There's a radio war going on in Washington, and this one has
nothing to do with the Fairness Doctrine. Talk of re-imposing the
requirement by the Federal Communications Commission (FCC) that
broadcasters air opposing views on controversial topics sparked an
intense and highly publicized debate this summer. Almost lost in
the "fairness" furor, however, has been a second, but no less
intense, radio industry battle over the merger of satellite radio
providers XM and Sirius. After months of review, a ruling from the
Justice Department is expected within weeks, to be followed by a
decision by the FCC, which also must approve the transaction. The
merger debate is different from the "fairness" debate in that it
involves the structure, rather than content, of the radio industry.
Like the "fairness" debate, however, the outcome could determine
how Americans will listen to the radio for years to come.
Satellite radio--the transmission of radio programming directly
via satellite rather than via broadcasts from land-based towers--is
a relatively new service. The FCC, overcoming the opposition of
radio broadcasters, auctioned frequencies for two satellite radio
providers in 1997, which were won by XM and Sirius for a combined
$173 million. The two firms began offering service until
2001 and 2002, respectively.
Growth for the new services has been rapid, with combined
subscribership nearing 14 million last year. But despite this
expansion, the firms have struggled financially. The cost of
launching and maintaining satellites and other infrastructure is
high, as is the cost of programming. (Howard Stern alone costs
Sirius some $100 million per year.) Neither XM nor Sirius has
ever made a profit. In 2006 alone, Sirius lost $1.1 billion, and XM
lost $719 million.
Hoping to turn this dismal financial performance around, XM and
Sirius announced plans to merge in February of this year. Among the
benefits they foresee: accelerated development of new technologies
as research budgets are combined; increased variety of programming
due to increased channel capacity; and perhaps $3 billion to $7
billion in net present value cost savings.
Of course, none of these benefits are guaranteed. In
dynamic markets, no particular outcome is ever certain; the
specific results can only be determined in the marketplace.
Nevertheless, the potential for real consumer gains from this
transaction is real and substantial.
Merger Would Preserve, Strengthen
Traditional AM and FM broadcasters, among others, are fighting
the deal, arguing that since Sirius and XM are the only two firms
offering satellite radio, the merger would create a monopoly. The
two sides have spent hundreds of thousands of dollars on their
campaigns, along with allies ranging from former Attorney General
John Ashcroft (against the merger) to Frank Sinatra Enterprises
(supporting the merger). Highlighting the intensity of the battle,
the National Association of Broadcasters (NAB), the trade
association for traditional radio, even hung on its D.C.
headquarters building an outsized banner, proclaiming: "XM + Sirius
This argument, however, doesn't square with the facts. Sirius
and XM have plenty of competitors, starting with the broadcasters
themselves. In fact, counting both broadcast and satellite
services, Sirius and XM have only 3.4 percent of the total radio
But that is only the beginning. Internet-based service is
increasingly becoming a player in radio. Moreover, other forms of
audio entertainment compete for American ears. In fact, i-Pods and
other MP3 devices, which have grown phenomenally in recent years,
may be the biggest challenge to radio of any kind.
Even the National Association of Broadcasters has noted the
broad nature of competition in audio entertainment, stating to the
FCC this January "...there can be no reasonable doubt that the
current media marketplace is robustly competitive, and indeed
exploding at the seams with consumer choices for both delivery
mechanisms and content."
More directly, NAB president David Rehr remarked on the tough
competitive landscape: "Who are our newer competitors? On the radio
side, we have satellite radio, Internet radio, iPods, other MP3
players, cell phones, and others." Far from monopolizing
anything, satellite radio is still an upstart challenger in the
audio entertainment marketplace.
Yet, opponents maintain that Sirius and XM have no competition.
Economist Gregory Sidak of Criterion Economics has argued that
competition in one aspect of the market doesn't necessarily mean
there is competition in others. Specifically, he maintains that
radio is a "two-sided" market, in which terrestrial and satellite
radio compete for advertisers, but not for listeners.
For listeners, Sidak argues, the two types of radio are
complements, not substitutes, for each other.
That claim doesn't hold water. While many consumers do enjoy
both types of radio, the relative merits of AM and FM radio
certainly impact a consumer's decision as to whether to subscribe
to satellite service. Conversely, the merits of satellite service
certainly affect how much its subscribers will listen to
terrestrial programming. This view was expressed by the National
Association of Broadcasters itself, which in a 1995 filing to the
FCC wrote that satellite radio "fundamentally will compete with
terrestrial broadcasters for listeners."
NAB's Rehr used a slightly different argument in a recent letter
to Congress on the competition issue. He argued that while AM
and FM broadcasters do provide competition to satellite radio in
individual local markets, they can't compete in the market for
national programming, since they don't have nationwide
signals. This argument also is flawed. While broadcasters transmit
signals locally, national programming--via networks and
The merger of XM and Sirius would not create a monopoly.
Satellite radio is just one choice in an increasing array of audio
entertainment options available to consumers. Rather than destroy
competition, the proposed merger would increase it by
allowing satellite radio to offer improved services to consumers.
Regulators should reject the false arguments of satellite radio's
earthbound rivals and allow the merger to go forward.
Edwin Meese III
is Ronald Reagan Distinguished Fellow in Public Policy and
Chairman of the Center for Legal and Judicial Studies, and James L. Gattuso is
Senior Research Fellow in Regulatory Policy in the Thomas A. Roe
Institute for Economic Policy Studies, at The Heritage
Sirius and XM have made a variety of
commitments regarding their post-merger practices, ranging from a
price freeze to allowing customers to choose channels on an "a la
carte" basis. While these commitments are apparently based on the
firms' expectation of benefits from the merger, no service
guarantees should or need be mandated by regulators as a condition
of the merger.
remarks of David Rehr, National Association of Broadcasters,
National Press Club, October 4, 2006, p. 5.
Reply comments of the National Association of
Broadcasters, "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, at 34 (filed Jan. 16, 2007).
See remarks of David Rehr, National Association of Broadcasters,
National Press Club, October 4, 2006.
Sidak, J. Gregory, "Supplemental Declaration
of J. Gregory Sidak Concerning the Competitive Consequences of the
Proposed Merger of Sirius Satellite Radio, Inc. and XM Satellite
Radio, Inc," July 9, 2007.
Federal Communications Commission, In the
Matter of Establishment of the Rules and Policies for the
Digital Audio Radio Satellite Service in the 2310 to 2360 MHz
Frequency Band: Reply Comments of the
National Association of Broadcasters, IB Docket No. 95-91
(October 13, 1995), p. 34 (cited in Hazlett, "Economics of the
Radio Satellite Merger.") Some also argue that competition is
uneven because satellite radio is subscription-based and--unlike
broadcasters, whose ad revenue depends upon ratings--doesn't lose
money unless a customer drops his subscription. But subscription or
not, satellite radio companies have no permanent lock on customers.
A radio subscription isn't like an electric bill; few consumers see
it as a must-have. If radio broadcasters provide enough of what
they want, subscribers will drop satellite in a second.
David K. Rehr to the Hon. John Conyers, March