[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

                              ----------                              
                                                                   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

                              ----------                              


                        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\
---------------------------------------------------------------------------
    \1\ Section 7 of Clayton Act, 15 U.S.C.  18.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \6\ Citigroup 17th Annual Entertainment Media & Telecommunications 
Conference (Jan. 10, 2007), webcast available at http://
investor.sirius.com/medialist.cfm.
    \7\ Id.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \16\ www.xmradio.com.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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'').
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.]

                                  
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