
opposition to any merger condition involving limitations on the ability
of consumers to record these satellite radio services. Such a condition
would be tantamount to repealing the Audio Home Recording Act, which
specifically protects a consumer's ability to record digital music.
The second is to urge Congress and the FCC to permit satellite
radio broadcasters to do more, and not less, local programming.
Broadcasters' opposition to this merger and to satellite radio's
provision of local traffic, weather and emergency information is not
only incredibly hypocritical given their own current regulatory efforts
to consolidate, but it is also anticompetitive in its own right. Even
assuming that broadcasters take seriously their statutory duty to serve
local communities with programming that serves local needs (and not
just traffic and weather), there is no reason why, in 2007, any media
service should have a government-granted monopoly over local
programming.
Whether the Proposed Merger Would Survive Antitrust Scrutiny is a Close
Call and Warrants Thorough Analysis
Let me say at the outset that I am not an antitrust expert.
Luckily, I have several colleagues who are. After conferring with them,
I can only conclude that the antitrust questions raised here are very
complex and ultimately depend on information to which Public Knowledge
does not have access.\1\
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\1\ A former official of the Department of Justice's Antitrust
Division apparently agrees with this assessment. See Statement of
Charles E. Biggio, Wilson, Sonsini, Goodrich & Rosati, PC; Before the
Antitrust Task Force, Committee on the Judiciary, U.S. House of
Representatives Concerning Competition and the Future of Digital Music,
February 28, 2007. (``Right now, we do not have all the facts necessary
to determine the legality of the merger'').
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Take, for instance, the critical question of what would be the
relevant market. If one views the relevant product market solely as
satellite delivered radio service, the proposed transaction could be
characterized as a ``merger to monopoly,'' which would strongly suggest
outright rejection. Some of my public interest and academic colleagues,
whom I respect enormously, do just that. For instance, the satellite
radio broadcasters are the only services that provide listeners with
certain programming, available at both high quality and from a mobile
device. The satellite services also provide the only continuous
national market for certain types of broadcasting. For example, only on
satellite radio can a New York Mets baseball fan listen to the team's
baseball games anywhere in the Nation, or even as one drives from state
to state.
On the other hand, if the market is defined more broadly to include
a wide variety of radio, mobile, and multi-channel music services, a
regulator might reach a very different result. Indeed, XM and Sirius'
services overlap with and have effects on several different services
(including video, if you include their feeds of cable shows).
Competitors in this broader market would include over-the-air broadcast
and HD radio, Internet radio services, cable (and DBS) radio, and
wireless phone music and services like Sprint Radio, MobiTV, and V-
Cast, as well as podcasts that can be downloaded onto MP3 players.\2\
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\2\ Moreover, it appears that Sirius and XM may soon no longer be
the only satellite radio providers. Slacker, a new service, is slated
to begin delivering music to consumers via satellite in the near
future. See, e.g., Associated Press, Start-Up Launches `Personal Radio'
Service, Mar. 14, 2007, available at http://online.wsj.com/article/
SB117388069334336810.html.
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A more broadly-defined market would include all of the services to
which consumers would readily turn if satellite radio prices were
raised. Anecdotal evidence suggests that there is no shortage of
substitutes.\3\ Still, we cannot ignore the fact that there are real
differences between satellite radio and its competitors.
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\3\ See, e.g., David Bank & Ryan Vineyard, Wedding Bells Are
Ringing For XMSR And SIRI, RBC Capital Markets Industry Comment:
Broadcasting and Cable TV, Feb. 20, 2007, 1, 4.
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For instance, an audiophile colleague of mine is puzzled over my
love of satellite radio because he receives all the new music he wants
(for free) from Internet radio. In addition to providing highly diverse
and specialized programming, Internet radio is becoming more mobile,
and as a result is becoming a viable competitor to satellite radio.\4\
However, wireless services still may lack the higher-quality sound of
satellite radio, and recent, drastic increases in the already-high
webcasting royalty rates may drive a lot of Internet radio services out
of business.\5\ Podcasts, which many satellite consumers may consider
an easy substitute for satellite programming, are provided via a
``pull'' technology, where the consumer picks and chooses content. In
contrast, satellite radio is a ``push'' technology in which the
consumer may receive new content without specifically selecting it. And
while broadcast radio is becoming a clear satellite competitor with
multi-channel and some commercial-free HD services, it is a local
service that still hews to strict music playlists and is largely
advertiser supported.\6\ Of course, a product needn't be identical to
be substitutable.\7\ While intuitively it would seem that at least some
of these competitors could act as substitutes, the important part of
this question is not whether consumers can conceivably switch, but if
they will, given the switching costs. Evidence of past pricing behavior
\8\ and data on how and why consumers choose to spend their money on
satellite radio would be most helpful to answer this question.
---------------------------------------------------------------------------
\4\ A number of mobile carriers are currently providing streaming
audio, video, and data to the mobile phone handsets they sell,
generally on an exclusive basis between the wireless and content
providers. This content is provided to the subscriber for a fee,
typically in addition to wireless data fees, as these services are
usually IP-based. Verizon's V-Cast provides entertainment, sports,
news, and weather video clips, music downloads, and mobile data;
Verizon is also employing new MediaFLO technology to directly
distribute content to handsets, apart from their data-based network.
Clear Channel and MobiTV are exclusive providers of streaming audio and
video content to Cingular subscribers. Sprint Mobile currently provides
a number of streaming radio channels, from Music Choice, Rhapsody,
Sprint Radio, and Sirius; it is also aiming to provide more competition
for high-speed data and competitive video streaming with WiMax
technology.
\5\ See, e.g., Eliot Van Buskirk, Royalty Hike Panics Webcasters,
Wired News, Mar. 6, 2007, http://www.wired.com/news/culture/music/
0,72879-0.html.
\6\ As evidenced by its appearance here today and its strong
opposition to the merger, there is little doubt that the broadcast
industry views satellite radio as a substitute.
\7\ United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377,
394 (1956). Although each of these products differs in the technical
and legal details of how a user receives audio content, the various
products are still competitors to the extent that consumers could
migrate from one to another due to a change in price.
\8\ One analyst argues that if XM and Sirius did constitute an
entire market, there should be evidence that they are engaging in
oligopoly-like behavior, and reaping similar profits. The fact that
they are both losing money suggests otherwise. Blair Levin, Rebecca
Arbogast, & David Kaut, XM-Sirius Review: Government Approval Close
Call But More Likely Than Not, Stifel Nicolaus Telecom, Media & Tech
Regulatory, Feb. 20, 2007.
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In the end, whether or not the merger is approved should depend
upon its effects for consumers and for the market. If, for instance,
the merger increases net efficiencies through the sharing of expensive
infrastructure, or if the merger prevents one company's assets from
being lost altogether, then these factors would favor approval. We look
forward to the antitrust authorities' thorough analysis of the merger's
impact on consumers.
The Failed 2002 Merger of DIRECTV and Echostar Does Not Provide a Basis
for Denying the Merger of XM and Sirius
Some argue that this proposed merger should be denied based on its
similarity to the failed 2002 merger of the Direct Broadcast Satellite
providers Echostar and DIRECTV. But there are significant differences
between the two mergers, as well as lessons from the 2002 merger that
caution a different result here.
The foremost difference between the two mergers is that consumers'
options for both audio programming and multichannel video programming
have changed drastically over the past 5 years. Just 5 years ago,
nobody had an iPod jack in their car; cellular phone companies did not
provide mobile music services; and WiMax and other mobile Internet
services were no more than gleams in technologists' eyes. Similarly, in
2002 neither telephone companies nor webcasters were providing any
significant multichannel video services. Given the changes in the
multi-channel video market, I am not certain that the Echostar/DIRECTV
merger would be denied today.
Second, there are important differences between multichannel video
and audio services. Most important among these is that many, if not
most, subscribers to cable and DBS buy these services to get better (or
any) local TV reception.\9\ Thus, ``free'' over-the-air TV has had
little effect on the price of multichannel video services, because
consumers do not see one as a replacement for the other, but rather see
the multichannel services as a means to receive the free services. This
is not the case with multichannel audio services. With a handful of
exceptions, local radio stations are not carried on XM and Sirius, and
consumers only subscribe to those services because they are willing to
pay for content they believe that over-the-air radio does not carry.
However, should satellite radio prices rise or competitors such as
over-the-air radio provide cheaper and comparable content, there would
be much less of a reason for consumers to continue to subscribe to XM
or Sirius.
---------------------------------------------------------------------------
\9\ Before DBS providers were required to carry all local stations
if they carried one such station, many rural residents would subscribe
to get access to television of any kind, whether local or not.
---------------------------------------------------------------------------
Finally, it could be fairly argued that denying the Echostar/
DIRECTV merger did not benefit consumers. Supporters of that merger
argued that one strong satellite TV company would provide better
competition to incumbent cable than two weak companies. However, at the
behest of News Corporation, which sought to purchase DIRECTV, the
merger was denied. As a result, cable prices have continued to go up,
and two separate, weak DBS companies lack the capacity to provide a
competitive broadband service, which is essential to compete with
cable. Nor did the DBS companies have the resources to bid successfully
for new Advanced Wireless Services spectrum, which might have given
them adequate broadband capacity.
I see parallels to the DBS merger here--one strong satellite radio
company will be able to push radio broadcasters to provide better, more
diverse programming and fewer commercials, particularly as broadcasters
provide multiple HD radio streams. This competition could be even
stronger if satellite radio providers are permitted to do more local
programming, which they are currently prohibited from providing except
in narrow circumstances. But two weak companies are unlikely to provide
any competitive or political pressure on broadcasters, which goes a
long way to explaining that industry's opposition to the merger.
The Proposed Merger Would be in the Public Interest if it is Subject to
Conditions Which Promote Diversity, Preserve Consumer Choice
and Keep Prices in Check
Even if the merger survives initial antitrust scrutiny, significant
competitive concerns remain. Therefore, the public interest would be
served only by permitting the merger subject to conditions that promote
diversity, preserve consumer choice and keep prices in check.
I reach this conclusion for several reasons. First, over the past
several years, both companies have consistently lost money, and
subscriber growth has slowed,\10\ which makes it less likely that they
will take a chance on alternative programming or programming provided
to under-served communities. For example, in 2005 XM dropped almost all
of its world music channels, including one channel devoted entirely to
African music. Around the same time it dropped its alternative Spanish
music programming, opting for more popular Spanish fare. The desire to
attract the largest number of listeners and the high fixed costs of
operating a satellite service will make it difficult for each service,
with its relatively small subscriber base, to take chances on
alternative programming and/or lower prices. Combining the subscriber
base of the two companies would allow the new entity to expand the
diversity of its programming to better serve niche preferences of the
larger base. Increased program diversity would not only benefit
satellite radio customers, it would likely encourage competitors such
as broadcast radio to provide more diverse programming.\11\
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\10\ See, e.g., Craig Moffett, XMSR and SIRI: Where to from here?
Bernstein Research, Feb. 20, 2007, 8-13 (showing projected losses and
declining net subscriber growth for both companies). See also Richard
Siklos and Andrew Ross Sorkin, Merger Would End Satellite Radio's
Rivalry, N.Y. Times, available at http://www.nytimes.com/2007/02/20/
business/media/20radio.html (noting combined $6 billion in losses and
slower-than-expected growth). One commentator has surmised that many
consumers have hesitated to subscribe to satellite radio services
``because they didn't know which company would survive.'' James
Surowiecki, Satellite Sisters, The New Yorker, March 19, 2007
\11\ See, Suroweicki, supra note 10.
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Second, consumers would be served by gaining access to channels
that they could not receive unless they subscribed to both services. No
longer would a consumer have to choose between Major League Baseball
and the National Football League, Martha Stewart and Oprah or National
Public Radio and XM Public Radio (which features the still-popular
former NPR personality Bob Edwards). Moreover, to the extent that the
new company will eliminate duplicative channels, there will be more
capacity for new and diverse programming (which could even include
video programming). In addition, as discussed below, we would urge the
FCC to permit the new company to provide increased local programming,
including news and public affairs, which would directly compete with
over-the-air broadcast radio.
However, the magnitude of this merger indicates that it will
increase market concentration to some extent. Existing satellite
subscribers may have significant switching costs to other services, and
will certainly have no perfect substitutes. In order to ensure that the
efficiencies from the merger will in fact result in greater program
diversity, increased consumer choice, and better pricing, the merger
should only be approved subject to the following three conditions:
Consumer Choice. The new company should make available to
its customers tiered program choices. For example, the company
could make a music tier or a sports tier available to
consumers, which would cost less than subscribing to the entire
service.
Non-commercial Set-Aside. The new company should make
available 5 percent of its capacity for noncommercial
educational and informational programming over which it will
have no editorial control. There is precedent for this kind of
non-commercial set-aside. Section 335 of the Communications Act
requires a Direct Broadcast Satellite provider to ``reserve a
portion of its channel capacity, equal to not less than 4
percent nor more than 7 percent, exclusively for non-commercial
programming of an educational or informational nature.'' \12\
This would ensure a diversity of programming choices and would
grant access to a national service to programmers who normally
would not have any. As with the DBS set-aside, the new company
could not fill it with programmers already on its system, and
no non-commercial programmer would be able to control more than
one of these channels.
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\12\ 47 U.S.C. 335(b)(1).
Three-Year Freeze on Price Increases. Because of the
expected gains from the merger and because competing services
are still nascent, the new company should be prohibited from
raising prices for 3 years after the merger is approved. This
price freeze should apply to the combined programming package
of the new entity, and not just to the current service of each
individual satellite radio provider.\13\
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\13\ Ever since Mr. Karmazin promised that the combined company
would not raise prices for its service at a February 28 hearing before
the House Antitrust Task Force, questions have been raised by FCC
Chairman Martin and others about exactly what service would be
encompassed in the proposed price freeze. Stephen Labaton, FCC Chief
Questioning Radio Deal, N.Y. Times, Mar. 7, 2007, available at http://
select.nytimes.com/search/restricted/article?res=F10816FB3E
550C748CDDAA0894DF404 482.
In addition, the FCC should determine whether the new company
should divest all or some of the extra 12.5 MHz of spectrum that it
will have as a result of the merger. If, as Sirius CEO (and presumptive
CEO of the new company) Mel Karmazin has testified, the new company
will not be providing local programming even if it is given the
authority to do so, there may be no reason for the new company to
control double the spectrum that the individual companies have today.
There is a belief among some of that if this merger is approved,
then no other merger involving digital media will ever be denied. But
that need not be the case if the antitrust authorities and the FCC are
clear that the merger is being approved based upon very specific facts
and circumstances. This merger involves a national service that has
become a luxury item for less than 5 percent of Americans. As such,
approval should have no impact on any questions about any proposed
consolidation of local broadcasters.
This Merger Should Not Be Conditioned on any Limits on Consumers' Right
to Record Satellite Radio
For the past 18 months, the recording industry and XM Satellite
Radio have been engaged in a battle over whether XM should pay an extra
licensing fee for selling a receiver that allows consumers to record
blocks of programming and disaggregate it into individual songs. In the
alternative, the recording industry has sought to have XM embed
technological protection measures that would prohibit this activity.
This dispute is the subject of an ongoing lawsuit in the Second Circuit
\14\ and pending legislation in the Senate.\15\
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\14\ See Atlantic Recording Corp. v. XM Satellite Radio, Inc., No.
06 Civ. 3733 (S.D.N.Y. Jan. 19, 2007).
\15\ Platform Equality and Remedies for Rights Holders in Music
(PERFORM) Act of 2007, S. 256, 110th Cong. (2007).
---------------------------------------------------------------------------
Public Knowledge is concerned that the recording industry will
attempt to use the merger to limit consumers' ability to record
satellite radio transmissions. Consumers have been permitted to record
radio transmissions since the invention of the tape player, and that
ability is specifically protected under the Audio Home Recording Act,
17 U.S.C. 1001 et seq., which prohibits any copyright infringement
action:
. . . based on the manufacture, importation, or distribution of
a digital audio recording device, a digital audio recording
medium, an analog recording device, or an analog recording
medium, or based on the noncommercial use by a consumer of such
a device or medium for making digital musical recordings or
analog musical recordings.
(Emphasis added.)
The record companies have questioned whether the Audio Home
Recording Act is in need of revision and repeal in light of changing
technologies. While this might be a legitimate question, the place to
ask that question is before Congress, not in the context of a merger.
Moreover, to the extent that such a condition might be sought at the
FCC, the Federal courts have already ruled that the Commission has no
power to require particular technological design mandates in the
absence of express Congressional authority.\16\ Nor does the FCC have
the power to require XM to pay a licensing fee in exchange for the
ability to sell such receivers.
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\16\ Am. Library Assoc. v. FCC, 406 F.3d 689 (D.C. Cir. 2005).
---------------------------------------------------------------------------
The Broadcast Industry's Opposition to the Merger is Hypocritical and
Anticompetitive
Claiming that it ``fully supports competition on a level playing
field,'' the National Association of Broadcasters opposes this merger
for a variety of reasons, including that it would result in ``state-
sanctioned, monopoly control over the 25 MHz of spectrum allocated to
satellite radio service,'' that it ``will not provide sufficient . . .
public interest benefits,'' and that it is ``a government bailout for
questionable business decisions.'' \17\
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\17\ Statement of David K. Rehr, President and CEO, National
Association of Broadcasters, Hearing on Competition and the Future of
Digital Music, U.S. House of Representatives, Committee on the
Judiciary, Antitrust Task Force, February 28, 2007.
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There are many delicious ironies in the NAB's opposition to this
merger,\18\ but perhaps the most salient to this discussion is that as
we speak, the broadcast industry is seeking FCC relief in order to
consolidate. And perhaps the primary rationale for requesting that
relief is the supposedly uncertain and deteriorating financial state of
the broadcast industry.\19\
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\18\ See Gigi Sohn, From the Unmitigated Gall Department, Public
Knowledge Policy Blog, http://www.publicknowledge.org/node/836. For
example, despite its alleged desire for a ``level playing field,'' the
NAB is actively opposing any and all efforts to require their members
to pay the same ``performance'' fees to artists that webcasters and
satellite radio pays, going so far as to call that fee a ``performance
tax.'' See http://www.publicknowledge.org/node/850.
\19\ See, e.g., Shira Ovide, Clear Channel's Profit Declines 54%,
Wall Street Journal, 1Feb. 24, 2007 at A6; Associated Press, Earnings
Preview: CBS Corp, available at http://www.chron.com/disp/story.mpl/ap/
fn/4583381.html, Feb. 26, 2007 (noting losses in the ``troubled radio
unit,'' apparently caused by ``stagnation in the overall radio
market''); Comments of the National Association of Broadcasters, FCC
Quadrennial Ownership Review, MB Docket No. 06-121 (Filed Oct. 23,
2006) 29-35 available at http://www.nab.org/Content/ContentGroups/
Legal/Filings/2006/QuadrennialOwnership2006Final.pdf (``In sum, the
combination of competition from cable, satellite, the Internet and
other digital technologies is forcing broadcasters to fight even harder
in the advertising marketplace.'').
---------------------------------------------------------------------------
The Committee should take the NAB's opposition for what it is
worth--the last in a very long history of broadcaster efforts to place
regulatory roadblocks in the path of the satellite broadcast industry.
This history started about 15 years ago when broadcasters tried to
convince the FCC to impose content and other public interest
obligations on satellite radio. It has continued with refusals by at
least two broadcast groups to carry satellite radio advertising and by
another broadcast group to insist that satellite radio carry
advertisements when it programs channels on satellite radio.\20\ Over
the past several years, the broadcast industry has concentrated its
efforts to constrain satellite radio at the FCC and in Congress through
attempts to limit satellite radio from providing local programming,
including weather, traffic and emergency information.\21\
---------------------------------------------------------------------------
\20\ See Sarah McBride, Four XM Music Stations Will Start Running
Ads, Wall Street Journal, Mar. 8, 2006, available at http://
online.wsj.com/article/SB114178705518792190-email
.html; Clear Channel's New Plan for Satellite Radio: Make it Worse,
TechDirt, Mar. 8, 2006, http://www.techdirt.com/articles/20060308/
0836259.shtml.
\21\ See the Local Emergency Radio Service Act of 2007, H.R. 983,
110th Cong. (2007).
---------------------------------------------------------------------------
It is no secret that one of the broadcast industry's main goals in
opposing this merger is to obtain conditions that would, if not
entirely prohibit satellite radio from providing local programming,
prevent any increase in that programming. In other words, in order to
save local radio, the NAB seeks to have the government prohibit more
local radio.
Any conditions on the merger that would limit satellite radio from
providing local programming would be profoundly anticompetitive and
should be rejected. Setting aside the question of whether ``local''
broadcasters take seriously their responsibility of serving their local
communities with news and public affairs programming (not just traffic
and weather), there is no rationale for shielding broadcasters from
competing for local viewers and listeners. Indeed, rather than limiting
such competition, Congress and/or the FCC should permit satellite radio
and other national services to provide more, not less, local
programming.\22\
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\22\ A condition limiting local programming via satellite radio
should not be imposed even though Mr. Karmazin has testified that the
new company would have no interest in providing such programming. Such
a condition would limit the ability of any future satellite radio
service or any entity that might in the future purchase the new company
to provide local programming, giving broadcasters a ``state-sanctioned
monopoly control'' over local programming.
---------------------------------------------------------------------------
Conclusion
The proposed merger of XM Satellite Radio and Sirius Satellite
Radio raises complex antitrust questions. If these questions are
resolved in favor of the merger, Public Knowledge believes that with
conditions that protect consumer choice, promote diverse programming
and keep prices in check, the transaction is in the public interest. I
would like to thank the Committee again for inviting me to testify and
I look forward to any questions you might have.
The Chairman. I thank you very much, Ms. Sohn. Mr. Bank.
STATEMENT OF DAVID BANK, MANAGING DIRECTOR,
MEDIA AND BROADCASTING EQUITY RESEARCH ANALYST,
RBC CAPITAL MARKETS
Mr. Bank. Thank you. Good morning, Senator Inouye, Vice
Chairman Stevens, members of the Committee. My name is David
Bank. And I am the managing director--equity research for RBC
Capital Markets, responsible for coverage of both the satellite
radio and traditional radio broadcasting industries. XM
Satellite Radio and Sirius currently have combined enterprise
value including debt and equity securities of approximately $11
billion traded in the public markets. I hope to put the
proposed XM and Sirius merger into context with respect to the
issues that these capital markets are focused on.
Of these issues, the first and foremost would be the
potential synergies and subsequent savings that we believe are
possible in an XM and Sirius merger. We estimate the value of
these synergies to be somewhere between $5 billion and $6
billion. While it is not etched in stone, the extent to which
the combined entity might pass savings and value creation on to
consumers, we believe that there are three primary
constituencies that stand to benefit financially from this $5
to $6 billion of savings.
The first are the employees of each company as the
viability of the combined entity becomes stronger with greater
long-term visibility. The second are the customers and
consumers, which could probably benefit from greater
innovation, more flexibility and pricing, and a more diverse
selection of content. And third are the shareholders who will
see value creation from increased long-term earnings potential.
Synergies would likely arise in two fashions. The first is
rather straightforward, and it will stem from simply
eliminating redundant network components, marketing costs and
operating support functions.
The second is ultimately more difficult to quantify. It
stems from a potential reduction in leverage that content
providers such as sports, entertainment and news services, as
well as automotive manufacturers previously exercised, when XM
and Sirius were bidding separately for initial content and
distribution contracts. These costs extracted from XM and
Sirius in the form of fixed payments, variable revenue share
payments and subsidies have been significant burdens,
especially in light of slackening demand.
At the time most of the original agreements were signed,
satellite radio technology was still in its infancy relative to
consumer acceptance. Sirius and XM were very aggressively
bidding against each other for content and distribution deals
that were key to long-term survival against what we believe is
a broader competitive backdrop that includes standard and HD
terrestrial radio, iPods, entertainment over cell phone, and
Internet radio. In essence, the industry was competing against
itself as well as these alternative distribution platforms. In
addition, the demand for satellite radio subscriptions,
particularly on the retail or non-automotive side, was expected
to be more robust than it ultimately turned out to be.
As an illustration of this change in demand, look at the
picture against a backdrop of higher fixed costs. While our
current expectation for year end 2010 subscribers for the
combined industry is approximately 26 million subscribers, our
expectation for that figure when we made the estimate two-and-
a-half years ago was closer to 33 million. So the expectation
went from 33 million to 26 million by 2010.
Now, synergies are not going to occur overnight but rather
over a period of years, with more expected to be realized in
the latter half of the initial 5-year period after merger,
because most agreements that the auto manufacturers and content
providers have entered into are relatively long term. Most will
not expire until at least 2011. In addition, in our view, the
combined company will likely need to maintain two separate
network operating architectures for several years as it
continues to service existing customers.
The itemized details of these synergies by line item can be
seen in our report published January 12th, 2007, but the bottom
line is according to our estimates, these synergies could
amount to value creation for XM and Sirius stockholders of
approximately $8 and $1.73 per share respectively at the
exchange ratios set forth in the XM and Sirius merger
agreement. These amounts would correspond to premiums on the
current equity prices of XM and Sirius of approximately 66
percent and 60 percent respectively, at Monday's closing
prices, and this is probably the major focus of the capital
markets. The combined company will almost certainly have
greater resources to invest in technological innovation,
leading to a more rapid development of improved products than
either company would on a stand-alone basis.
As for implementation, that will be up to the management of
the combined companies. We believe that the satellite industry
is a viable one with or without this merger. However, we would
note that as competition is increasing for the mobile
entertainment consumer, as illustrated by the evolution of the
iPod to the iPhone, broadcast audio and video over cell phones,
MP3 integration into the automobile, broader adoption of over-
the-air HD radio, we believe the industry will be in a much
healthier and stronger position should the merger occur. In
conclusion, I would like to note that RBC Capital Markets has
at no time served as a financial adviser to either XM or
Sirius. Thank you.
[The prepared statement of Mr. Bank follows:]
Prepared Statement of David Bank, Managing Director, Media and
Broadcasting Equity Research Analyst, RBC Capital Markets
Good morning Members of the Committee and guests.
My name is David Bank. I am the media and broadcasting equity
research analyst for RBC Capital Markets responsible for coverage of
both the satellite and traditional radio broadcasting Industries.
XM Satellite Radio and Sirius Satellite currently have a combined
enterprise value including both debt and equity securities of
approximately $11 billion and I hope to put the proposed XM and Sirius
Merger into context with respect to issues that the capital markets are
focused on.
Of these issues, the first and foremost of them would be the
potential synergies and subsequent savings that we believe are possible
in an XM and Sirius Merger. We estimate the value of these synergies to
be somewhere between $5 billion and $6 billion dollars.
While it is unclear to us how, if at all, the combined entity might
pass on savings and value creation to consumers, there are three
primary constituencies that stand to benefit from the $5-$6 billion of
savings financially: (1) the employees of each of the companies as the
viability of the combined entity becomes stronger, (2) the customers
which could potentially benefit from greater innovation, more
flexibility in pricing and a more diverse selection of content and (3)
shareholders, who will see value creation from increased long-term
earnings potential.
Synergies would likely arise in two fashions. The first is rather
straightforward and will stem from simply eliminating redundant network
components, marketing costs and operating support functions.
The second is ultimately more difficult to quantify, but a clear
driver, nonetheless. It stems from a potential reduction in leverage
that content providers (i.e., sports, entertainment and news service)
as well as automotive manufacturers previously exercised when XM and
Sirius were bidding separately for content and distribution contracts.
These costs, extracted from XM and Sirius in the form of fixed
payments, variable revenue share payments and subsidies, have been
significant.
At the time most of the original agreements were signed, satellite
radio technology was still in its infancy relative to consumer
acceptance. Sirius and XM were very aggressively bidding against each
other for content and distribution deals that were thought to be key to
long-term survival against a broader competitive backdrop that included
standard and HD terrestrial radio, iPods, entertainment over cell
phones and Internet radio. In essence the industry was competing
against itself, as well as alternative distribution platforms. In
addition, the demand for satellite radio subscriptions, particularly on
the retail side, was expected to be more robust than it ultimately
turned out to be.
As an illustration of the change in the demand picture against a
backdrop of higher fixed-costs, while our current expectation for year
end 2010 subscribers for the combined industry is approximately 26
million, our expectation for that figure in late 2004 and early 2005
when we first published estimates for year end 2010 subscribers was
closer to 33 million, a discount of approximately 20 percent.
Synergies will not occur overnight, but rather over a period of
years--with more expected to be realized in the later half of the
initial 5 year period after a merger because most agreements that the
auto manufacturers and content providers have entered into are
relatively long-term--most will not expire till at least 2011. In
addition, in our view the proposed combined company will likely need to
maintain two separate network operating architectures for several years
as it continues to service existing customers. The itemized details and
timing of these synergies by line item can be seen our report dated
January 12, 2007, entitled--XMSR and SIRI Should Act On The Urge To
Merge . . . Now.
The bottom line is that, according to our estimates, these
synergies could amount to value creation for XM and Sirius stockholders
of approximately $8.00 and $1.73 per share, respectively, at the
exchange ratio set forth in XM and Sirius merger agreement. For further
details on this analysis, please see our report of February 20, 2007
entitled, Wedding Bells Are Ringing For XMSR and SIRI.
These amounts would correspond to premiums on the current equity
prices of XM and Sirius of approximately 66 percent and 60 percent
respectively at Monday's closing price--and this probably is the major
focus of the capital markets.
We believe that the combined company will almost certainly have
greater resources to invest in further technological innovation leading
to a more rapid development of improved products than either company
would on a standalone basis. As for implementation, that will be up to
management.
We believe that the satellite Industry is a viable one with or
without this merger. However, we would note that as competition is
increasing for the mobile entertainment consumer, (as illustrated by
the evolution of the iPod to the iPhone, broadcast audio and video over
cell phones and MP3 integration into the automobile, broader adoption
of over-the-air HD radio), we believe that the industry would be in a
much healthier and stronger position should the proposed merger occur.
In conclusion, I would like to note that RBC Capital Markets has at
no time served as a financial advisor to either XM or Sirius.
The Chairman. I thank you very much, Mr. Bank, Vice
Chairman Stevens.
Senator Stevens. Thank you, Mr. Chairman. Mr. Karmazin,
what happens if this is not approved?
Mr. Karmazin. If for any reason this merger is not
approved, I believe that both companies continue to operate,
that we have not made a failing argument case because we
believe that both companies are viable. I think that
competition would lessen, and I believe that satellite radio
would be weaker than it should be. And part of the reason that
the NAB is here to testify is obviously because they would like
to see what you just said happen, because obviously the
existing broadcasters that have HD radio and terrestrial radio
do not want to see the merger happen because they don't want to
see satellite radio be a better choice for consumers. Because
if satellite radio is better for the consumers because we have
lower prices and because we give the consumer more choices,
that will impact terrestrial radio, so we will become a less
good competitor and the NAB would have gotten their way if in
fact the merger doesn't happen.
Senator Stevens. I may be misinformed but I'm informed that
people who have satellite radio, one or the other, also have
over-the-air, and they are more high income people; is that
right?
Mr. Karmazin. I think that in the case of terrestrial
radio, everybody has an AM/FM radio in their car. So if you
think of where radio is listened to, if you listen to your
radio in your car, you have an AM/FM radio there. As far as the
satellite radio customer, it cuts across all ethnic and all
economic groups so that we have subscribers who are not, you
know, at the very extreme ends of either of those spectrums, or
are at both ends of the spectrum.
Senator Stevens. But if an automobile has one satellite
receiver it doesn't receive the other provider, right?
Mr. Karmazin. That's correct. And that's why it's such a
disadvantage to the consumer. Because right now if you like
Major League Baseball, let's use that as an example, and you
buy a Ford vehicle, you have an exclusive service right now
with Sirius so that you are unable to get that content that you
would also like to have. So it's obviously part of the argument
that we make as to why it's such an advantage to the consumer
is that it's not just the lower price but the greater choice,
so when you buy a Ford vehicle you might have the opportunity
of having the NFL and having Major League Baseball.
Senator Stevens. As satellite radio was developed, was it
impossible to make just one set that received both?
Mr. Karmazin. One of the things that both companies had
worked on, because as part of our commitment to the FCC that we
would develop what they are calling an interoperable radio,
would be a receiver that could have both services. And we have
developed such a receiver and have made our proprietary
intellectual property available to any manufacturer who would
like to make it. There is no subsidy that is being given by XM
or Sirius to subsidize that interoperable radio. That radio
would cost a higher price in the market today than the consumer
would be willing to pay.
And the reason, Senator, that the companies are not
subsidizing the radio, whereas we do subsidize our other
radios, is that when you buy just a Sirius radio we would
subsidize it because we get a subscription. It doesn't make
very much sense for us to subsidize a radio that doesn't result
in a subscription for us because if a consumer bought that
interoperable radio and they chose to subscribe to our
competitors or one or the other services, then we would not be
getting a subscriber. What we have said is that as a result of
this merger, that we would make those interoperable radios, or
make that interoperable radio commercially available to
consumers as a benefit to consumers as a result of this merger,
so they could get the full content of both services.
Senator Stevens. Mr. Withers, how much competition does the
over-the-air broadcaster get from satellite radio now?
Mr. Withers. Well, the competition now, Mr. Vice Chairman,
is the fact that they compete in all of our markets all the
time. If we have a market with six radio stations in it, XM and
Sirius have a total of approximately 303 channels, and yet the
market that has six stations, that's all they have. If those
stations, and let's say four of them are FM stations and four
of them had full HD complement and they had three additional
channels, that would be 12 more, and that certainly doesn't
compete. That's a disingenuous argument that we would have
competition face-to-face with 303 versus, you're talking about
18 or so.
They compete with us. We don't compete with them on a
national basis. They were authorized as a national radio
service and they are. I also can point out that the 1997
authorization for both satellite services required them to have
an interoperable receiver and they should have had one on the
market in my opinion a long time ago. Because if it served
both, it was subsidized by the subscriber to Sirius, then
Sirius would get that subscription rate, and if it was XM they
would get it. But it would be a receiver that would pick up
both and it would have certainly eliminated the Beta-VHS
situation now where they are not compatible with each other.
Senator Stevens. Mr. Kimmelman, do you see any consumer
benefit from this merger?
Mr. Kimmelman. It's really hard to see, Senator Stevens.
Even as they claim their major competitor is broadcast, local
broadcast radio, think about whether the consumer would benefit
from of getting a monopoly in satellite radio. Consumers pay
nothing for local broadcast radio. It's free. It's advertiser
supported. Satellite is not a competitor that is going to drive
down the price of local broadcaster radio. It's already free.
So it's really hard to see meaningful benefits there. And for
the 14 million who already have satellite radio, or 20 million
who will have it, to have one choice instead of two is an
enormous harm. I hear a lot of promises and maybe you'd want to
create a regulatory screen around those promises if you really
wanted to move to monopoly, but if you're going to go that
route why don't we take back half the spectrum. They don't need
double the spectrum to offer a monopoly service. They were
licensed to compete against each other. So if you want to
change the model, you could go that way, but straight out
whether this merger benefits consumers, it's very very hard to
see any benefit.
Senator Stevens. Thank you, Mr. Chairman.
The Chairman. Thank you.
Senator Lautenberg. This references the theory that they
would like to have me here and I would have to pay for this. Oh
my gosh. Well I used my good remarks already.
Mr. Karmazin, talking about the lower cost receiver,
because it's said there is a breadth of these lower cost and
higher cost receivers that presently could accept the two
channels, and then if the merger went through, obviously the
one. What about the quality of the reception on these? Are
they--am I making myself clear here?
Mr. Karmazin. I'm not sure. Our service that we offer is a
service that provides for excellent, almost CD quality kind of
service. If you mean the sound quality from a point of view of
the content quality that's available, you know, we have a full
spectrum of content on both services, you know, ranging from
NPR to Radio Disney to sports to entertainment kinds of
programming. On our receivers, there are receivers that, you
know what we have said, is for every single receiver that's out
there today. So assume you went into Best Buy and you bought a
Sirius or an XM radio a year ago and this merger happens, those
receivers are not going to be obsolete. So every one of those
receivers will still be able to work in the new service and
what we will do, and what we have committed to doing is that if
you bought an XM receiver, then we are going to be able to take
some of the content from Sirius that you can't get today and
make it available to you on that other receiver.
I know that this Committee, I think, had a hearing a couple
weeks ago on Major League Baseball because baseball was not
available on one platform. And what we are saying is that this
merger is going to make more consumers have access to more
content and get it at a lower price than they could without the
merger.
Senator Lautenberg. The thing that I see that Mr. Withers,
I think amplified, is whether or not the local interests are
served. We in New Jersey have a particular situation with a
channel whose license includes very specific obligations to
provide local news service.
We have been attentive to that obligation and when the
company announced that they were going to move their news
operation to New York City, we said just remember, you have a
license renewal coming up and we are going to have something to
say about it. Well, they canceled that program. And the
question is why, why couldn't these things, Mr. Withers,
operate successfully together and just like any other selection
you make about program content, and without impairing the local
opportunity, the local broadcaster's opportunity group that you
represent here, why wouldn't that permit you to operate side by
side with this merged company and still protect your share of
the marketplace?
Mr. Withers. As I understand the question, and I thank you
for it, they are operating side by side as they are today, but
they are not doing local programming, they are not doing local
sales. And I know that Mr. Karmazin has indicated that he would
be willing not to do either, but we are the ones that if there
is a missing child and we have to put the alert out, the AMBER
alerts, we do it. We are the ones that do the weather
forecasts. We are the ones that do the school closings if the
buses break down. And in some markets if there is a lost dog, a
Dog Gone report, they have no interest in doing that. But we
compete against them every day for programming.
And they spend a lot of money on their programming and do a
very good job, the way that they do it as a national
programming service. And if we are going to exist as a local
service and local broadcast service, which we are today and
proud to be, then we have to have the economic base to do that.
And if that's undercut, then you're left with a national
service that really doesn't care about the local situations.
They can't handle a tornado alert in southeast Missouri or in
southern Illinois, western Kentucky, wherever, in Anchorage, if
Anchorage were to get a tornado.
Senator Lautenberg. Does that compare to network services
who also own local, or franchise local broadcasters, NBC, ABC,
what have you?
Mr. Withers. Well, that's a good analogy, sir. The national
network, their local affiliate then has the obligation to do
that. But we are not local affiliates of XM or Sirius. We are
totally, you know, it's a totally different ball game.
Senator Lautenberg. Right. But if there was a side, if
there was side by side opportunity then that would not, kind
of, resemble the situation----
Mr. Withers. Well, I don't think, and I'm not authorized to
speak on this matter for the National Association of
Broadcasters, but I was at a hearing the other day when Mr.
Karmazin testified that they had lost $6 billion with their
business plan. I don't think we have any intentions of making
an offer for XM or Sirius.
Senator Lautenberg. Well, I guess there are people who
think that some of the content is worth an awful lot of money.
Mr. Withers. It--I think that--I'm trying to--I see where
your thought process is on that.
Senator Lautenberg. I'm trying to be fair here on both
sides.
Mr. Withers. Oh, I know you are.
Senator Lautenberg. I'm very interested in your views, and
I would just move to Ms. Sohn for a minute. Should the FCC
require that XM and Sirius return some part of the spectrum if
they merge?
Ms. Sohn. We have said that they should definitely look at
that. You know, it's possible that XM and Sirius might have an
idea for that extra capacity that would serve the public
interest, particularly local broadcasting. I mean, I guess I
don't understand why it wouldn't be better for New Jersey to
have the combined entity do local programming and broadcasters
do local programming. I know you have that problem with WOR and
New Jersey is often underserved. So, why not allow more local
broadcasting. So it really would depend on the plans that XM
and Sirius have for the extra capacity; however, I do think
it's something the FCC should look at, whether they really need
to have all 12 megahertz of spectrum.
Senator Lautenberg. Yes. That would certainly, I think,
provide an outlet for competitive operation. And I think it's
fair to say, Mr. Karmazin, that the most obvious conclusion
that one draws is that it would be awful good for the
companies, for the two organizations. The question is, is it as
good for the consumer as it is for the companies. We'll be
looking at that, Mr. Chairman. I ask for a period of time to
try to make some decisions on our side as well as----
Mr. Karmazin. Did you want me to answer that question? I'm
a resident of New Jersey.
Senator Lautenberg. I just changed my mind, Mr. Chairman.
Mr. Karmazin. And I know exactly what you're talking about,
but let's just get real about this. So you get into your car in
New Jersey and you have an AM/FM radio. And if in fact you
chose to and you decided that you wanted to pay for radio in
addition, that we have convinced you that the content we offer
is worth paying more for than for something you get for free,
then you'll have the satellite radio. And the merger makes it
beneficial to the consumer.
I'm not talking about the benefit, you know, for anybody
but the consumer in what my comments are because I believe
lower prices and more choice for the consumer is a good thing.
And we are not looking to replace local radio. Local radio is
going to exist and local radio, by the way, is financially
amazingly healthy, you know. I've been in it for a long time
and made an awful lot of money in it. And if you question it,
just take a look in the papers and see how much money Clear
Channel is selling itself for. So there is no question that
there is a very, very healthy terrestrial radio who, by the
way, got HD radio for nothing. So the same people that control
the AM/FM radio stations today are also being given free HD
radio. So this is not a troubled industry, and we are not
saying that Sirius is troubled, but we do believe that if you
believe that choice for the consumer is a good thing, then this
merger is a good thing.
Senator Lautenberg. If I may, Mr. Chairman for a second
here, maybe a couple of seconds. I had in the car I own, a
General Motors car, XM radio. Now along the way--and I pay for
it--along the way suddenly a choice part of that was taken
away. So effectively if I want to have the same kind of
programming, my price has just gone up substantially. And I'm
talking about MSNBC, that was shifted away from XM radio.
And so now I have to pay separately for what I used to pay
only one time for.
Mr. Karmazin. Not exactly accurate, sir. MSNBC was taken
off by a lack of popularity. You can't buy it. It doesn't cost
you more, it just was replaced at a higher channel. It's not
like they are selling it at a higher price; they just said we
are constrained with a certain amount of bandwidth and we are
going to put channels together that are going to be covering a
broad spectrum, so they have Fox News, they have CNN News, they
have public broadcasting.
Senator Lautenberg. What does Sirius have?
Mr. Karmazin. Sirius has Fox News, CNN News, NPR News, BBC
News, we have ABC News, so we have an----
Senator Lautenberg. So MSNBC is no longer----
Mr. Karmazin. Correct. We do not choose to have MSNBC as
one of the channels we offer.
Senator Lautenberg. We have to expand the spectrum.
Mr. Karmazin. I welcome that.
Senator Lautenberg. Thank you very much.
The Chairman. Senator Dorgan.
Senator Dorgan. Mr. Chairman, I have to leave. I'd be happy
to defer to the gentlewoman from Minnesota if she wishes.
STATEMENT OF HON. AMY KLOBUCHAR,
U.S. SENATOR FROM MINNESOTA
Senator Klobuchar. Thank you, Mr. Chairman. I look at this
deal as a consumer. Is it true that some of the customers will
have to upgrade their equipment if these companies merge?
Mr. Karmazin. No.
Senator Klobuchar. Is there any kind of a change to the
equipment or anything that they have to buy?
Mr. Karmazin. No. Senator, if you subscribe to one or the
other services today, that radio will not be obsolete. You will
still be able to get everything that you're currently getting
from that service today. And additionally, we are willing to
add to that with the existing radio the ability to get some
content from the other partner as well, but the receivers will
not be made obsolete. As a matter of fact, if you went into a
retailer today you will see both companies having a guarantee
that we are offering the consumers that says that it's a
guarantee that these radios will not be obsolete.
Senator Klobuchar. To follow up on some of the questions
that Senator Lautenberg was asking about the spectrum, and the
amount of spectrum was given out with this idea that there
would be competition. I just wonder, I know that Ms. Sohn
answered the questions, but I wonder if others could answer
that. He was going into the area of whether some of the
spectrum should be returned when we don't have two companies
competing. You want to start, Mr. Kimmelman?
Mr. Kimmelman. Yes, I'd love it. Retaining twice the
spectrum initially allocated violates the FCC's own guidelines
for how this spectrum was auctioned so it's in direct violation
of the rules. I would hope you would be promoting competition
as opposed to monopoly, but if you went down the path that
there should only be one satellite radio provider for whatever
reason, our financial analysts tell us they are going to
consolidate content onto fewer channels. And we have already
heard from Mr. Karmazin in previous hearings so they have got
excess capacity.
The problem here is that you've got this interoperable
equipment--the consumer has been held hostage here, Senator. We
had a promise of interoperable equipment that wasn't fulfilled.
Mr. Karmazin says they couldn't do it because, because they
would lose customers. Well, if they worked together, or even if
they had come to the Congress if they really felt they needed
an antitrust exception to be able to come up with one standard
for equipment and then competed on that, we wouldn't be in this
situation.
But now we have two different pieces of equipment, which
they say they will keep functioning, and they are going to hold
us hostage for all the spectrum. So if you decide to go with
the monopoly consider what Senator Stevens proposed with the
DTV transition, which is make the first dollars from an auction
of the reclaimed spectrum available to you to hold consumers
harmless, and you probably would have money left over for the
Treasury for other purposes. So if we went down that path,
there is another model here that gets them the consolidation
they want, and the synergies which will let them squeeze
programmers, squeeze auto manufacturers.
I still don't clearly see any benefit to consumers, so you
would need some sort of regulated price, but by requiring that
some spectrum be returned you would be able to have spectrum
available for other purposes.
Senator Klobuchar. Others want to answer this about the
spectrum?
Mr. Bank. Well, I think from a practical purpose what we
would say as financial analysts is a stronger company would
probably lead to greater technological innovation. And you
know, ultimately I think while it's going to be up to the
management of what they do with the spectrum there is very good
likelihood that you'll see improved innovation and additional
products that will program that spectrum. So you know, from a
practical perspective if you took away some of the unused
spectrum, I think the key driver in this industry is its
entrenchment in the automotive industry and the original
equipment manufacturers. It would be relatively difficult from
a standing start for a new competitor in satellite radio to
probably penetrate that entrenched competitive landscape right
now. But the reality is you may be trading off technological
innovation that could bring a lot of really interesting and
important new products.
Senator Klobuchar. Mr. Karmazin?
Mr. Karmazin. Let me give you the spectrum answer. Senator
Lautenberg mentioned that he has a car that has an XM radio and
if in fact we were to do anything with this spectrum, what we
are now telling Senator Lautenberg is that he needs to buy a
new radio because his receiver is only able to receive the XM
satellite and the terrestrial repeater networks. So the idea of
us not having the spectrum that we currently have would be a
disservice to the consumers, because they would be the ones
that would be disrupted because their existing receivers are
only tied to be able to receive the existing system.
I think the whole question, Senator, about satellite radio
right now, and we got our first subscriber in 2002 and we had 6
million subscribers at year end last year, and XM had a little
over 7 million subscribers, that the idea of these words that
Consumer Union is using, and especially the comments that the
NAB is using about satellite radio being a monopoly and that,
you know, somebody must have their satellite radio when there
are terrestrial radio with local radio, with the stations able
to put whatever content on it--and I'm sorry, but we compete
with all of this radio.
There is HD radio. If you take your cell phone and you put
your cell phone in a Bluetooth device in your car, you're able
to get all kinds of content, sporting events, all kinds of
news, all kinds of music coming through your radio speakers in
your car. So the fact that 10 years ago, you know, when the FCC
gave us our license, there was a policy statement. I don't
think you want to use policy statements that were made 10 years
ago insofar as dealing with the reality in the marketplace 10
years later, particularly since that marketplace is so robust.
So there is plenty of audio entertainment content available to
the consumers and I think the American consumer would be better
off if they had a stronger competitor to terrestrial radio and
satellite radio being combined.
Senator Klobuchar. Mr. Withers?
Mr. Withers. My response to that is, it's an interesting
observation that we have to make. If we are going to merge, we
have to maintain both systems; otherwise, we have short sheeted
the one that doesn't have it. But then also by the merged
monopoly continuing to have the entire 25 megahertz, there will
be no way and no time where another competitor could enter,
enter the satellite race.
I did want to address the fact that we had a dangling gift
a moment ago where we were given the free HD, when all we've
done is, as they multiplexed their signals and satellite, the
Commission originally thought each carrier would have about 50
channels, and the technological advances of multiplexing has
allowed 133 in one case and 170 in another, and that's fine.
But HD is done with our existing frequency, so we weren't given
anything. We have had to spend money to provide another service
for free to the American public and that's where that came
about.
But I think if you're going to have, as Mr. Kimmelman said,
if they go down the road that way, it doesn't make any sense to
leave all the spectrum there with the merged monopoly.
Senator Klobuchar. Thank you.
The Chairman. Thank you. Senator Dorgan.
Senator Dorgan. Mr. Chairman, thank you very much. Mr.
Karmazin, first of all, thanks for visiting yesterday. You are
a very accomplished chief executive officer and as I said, I'm
a customer. I like satellite radio. But as I understand your
message, what you are saying is both companies are in pretty
good shape. You believe both companies are in a position to
reach profitability and that is not what provokes a merger. You
talk about merging for purposes of efficiency, and the
efficiency therefore would result in savings which then would
be good for the consumer.
I'm trying to understand that. I'll give you a chance to
comment on it, if I can ask a couple of questions in the middle
of all of that.
One, what kind of equity position does Clear Channel have
in either of the satellite radio companies?
Mr. Karmazin. Clear Channel has no position in Sirius and
you know, I don't know for sure, but let me tell you what I
believe, is that when XM first started, Clear Channel was an
early investor and they owned a certain percentage, I want to
say about 10 percent of the company. They have subsequently
monetized that investment and are no longer--they were a board
member at some point. They are no longer a board member of XM
nor do they have a financial interest in the company as a
result of that monetization.
Senator Dorgan. That's fine. Mr. Karmazin, I called XM some
while ago about a programming change because when I was out
running I would listen to XM, and they changed programming. And
I called them and asked them why they changed that particular
kind of programming on those channels. They said it was because
of Clear Channel and Clear Channel had a certain percentage
stake in the company, had certain proprietary capabilities in
various channels. I'm trying to understand that because that's
also a part of this.
Mr. Karmazin. Senator, I think the answer to that question,
because that wasn't financial investment, but Clear Channel has
a certain number of channels remaining on XM service so that
today XM has some Clear Channel program stations. So therefore,
a change that was made on a channel was the result of Clear
Channel making a decision on one of their channels.
Senator Dorgan. It's interesting, though, that this
discussion about what is the new competition, if one were to
describe the new competition the way you described it, iPods
and cell phones and the broadcasters, that the broadcasters are
actually a part of XM, in this case one of the largest radio
broadcasters is actually a part of XM. And second, if satellite
radio and broadcast in general competes with iPod and cell
phones, I suppose the logical extension of that is there needs
to be no ownership limitations anywhere because everybody
competes with everybody.
Let me ask about pricing, if I can put up this chart. Some
have been very critical that there has been a substantial
amount of money spent in the early days. I read that in the
papers. I don't have the foggiest idea what you're paying
anybody else. If we were to ask both XM and Sirius what you are
paying for this programming, would we get answers to all of it?
Mr. Karmazin. I don't know whether or not we can answer all
of it, whether we would give you everything that we have a
right to talk about. So on anything we are not precluded by a
contract, there is nothing that we would hide. In other words,
I would be happy to tell you what we pay for Nascar because we
announced it, so we announced that we pay $20 million a year
for the rights to have all of the Nascar races. That was
public. The Oprah announcement was public. The Howard Stern
announcement was public. I don't know whether or not Senator
Bill Bradley, who gets a very small amount of money, would want
us to be talking about how much money he is making. I'd have to
leave that to whether he would want us to do that.
Senator Dorgan. Well let me send you a letter and you tell
me what you can and what you can't answer. My understanding is
most of it, you are not able to answer because of what you call
confidentiality agreements.
Why did Sirius drop C-SPAN?
Mr. Karmazin. We like C-SPAN, we wanted to keep it. One of
the things we have is some constraints on our content, so we
are often rotating channels and making changes. C-SPAN was a
very, very low utilized radio channel on our service and we
felt that we would be able to serve our customers better by
providing another service to C-SPAN. C-SPAN is available on XM.
It's just not available on Sirius.
Senator Dorgan. Let me say, Mr. Withers, while I believe
that this merger is not a good thing for the consumers, you're
not exactly a perfect messenger here. As you know, you come to
this table in most cases supporting substantial increased
concentration, and my concern about the merger is the
concentration in this case from two to one. But when I look at
radio broadcasting and particularly radios, there has been a
very substantial concentration there and I worry very much that
the very argument that Mr. Karmazin makes here is an argument
that will be made by you at the next hearing when you come to
the table to say, you know, when you define this market and you
talk, Senator Dorgan, about concentration, understand that
Clear Channel and all these companies, they are competing with
cell phones and iPods.
When I say you're not a perfect messenger, in North Dakota,
you all know the story, but all six stations in Minot, North
Dakota were purchased by Clear Channel, every station in the
town of 50,000, 40,000 was purchased by Clear Channel. And at
2:30 in the morning they called the radio station, nobody
answers the phone, you know, why would that be. And so I would
just observe while we are on the same side on this issue, I
don't view the broadcasters as perfect messengers to this
subject.
And let me just ask Mr. Bank, and I'll be glad to have Mr.
Withers comment in a moment.
Mr. Withers. I was going to make, if I might----
Senator Dorgan. Yes. Go ahead.
Mr. Withers. One that we are talking about radio companies,
and when we have, XM and Sirius are national radio companies
basically. But as far as us at the broadcasting industry and
the National Association of Broadcasting asking for more
concentration of control, if there has been proposals they have
been de minimis. It's like we are limited, I understand they
are limited to--I'm sure I've heard, so have you, that we want
all ownership limits removed. I'm not a party to that but if
you have, if you're allowed to own eight stations out of New
York for example, the proposals I have heard kicked around, it
might go to, 10 or 12 would be the proposals. But still, that's
a long way from the 330 some odd.
And Clear Channel must have heard your message that you
repeated because they have sold those stations; they are on the
block and will be sold.
Senator Dorgan. On the block. That's more correct.
Mr. Withers. They are disassembling a lot. They have 440
stations up for sale right now.
Senator Dorgan. Well, we'll see. I hope we can have some
hearings on the issue of localism one of these days as well,
because that's another part of what broadcasting used to be and
too often is not any longer.
Mr. Withers. We may welcome those. Thank you.
Senator Dorgan. Mr. Bank, you indicate, you talked about
these synergies in support of, and I understand you come from
New York and you're looking at the market side of this.
Synergies, first, are straightforward simply eliminating
redundant effort components. We had a hearing in this room not
very long ago with a couple of airlines that wanted to merge,
and they made exactly the same case. My guess is any two
companies that would come to the table, or any company that
comes to the table saying I'd like to merge with another
company in their industry with any circumstance where there is
some dominating position, I think they would be able to make
the case that there are synergies and efficiencies. Would you
agree that there is no unique case to be made here at all with
respect to synergies or efficiencies, just as there are not
with two airlines that want to merge and become one because
they combine their reservation systems and so on, or is there
some unique thing that I'm not aware of here?
Mr. Bank. Well, I think the unique issue is more on the
content side where you, the second example of where the
synergies can come from. But the reality is yes, you know,
network architecture and back office savings are probably
relatively common to any two companies in the same industry
where you can derive savings.
Senator Dorgan. And Mr. Kimmelman, finally, I suppose
people perhaps say this of me but I probably should say it of
you. We can probably guess your testimony before the hearing
started. You generally are opposed to mergers and these sort of
things. Tell me what's unique about your opposition to this, if
there is anything that's unique.
Mr. Kimmelman. Senator Dorgan----
Senator Dorgan. I admire that position, I don't say that to
denigrate it, but tell me what is unique about your opposition
to this. Then I'll ask Mr. Karmazin to respond.
Mr. Kimmelman. It's when it gets to a point of
concentration and reduced consumer choice, and here we are
talking about not all consumers but the 14 million who have,
and maybe the 20 million who want real mobile national audio
programming. They would be severely harmed here. That's a
significant segment of the consuming public. And going from two
to one is one of the most extreme losses of competition that we
could face. So, it opens, if you follow the logic of this type
of merger, even if it's not the most important service in the
world to consumers, it opens the floodgates to more broadcast
mergers, more cable mergers, more newspaper-broadcast mergers
just by following the exact same reasoning.
So as a matter of principle, as a matter of logic, using
the same analysis we've used in all those other mergers, this
one just doesn't pass muster.
Senator Dorgan. Mr. Chairman, let me ask Mr. Karmazin in
fairness to respond to the issue of is there unique synergy and
so on, and then if I could ask him again, could you give me the
construct of how this merger putting two into one would benefit
the consumer, because I think that's the case you've made.
Mr. Karmazin. Sure. I think we have not yet submitted our
answer to the Department of Justice as to what the efficiencies
of this merger will be, but we believe there are some
compelling efficiencies that we will be able to make to the
Department of Justice that would demonstrate that this merger
has unique opportunities for efficiencies which would mean
benefits to the consumer.
And I can tell you that with no details of the merger, you
know Mr. Kimmelman was against the merger obviously because of
the fact that we are in the media world, and there is no such
thing as a good media merger. And we happen to think that this
is one that is.
And in answering your last question, the benefit to the
consumer is the fact that the consumer will have more choice if
the merger is allowed to proceed than they will if the merger
is not allowed to proceed. The consumer will get lower prices
if the merger is allowed to proceed than they will get if the
merger is not allowed, so lower prices and more choice are the
benefits to the consumer.
The Chairman. Thank you. Senator Thune.
STATEMENT OF HON. JOHN THUNE,
U.S. SENATOR FROM SOUTH DAKOTA
Senator Thune. Thank you, Mr. Chairman. I want to thank you
for holding this hearing today and thank our witnesses for
taking the time to testify before the Committee, and for your
input.
Satellite radio is a particularly important resource for
those of us in rural states. There are too many places in my
state of South Dakota where you can turn on the terrestrial AM/
FM radio, hit the seek button, and just have the dial spin and
spin and spin. So for traveling businessmen and women, farmers,
and many other music or sports enthusiasts in South Dakota,
satellite radio can be one of the few consistent means to get a
wide variety of music and other radio programming. The
definition of the market is obviously the key question in this
debate. And it would be my hope that these hearings and
deliberations at the FCC and Department of Justice will help us
come to a clear understanding of how the market should be
defined, and once that market is defined, I believe the
invigorating fierce competition among market players is the
best way to get consumers the best services at the best price.
Mr. Karmazin, can you promise customers of both XM and
Sirius that they will not have to buy new equipment to receive
the same coverage in the foreseeable future?
Mr. Karmazin. Yes, sir.
Senator Thune. As I mentioned at the outset, satellite
radio may have fewer terrestrial AM/FM rural competitors, there
could be fewer alternatives for these listeners than for
listeners in Chicago and LA. Does the competition in larger
more populated areas between terrestrial and satellite make up
for the lack of competition that exists in some rural areas?
Mr. Karmazin. Senator, we think this merger is particularly
beneficial for people in rural areas because of the importance
of satellite radio, and what we are committed to is to offer
people lower prices and more choice. So we will obviously not
be raising prices, and any price increases that you would be
concerned about would be dealt with that we are a national
service and not, we don't know where your radio is at any given
moment in time. So you could be a New York subscriber but you
could be somewhere in South Dakota, so yes, no new receivers
and no higher prices.
As a matter of fact, we will have a lower price point than
we have ever had before. We started our service in 2002 with a
price of $12.95, the exact same price that we have today, and
as a result of the efficiencies that we would get from this
merger, because we have said the benefit, we know there is a
benefit to shareholders, but there has got to be a benefit to
the consumers. So we are going to take some of the benefits
that our shareholders get and put it back in the form of
benefits to the consumer, and that will result in lower prices,
so we will have a package that will be available of service
below the current $12.95, so it will be cheaper, not
necessarily more expensive.
Senator Thune. Thank you. I appreciate the answer. Mr.
Withers, if you believe that local terrestrial radio stations
are not competing against satellite radio, then why are many
local radio stations and the NAB coming out so strongly against
the merger?
Mr. Withers. We don't compete against them on the national
level because we can't. They are a national radio company. Both
of them are. But they compete against us every day, and that's
why. Because if we have a market like your markets in South
Dakota where there are not that many--in fact, I have a truck
in Colorado that at night I can't pick up anything up there at
the ranch except satellite. So I hate to tell this to Mr.
Karmazin, but I happen to be an XM subscriber there and it
works because I can listen to ball games, et cetera, but they
compete against us every day by the plethora of channels that
they have. And when you're a national radio company, you
program nationally. We can only program locally, so we are
competing against that, that morass of signals that we have, we
can't have any more than what we have, and that's where we are.
Senator Thune. Who would you define as competitors to local
AM/FM radio?
Mr. Withers. Who would I?
Senator Thune. Yes. I mean, what's your competitive
environment?
Mr. Withers. The competitive environment is the satellite
companies obviously and anybody that takes attention away,
iPods, we have talked about cell phones. iPods are individually
programmed stations and basically it's what you have a personal
preference for and what you want to hear and when you want to
hear it, and we have no quarrel with that. Because we have
found that when it's information they need, and other
entertainment with the news, they will revert back to the local
over-the-air stations, the terrestrial stations.
I think some of the things that have been bandied around
today about competition, and broadcast over cell phones and
over this and over that, and the Bluetooth and the Red Dragons,
all the things that we do in cars, out of cars, that would be
fine 15 to 20 years from now. But when this merger was proposed
and filed back in March, we looked at the existence in the
marketplace as of the date that it was filed. And then they are
not the competitors that they will be 15 or 20 years from now.
In 20 years we can look at it again and see where we are. The
direct answer to your question, which I'm sure you'll be
pleased to hear, is anything that diverts the attention away
from listening to AM and FM radio.
Senator Thune. Ms. Sohn, in your testimony you describe XM
and Sirius as basically weak in their current state, and if the
merger passes antitrust scrutiny, then you would support the
merger with a few conditions. Why do you believe that
conditions are needed for the merger, and won't the competitive
marketplace not provide enough checks and balances on the new
combined satellite radio providers?
Ms. Sohn. Well, I guess I'm not sure. And you know, even if
the authorities pass muster on this, I still think it would be
better for the consumer to have some protections. So I mean, I
tend to think that the market is a little bit broader. I think
some of the opponents of the merger are sort of prejudging what
the antitrust authorities would say. I think that the antitrust
authorities have to look at consumer data and decide, you know,
do iPods--there are tons, tens of thousands, hundreds of
thousands of podcasts out there. It's not just that you go to
iTunes and put songs on your iPod. In fact, there was a recent
study that showed that for every iPod there is an average of 22
purchased songs. So most people either use the songs that they
already have on their CDs or they go to the tens of thousands,
hundreds of thousands of iPods out there, OK?
So I think that, that kind of data needs to be out there,
the antitrust authorities have to look at it and say OK, is
this something that will keep satellite radio prices low? I
mean, we could differentiate every single, you know, the iPod
or Internet radio, we could spend all day saying it's not
exactly like satellite radio. We know this but that's not the
relevant question. The relevant question is, is it
substitutable in a way that would keep satellite radio prices
low.
But let me get back to your main question. The main
question was why the conditions. Again, I still think even if
the antitrust authorities pass on this and say it's OK, I still
think there needs to be some temporary conditions to ensure
that prices don't get up, that there is still diversity of
programming, and that consumers have programming choices, which
it sounds like some of these things the combined entities are
willing to promise. They don't seem to be particularly burdened
by it.
Mr. Kimmelman. Senator Thune, I'd just like to say that
maybe some things aren't known, but their 10(k)'s indicate
quite clearly that their revenue is up 50 percent,
subscribership is up 50 percent just last year, the year
before. These are not failing companies. These are not
companies that can't compete against each other. They are
companies that are holding consumers hostage by signing
exclusive deals so that you can only get the NFL on one and NBA
on one, usually baseball on the other. Holding consumers
hostage by not working together by having interoperable
equipment so you can have the same equipment and pick whichever
you want. And now coming in and saying the only solution is to
allow them to merge and dominate this market, where in many
parts of the country there is no local broadcast radio to
listen to. So I think there are a lot of facts known here that
should lead us to believe, as Senator Inouye said at the
beginning, there's great skepticism about allowing them to
merger two to one. More facts would be wonderful, but a lot are
already known.
Senator Thune. I appreciate that. Mr. Chairman, I thank you
for holding this hearing and all of you for your testimony. I
think any time you start talking about going from two to one,
that's pretty unusual in a competitive market environment, and
so I think you can understand why there is going to be a good
deal of scrutiny and analysis given to this proposal. But I
appreciate your answers to the questions. Thank you, Mr.
Chairman.
The Chairman. Thank you. Senator McCaskill.
STATEMENT OF HON. CLAIRE McCASKILL,
U.S. SENATOR FROM MISSOURI
Senator McCaskill. Thank you, Mr. Chairman. It's been a
long time since I've sat in a college economics class but I
have to confess to you, Mr. Karmazin, that as I sit here, I
don't ever recall the lecture where less competition delivers
more choice and lower prices. On its face less competition does
not mean more choice and lower prices. And if, if we are to
assume that you are testifying in good faith that your company
is going to sacrifice stockholder profits indefinitely in the
future to keep prices low, then I think we need to look back at
commitments that have been made previously that have not been
kept. And I want to specifically ask you about the repeaters.
In St. Louis, nine of the 11 repeaters exhibit some kind of
variance with FCC rules. You have clearly ignored FCC
requirements on repeaters in the way that you have rolled them
out across the Nation. With that and the promises that were
made about interoperability in terms of receiver boxes, which I
know has been covered prior to my arriving at the hearing, I
apologize, I was at Armed Services, it's been 10 years since
promises were made about interoperability, and as one of your
subscribers I've never heard about such a thing.
I'm a consumer. I've never heard about interoperable
receivers. I have never heard about where I could buy one. I
have never heard about how much it would cost. And that makes
me more than cynical and suspicious about the testimony you
give about more choices and lower prices by eliminating
competition. Could you speak to your failure with respect to
FCC compliance as it relates to the repeaters?
Mr. Karmazin. If you don't mind, I'd like to respond to all
three of the points that you raise. So first of all, on the
economics class, we compete with free radio. And the reason
that, if you were to take a look at our SEC filings going back
10 years, what we have said is that we compete with AM/FM
radio. You have to acknowledge that if you are in a car,
Senator that you have in that car an AM radio and an FM radio,
and let's assume that you are a subscriber, you also have a
satellite radio. And to say that those things are not competing
with each other is just not fair. So the fact is that what
keeps the prices low and why we are willing to deal with it is
because of the fact and the reason that the NAB is here today,
is that they don't want us to lower our price because if in
fact we lower our price we will get more subscribers, because
it is easier to compete with free to charge a lower price than
to charge a higher price. So what is the reason for it and why
are we willing to do it? The reason we are willing to do it is
that these efficiencies can only come about by the two
companies combining, and that we are prepared because there are
so many synergies, to give to the consumer some of this choice.
Regarding the terrestrial repeater network, I'm not
familiar specifically with St. Louis but I can tell you the
fact that we found out that we had 11 in total terrestrial
repeaters at Sirius that were operating not consistent with the
FCC rules, and the day, the day I found out about it, I turned
them off, because we believe in following the rules.
If you wanted to look at the rulings, Senator and look at
broadcasters who we compete with, there hasn't been almost a
single broadcaster that has not either been found violating
some FCC rule, whether it was children's programming in the
case of a $24 million fine, whether it be in the form of payola
from a bunch of radio stations, whether it be AM on later
hours. So I don't condone violating the rules. I don't believe
in violation of the rules. I've been a licensee for too long to
do that. That, we'll deal with the consequences, whatever those
consequences are of the FCC, and if in fact the FCC fines us or
does something, we would prepare to deal with violating rules.
As it applies to the interoperable radio, if you take a
look at what we were asked to do, what we were asked to do was
to develop an interoperable radio, and we spent millions of
dollars, XM and Sirius, on developing the interoperable radio.
It's not a loophole. It's not a hedge. There was no obligation
on our part to commercially market an interoperable radio.
That's for receiver manufacturers to do. We certainly have made
our IP available to any receiver manufacturer that would like
to develop an interoperable radio.
So we have in fact lived up to everything that we have
committed to the FCC as it applies to that.
Senator McCaskill. Well, I understand that you know that
you compete against free radio but you also compete against the
other satellite company, and it is apples to apples here. It is
a different type of listening experience. If I'm listening to
music, I know that if I listen on my satellite I'm not going to
listen to commercials except frankly, I will tell you just as a
consumer, the irritating promos for other XM stations. It's
much different listening to music, listening to classical music
on a satellite station versus listening to classical on a
commercial station.
I think you compete only in the significance of local
programming, which I think is an issue for Mr. Withers and his
colleagues, because if broadcasters don't maintain local
programming, you're going to lose a competitive niche that you
have against satellite. But you as a company subject to
satellite to satellite competition, when it was time for me to
decide, I had two competing companies that knew that they had
to compete with one another to give the best and to be service
oriented and to, in fact, compete on price. Now if there is
only one satellite option, I think it is really unfair to try
to claim that that is not eliminating competition. Clearly it
is eliminating competition within an apples to apples
comparison. I know that people violate the rules, but what
you're asking us today to say is we are going to live up to
what we are telling you today in this hearing. And the bottom
line is, there were representations made that interoperability
would be commonplace and it's not. You have subsidized
receivers for years, but the two of you have not made any
effort, which I understand as a business model, but I'm just
talking about overall from the consumer's perspective, I'm not
here to protect your shareholders, I'm only here to protect the
consumers, I also want to ask with resqect as to the repeaters
that are in St. Louis, will they be brought into compliance if
this merger occurs?
Mr. Karmazin. Senator, there was not anything that said
that interoperable radios would be commonplace. If you'd like,
if you want to send me what you've read that says that, we have
said that it would be commonplace, I'd be very happy to admit
that I'm wrong. But I believe you're wrong, Senator, that there
is nothing that said that, and that we did live up to----
Senator McCaskill. I guess the FCC rule gave that
impression. I mean, if you read the actual language of the FCC
rule, it's very clear that one would get the impression in
plain language it's going to be required.
Mr. Karmazin. I've read the rule and I don't believe that's
accurate. And in answer to your question on the repeaters, that
yes, that we do not believe on operating anything that's not
consistent with the FCC rules, and that's true in the case of
Sirius, all of the noncompliant repeaters are off. They are not
on, in answer to your question.
In the case of XM, there are discussions underway in
demonstrating to the benefit of the consumer, to your
constituency who feel that there is no interference in those
repeaters and that the service is better, and there is
discussion as to whether it's in the public interest to keep
those repeaters on or to shut them off, and whatever the FCC
does, XM will conform to.
Senator McCaskill. Just for the record, let me quote from
the rule, ``a receiver that will permit end users to access all
licensed satellites' DAR systems that are operational or under
construction.''
Mr. Karmazin. Doesn't it say will develop? That's what we
did.
Senator McCaskill. Their systems must include a receiver
that will permit.
Mr. Karmazin. That's what I said. Senator we have developed
it. It doesn't say it will be commonplace. It doesn't mean that
we will advertise to you. It says that we will develop it, and
we have, Senator.
Senator McCaskill. Well, I appreciate your testimony. And
just so that I'm an equal opportunity questioner this morning,
just briefly let me say to Mr. Withers, first, let me
acknowledge that I recognize that you have a number of stations
in my state. Let me also say that in the boot heel, between you
and Gary Rust, it's hard to get any light. You dominate that
area of the state and Gary Rust dominates the papers in that
area of the state, so we have two large media conglomerates
that for someone who has tried to navigate news and so forth in
that area, sometimes it's a little difficult. So I encourage
you to keep in mind that competition is very important
regardless of whether or not we are talking about the free
broadcast radio airwaves or whether we are talking about
satellite.
Mr. Withers. Thank you for acknowledging the fact that we
do have stations in your state, yes. But I don't dominate the
ownership of the stations in the boot heel. For example, in
Cape Gerardo, there are 13 stations and I, my daughter and I
have six combined, and there is one newspaper, so that's
different.
Senator McCaskill. You're right. Mr. Rust has a leg up on
you, there is no question about it.
Mr. Withers. He has stations in Bluff and Sikeston and----
Senator McCaskill. He has them all.
Mr. Withers. I introduced Gary and his wife 30-some years
ago, so obviously he is a great salesman, or she is. And I
agree with your comments about localism, that's very important,
and the stations that don't do local broadcasting don't deserve
to be successful, and I feel very strongly about that and I
also concur with your idea on ownership. We have to earn our
listeners. They don't come to us.
Senator McCaskill. Thank you, Mr. Chairman.
The Chairman. Thank you very much.
Most of the questions I have have been asked, but Mr.
Karmazin, you indicated that a consumer or subscriber may opt
out from paying, and you'll get credit if you cancel certain
adult channels.
Mr. Karmazin. Yes, Senator.
The Chairman. Let's say that I wanted to cut out Howard
Stern. What sort of credit would I receive?
Mr. Karmazin. We have not made an announcement of what the
exact amount would be but if you choose not to listen to Howard
Stern, the way it works today is we'll block it or you can
block it on your own receiver. After the merger is approved,
and one of the issues in listening to people talking about
their concern is that we heard them say that it's not just
about not wanting to listen. We don't want our money
subsidizing that content that's on the air. And what we have
said is that we will have a credit, and at the appropriate time
announce exactly what that is, what the credit would be for you
not to listen, something I understand that hasn't been done in
other forms of entertainment to date.
The Chairman. Will it be more than 50 cents or a dollar?
Mr. Karmazin. You know, Senator, we have not discussed
exactly how it will work, you know. We have gotten some people
who are talking to us about a package of those adult
entertainment content, you know, and whether or not it would be
on an individual station basis or on a group basis. And once we
have announced what this would be, we would absolutely make you
aware of that.
The Chairman. Well, so we have no idea what the benefit
will be?
Mr. Karmazin. Well, no. We know that there is a benefit,
sir. Right now what we are saying to you, what we don't know is
how good a benefit it's going to be, but we know that there is
a benefit because you will not have to pay for it, and you know
we recognize that, and we understand that it should be an
important credit.
The Chairman. I've been told that if you do have the
merger, you will be eliminating about 90 channels because they
are substantially similar or duplicative. What do you mean by
that?
Mr. Karmazin. I think what some have speculated, because we
have not been able to spend the time in discussing what will
happen after the merger, we have been working through the
regulatory process, and what we have said is that we are going
to continue to provide a service that is essentially similar to
the exact service we have. So if you subscribe to Sirius right
now you will get essentially the same 130 channels that you're
getting right now, and the same thing is true about the XM.
There may be some efficiencies. So as an example, if we have a
1960s music channel and XM has a 1960s music channel, maybe we
will have one 1960s music channel that would be available on
both services. But you as a subscriber to the existing service
will not be losing any channels.
The Chairman. Where does that enforce the model about 90
channels being eliminated?
Mr. Karmazin. Senator, I have not seen it. I have not seen
that specific report, so I don't know where it came out of.
The Chairman. I've been told that it's in your filing for
the public interest.
Mr. Karmazin. In our filing? Senator, if it's in one of our
filings then I will look at it again, but I don't recall that
specific language in any of our filings.
The Chairman. Right now you have----
Mr. Karmazin. Senator, I have a whole bunch of lawyers
sitting behind me and all of them are shaking their head no,
that they don't remember seeing it in any of our filings.
The Chairman. But you do plan, if you've got a 1960s music
channel and XM has the same thing, you will cancel out one of
them.
Mr. Karmazin. That is a definite possibility, but we have
made no final determination on what the specific program
lineups will be going forward.
The Chairman. You won't be able to tell us what the benefit
of opting out would be?
Mr. Karmazin. Well, no. I've said that there will be a
financial benefit of opting out, much in the same way, Senator,
that we have not yet discussed what the lower price point was
going to be insofar as the $12.95. What we said is that it
would be lower, so therefore, that's a benefit to the consumer
because anything lower is better than the consumer has now.
What we have also said is that if somebody wanted both
services, they would currently pay $25.90, and we said it would
be a significant reduction to the $25.90 that it costs today.
The specifics were at the early stages, Senator, of going
through what we believe is going to be a long process and that
we have not focused and we have not provided the specific
information, but along the way we will, sir.
The Chairman. Well, this application here speaks of 75
channels overlapped by generally providing substantially
similar programming.
Mr. Karmazin. Now I know what you--that's helpful. So I
believe in what we have said, we have described our service and
we described that our service has content that is unique to
Sirius and unique to XM, and then it has other channels that
are substantially similar. So as an example, today we have the
NFL and XM has Major League Baseball. That's different. Both of
us have CNN News and Fox News. That's included in those 75
channels. What we have said, and I think what your aide did not
give you, was we said eventually longer term what we might have
is when there is a radio that would enable the service to be
able to pick up both so that you don't need to have Fox News on
both services, that we would have the ability to replace that
duplicative programming with additional niche new programming,
and that's the context that that was discussed.
The Chairman. At the present time, your coverage is on 48
states but not Alaska and Hawaii. When you do merge, will the
coverage be by terrestrial means or by satellite?
Mr. Karmazin. Senator, currently our configuration of XM
and Sirius satellite provides for coverage of the 48 states and
not full coverage of Hawaii and Alaska. Part of our service, so
if we looked at our license, our service provides that as a
national service that we also have terrestrial repeater
networks, and that we are prepared to commit to adding more
coverage into Alaska and Hawaii through our repeater networks,
because the configuration of our existing satellite is doing
whatever it can do.
The Chairman. I was told that when you got your license
that the exemption was on the first generation system but now
we have new systems. Can't you do it right now without the
merger?
Mr. Karmazin. Senator, we have a satellite that we are
going to launch in 2 years that is going into the same kind of
orbit that our current one does, and I am not aware of any
exemption that was done--I believe that we are fully operating
in accordance with our license as it applies to how our
satellites are flying.
The Chairman. Well, I know that it's not travel--may we
submit questions to all of you? And we'd appreciate if we can
get your responses.
Senator Stevens. I have one question. Pardon me, Mr.
Inouye. I've got to confess, I'm at a loss in terms of this
technology. I was under the impression, and I think the
Chairman is too, that we are going toward a development of a
technology, that all satellite radio will be using that
technology and there will not be the difference that would
require a merger, you would have available that technology to
anyone that wants to come in and compete in the future. Am I
correct? Are we correct?
Mr. Karmazin. No. I think what we are saying is the same
thing. I don't think we are in disagreement. We are saying that
individually both companies are flying satellites and putting
in terrestrial repeater networks. Putting in terrestrial
repeater networks into low density population markets is a very
very costly thing for a company to do. What we have said is
that again, part of the synergy that we would get as a result
of this merger is that we are prepared to take the cost and
spend the money to put these terrestrial repeaters in so that
people in more rural and less urban areas will be able to pick
up the service. And by the way, it should be indifferent as to
whether or not the consumer is getting it from the satellite or
from the terrestrial repeater networks. They are all part of
our national service and license. And I can also assure you
that any additional satellite, any additional receivers and
terrestrial repeaters that are put into your respective states
would obviously be fully licensed in accordance with any local
laws as well as the FCC rules.
Senator Stevens. I wasn't clear then in my question. My
question is, you currently have one technology base for one
satellite provider and another for the other. You have to have
separate sets to get them now. I'm led to believe that those
are going to merge and that future satellite radio providers
will have the identical technology. You're going to bring that
about by reforming what you have now. Am I correct that if you
merge, a future competitor would be able to utilize this same
technology?
Mr. Karmazin. I don't know who that future competitor is.
Senator Stevens. I don't either. But I want to know, is the
technology available to the public once you merge?
Mr. Karmazin. Senator, I apologize, but I'm not quite clear
I understand what your point is or what your question is. Is it
that if our two companies merge, if our companies are the way
they are today and after our companies merge we are going to
operate the same kind of satellite and terrestrial repeater
network as we did before the merger. Nothing is changing, and
we talked about that, and the reason is that we don't want to
make these receivers not able to pick it up. What we have
committed to is that and the reason that we have not expanded
our coverage, you know--I mean, am I not making it clear?
Senator Stevens. I'm not making it clear, I guess. When we
developed radio, we developed a basic concept and all radios
use that same technology. Now with satellites we have one set
of receivers per provider, and another station has another.
Which means that if you put them into an automobile, you're
going to take one or the other, right? After you merge, you'll
have one. You'll be using one system once you merge, is what I
understand. Is that system going to be patented so that it
would not be available to another competitor or is it going to
be in the public domain, as the radio technology was once it
was developed?
Mr. Karmazin. The systems that satellite radio has, because
it's a subscription service, are proprietary. So it's not like
somebody else can just put in a radio without paying us the
$12.95 to be able to pay for the subscription service. So
you're dealing with a proprietary network that exists in the
case in each of the satellite radio companies, and that's not
something that some manufacturer can say, OK, I know what I'm
going to do, I'm going to just put in a radio that's going to
be able to get satellite radio and bypass our subscription
service.
Senator Stevens. My friend sitting next to you 30 years ago
dealt me a straight royal flush in a five card stud game. Let
me ask him, do you understand what I'm trying to say, Russ?
Mr. Withers. Yes, I do, Mr. Vice Chairman That hand was
meant for me and you just happened to be sitting in my old seat
at that time. That's what happened.
As I understand the question, you're asking after the
merger, will the two noncompatible, like VHS and Beta, be
thrown to one. And the answer is, and if you had heard the
analyst talk about it earlier, at a later date that is their
ultimate goal. But right now, and I don't know how far their
ultimate goal is, but I would say 10, 15 years, you will have
the two existing systems. And I hate to be speaking for
Karmazin and Parsons, but I'll do it. The two existing systems
that are there will have to be maintained; otherwise, it will
not have the subscriber bases because all the sets out there
are compatible each only to its own self.
The fallacy, or the part that I don't think that you have
understood completely yet, and that's not a put-down, I just
understood it today for the first time, is that 25 megahertz of
spectrum is all that's available for the national satellite
radio service. They do not intend to give back half of that
when they merge. The monopoly national radio company will use
all 25 megahertz, not half, and therefore there can be no room
for another competitor. So it doesn't make any difference about
the interoperability of a radio or the fact that they are going
to pay them a fee to use their radio. There will be no space
for a competitor.
Senator Stevens. That I didn't understand. Thank you. Thank
you, Mr. Chairman.
The Chairman. Well, with that, we'll be submitting
questions and I hope we can get responses. I'd like to thank
the panel. It was a very interesting morning. I hope we can
make some decision, but thank you very much. And with that, the
hearing is adjourned.
[Whereupon, at 12:01 p.m., the hearing was adjourned.]