Pearlstein: XM-Sirius Merger

Washington Post business columnist Steven Pearlstein was online Wednesday, March 26, at 11 a.m. ET to discuss the XM-Sirius merger.

About Pearlstein: Steven Pearlstein writes about business and the economy for The Washington Post. His journalism career includes editing roles at The Post and Inc. magazine. He was founding publisher and editor of The Boston Observer, a monthly journal of liberal opinion. He got his start in journalism reporting for two New Hampshire newspapers -- the Concord Monitor and the Foster's Daily Democrat. Pearlstein has also worked as a television news reporter and a congressional staffer.

Read Pearlstein's latest columns.

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Washington, D.C.: So does this mean that XM in Washington is going to expand, shrink, or maintain status quo as far as staffing and operation levels?

Steven Pearlstein: That's a good question to which I don't have an answer. My suspicion, however, is that the center of gravity will move toward Sirius headquarters in New York, where the chief executive is located and lives. Not good news for the home team, in other words.

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Vienna, Va.: Speaking just as a consumer (I am not involved in this in anyway), I would like either XM or Sirius but one has Major League Baseball and the other the NFL. I want both, and I'm certainly not going to pay twice for it. Fine by me if they merge.

Steven Pearlstein: This is one of the fictions perpetrated by the two companies: that consumers couldn't have the best of both. Not true. Over the objections of the duopolists, the FCC ordered them to come up with a radio that could take signals from either/both services, so that if you wanted to subscribe to both services you could. And the FCC was pushing them to offer a la carte pricing, so you could buy just the baseball or the football from one or the other. THAT would have been very pro-consumer. But just merging them is not pro-consumer. What you will see over time is that the price will rise and the service will deteriorate and become less innovative. Count on it.

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Alexandria, Va.: If the merger is anti-competitive, why in your opinion is the National Association of Broadcasters so opposed to the merger? Last I heard, they were not an association representing consumers' interests.

Steven Pearlstein: Look, I hold no brief for the National Association of Broadcasters. In my opinion, they are one of the most selfish lobbies in Washington. I've long said that broadcast licenses should be auctioned off every 10 years to raise money for the government and keep the industry competitive. So I'm no friend of theirs. But just because they are opposed to the merger doesn't mean its right.

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Danvers, Mass.: Nice situation. What does a guy have to do to get the government working so hard for him?

Steven Pearlstein: As it happens, any of the three presidential candidates still int he race will be better on antitrust than Bush, which is why you may see a rush of mergers in the nexty few months, because companies realize the window may be closing. That's the advice coming from the corporate antitrust lawyers.

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Washington, D.C.: Can you clarify why you feel this creates a monopoly? They have direct competition with terrestrial radio, internet radio, wifi radio, and mp3 players in the portable market. It is an absolute necessity that they offer a compelling product at a desirable price to be successful as there are too many options for the consumer to turn to for audio content if they do not. A monopoly would imply that they have the freedom to charge whatever they want, which is simply not the case. As a Sirius subscriber, the ability to have MLB now is fantastic. I'm more excited about the new content offering than the modest boost I might gain as a share holder of Sirius.

Steven Pearlstein: Well, as I said, the companies set this up as a false choice: either approve the merger or you can't have baseball and football together. Or put another way, now that we have the exclusive rights to these broadcasts, you have to let us earn a monopoly profit by merging or we won't give it to you. Does that sound like someone who is consumer friendly?

The competition you cite is not that strong because the other products and services are highly imperfect substitutes. Do you really think that $12.95 is the break point at which large number of consumers decide its worth it to buy satellite radio, but at $15 they'll say, forget it, I'll go with that crap the Clear Channel puts out with all the ads. Of course not. There is no direct competition at the moment to satellite radio in the market for commercial-free, multi-format portable audio entertainment. None. That's why its so popular, why there are 14 million subscribers and why its growing so fast.

By the way, y our question also contains another common fallacy about monopolists and monopoly pricing. Monopolists can charge whatever they want, but they don't charge infinite pricing. Remember, consumers even in a monopoly market still have a choice of either buying or not buying from the monopolist. So the monopolist, in pricing his product, has to trade off price and volume: the higher the price the lower the volume. And he has to determine which price presents the best tradeoff between price and volume. That can be a complex calculation, having to do mostly with elasticity of demand and the cost of serving the marginal customer. And int he case of XM-Sirius, which high elasticity and low marginal costs, that means the monopoly price will still be pretty reasonable. But you can be pretty sure it will be more than $12.95 a month.

How do I know. Just look at your cable bill.

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Washington, D.C.: Another reason to oppose the merger: if there's one company, the FCC is going to impose more conditions on it, essentially creating one regulated monopoly. Do we really need another regulated monopoly?

Steven Pearlstein: You may not like a regulated monopoly, but an unregulated monopoly is the worst of both worlds.

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Bernardsville, N.J.: Is the Sirius-XM merger going through due to a general pro-monopoly business agenda of the current administration or as a means to help stimulate business during a sluggish period in the economic cycle?

Steven Pearlstein: The first: a bias against antitrust enforcement.

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Beltsville, Md.: Bravo! This is the best discussion of merger issues since the Supreme Court was debating the meaning of our anti-merger law in the 1960s and 1970s. The law (Section 7 of the Clayton Antitrust Act) is still on the books, but one would hardly know that from the behavior of administrations and courts, including the Supreme Court, over the last three decades. Not to mention economists, led on by the supposed "free market" views of the "Chicago School."

Steven Pearlstein: You got that right. The law is very simple and clear: the government should step in to block a merger if it substantially lessens competition. You'd think the merger of the only two satellite radio providers would be an easy one. But Justice now has this view that as long as there is one company somewhere in the world that is left to compete in a market (Maytag-Whirlpool) or there is some imperfect substitute for consumers (XM-Sirius) then that's enough competition.

Of course that's not what the law says -- enough competition. It says substantially lessen competition, wording which Barnett cavalierly ignores in every decision he has made.

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Alexandria, Va.: Nice parry on the NAB question. However, you must at least wonder why a group representing terrestrial radio would object to the satellite radio merger unless a combined XM-Sirius would be a powerful competitor with their ground-based counterparts. Also, how can you, in all honesty, equate the bailout of Bear Stearns with this situation? Thirty billion dollars in taxpayers' money spent to help financial services companies merge versus a decision that a merger would not be anti-competitive. Seems like you are trying to piggyback resentment over the Fed's decision to apply to this situation.

Steven Pearlstein: The government is not spending $30 billion -- that is a falsehood. The government, in the form of the Federal Reserve, will manage a portfolio of assets which have already been discounted in value to $30 million, with the expectation of selling off those assets in an orderly manner when market conditions are right. The best guess is that the government will either make or lose about $1 billion. The chance that the portfolio is worthless is close to zero.

As to bailing out XM and Sirius shareholders, that is exactly what the government has done. The two companies had overspent and overinvested in the thought that one or the other would get big very fast and knock the other one out, and it never happened. So neither company is making any money and share prices, which were once very high, began to fall. So executives came up with a brillant solution: let's stop competing against each other, cut our combined programming in half, cut our marketing and overhead costs in half, move to a single satellite distribution system and shareholders in both companies will be better off. The only losers, of course, will be the consumers, who will have less choice in the beginning and eventually, higher prices and less innovation. Mel Karmizan's is the new Soviet commissar, arguing that competition is wasteful and that having one government-designated satellite radio supplier is the best solution.

Why do I say government-designated: Because there are only two outstanding licenses for satellite radio, and Mel now controls both of them. And do you think he will give one back to the government so it can sell it to someone else. Or do you think he'll sit on his hands if some entrepreneur comes along and applies for a third satellite radio license. Not a chance. Mel will be up at the FCC in a New York minute arguing that giving anyone else a satellite radio license is anti-consumer because there is only room in the market for one profitable player.

Here's a little secret about people in the broadcasting business, which includes satellite radio: They are all, at heart, monopolists and oligopolists. They hate competition and do whatever is necessary to eliminate it or reduce it.

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Washington, D.C.: Isn't it possible that if the merger doesn't go through, one of these companies drives the other one out of business? Seems like there's really not that much room for two companies, and we're going to get the same result anyway.

Steven Pearlstein: You know, that might be a result, and then we'd have a legally obtained monopoly. But it would take years, and in the process consumers would enjoy the benefit of lots of competition. On the other hand, some big communications company or telephone company might come along and buy the weaker one for a low price, invest big money in it, and use it as part of a strategy to deliver phone-TV-Internet and music to homes and cars. You just never know. But in this country, we usually leave those things up to the marketplace, rather than simply granting monopolies that foreclose all other possibilities.

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Oklahoma City, Okla.: I subscribe to both services. What does this mean for me?

Steven Pearlstein: It means you will have about half the current programming offerings you now have, at probably half the price to start out. After that, however, the price will rise and you'll have less innovation. And they'll probably start experimenting with having advertising, starting with a little and then gradually more, but always keeping it less than the advertising content on free radio. You can almost bet on that.

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Washington, D.C.: Two years ago I would have considered this merger a monopoly but with the different types of media streams out now I don't know how people can consider this a monopoly anymore. They are just a segment of a media explosion that gives consumers more choices because apart they both would go bankrupt. Why did it take the Government so long to see the validity of this merger?

Steven Pearlstein: Because at the moment there is no good substitute if you want to hear music chosen and downloaded by someone else in a commercial free format. That's a pretty big market -- 14 million customers. And having just one company supplying that market is just plain dumb.

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Alexandria, Va.: How will XM-Sirius' a la carte programming proposal affect the satellite radio market and other subscription-based platforms?

Steven Pearlstein: Not sure.

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McLean, Va.: Steven: I couldn't agree more with your column. I'm a huge fan of satellite radio (I have XM) and want it to succeed but this is a clear case of the government granting a company a monopoly. It's hard to believe any lawyer could justify this. Take this point: "One reason, according to Barnett, is that when you buy a new car, you don't have a choice of whether to install an XM or Sirius radio." This totally ignores the large number of people, such as myself, who buy a radio/stereo unit to install in the car after I buy it. I had a choice of what to install, including which satellite radio receiver. Now I won't.

Steven Pearlstein: Mr. Barnett ignored the "after market", as I think they call it. And yes, people like you will now not have a choice, just as retail customers who go into Best Buy won't have a choice.

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Raleigh, N.C.: If they combine, will the XM people have to get new radios? Will Sirius pay for the new radios and if not, are they willing to lose us?

Steven Pearlstein: For a while, XM and Sirius will run essentially two distribution systems, each with its own satellite network and ground stations and radio "boxes" in your homes and cars. Next, they'll come out with a new "interoperable" receiver that will be sold to all new customers, that can receive either signal. And after a decade or so, they'll decide on one system or the other, and make everyone who has the "wrong" kind of radio exchange it for the new one. I say a decade because it will be at that point the company has to begin investing in a whole new generation of satellites and at that point, the cost of operating two different systems will be so high that it will be cheaper for them to pay the switching costs of the boxes. They may pay the full cost of the switch, or more likely, they will pay part of the cost and make consumers pay the rest.

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Bethesda, Md.: I'm glad the merger has been approved. My three year XM subscription ends April 30 and I was considering not renewing because just about everything I've read indicates that XM can't make it without merging. That would have stuck me with about $180 in XM hardware that was useless. I currently have the SkyFi2 receiver and have it hooked up in my car, at home to my Bose wave radio, and in the office in the XM boom box. If XM goes out of business and I still want satellite radio, I would have to switch to Sirius and buy even more hardware. I like satellite radio (no commercials, MLB). It beats commercial radio by a mile. At $10/month (averaged over a 3 year subscription), it's more than worth it not to have to hear the terrible morning radio programming in D.C. If the merger were not approved, I would probably drop satellite radio altogether and just use my MP3 player in my car.

Steven Pearlstein: You assume that XM would go out of business. I think that's not a good assumption. Interestingly, that could have been a winning argument with the Justice Department -- its called the failing firm defense. If, in fact, XM's failure was inevitable, then it would be silly for the government to step in and prevent a merger, even one that results in a monopoly. But they didn't make that argument because they couldn't. And they couldn't because they hadn't explored the possibility of XM merging or being sold to someone other than the only other satellite radio company.

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Mt. Vernon, Va.: I agree with your thesis that this is the type of merger that previously would have been blocked. But, really, who cares? Neither XM or Sirius have ever caught on, there's other competition (i.e., AM, FM, Internet-based radio) and it's probably destined to be replaced by Net radio and Mp3 players. This reminds of when AOL & Compuserve merged; it seemed like a big, scary deal at the time, but within a couple of years, both were obsolete.

Steven Pearlstein: It's an interesting point, but I don't think the analogy is really a valid one. This is a very sustainable technology. And not all of us want to spend our time and money downloading music. Nor is it clear that phone companies will be able, in any near time frame, to deliver such a rich subscription service on their own over portable telephones that can be used in cars and homes. In fact, the phone companies will probably want to partner with one of the existing satellite radio companies to provide the music service, just as DirecTV does now. ONly when whey go out to shop for such a service, guess what? There will only be ONE left.

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Boston, Mass.: I think you give too much credit to their exclusive content and too little credit to the scope of their competition. There are plenty of free alternative shock jocks to compete with Howard Stern, and MLB packages only really appeal to out of market fans for single teams.How many high-end vehicles does GM even sell with these packages included, and how many consumers actually maintain their subscriptions after the initial trial period ends? Also with the high probability that one of them would have gone out of business and had their expensive assets sucked up by the other, where is the beef? I think consolidation among terrestrial radio stations would be of much more regulatory concern.

Steven Pearlstein: The only point I would agree is that consolidation among terrestrial networks is of equal concern. But I think you underestimate the strength and viability of commercial-free radio. Its really great, with lots of niche channels to chose from. Nothing like it on the AM-FM dial.

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Advertising Guy: This sounds a little bit like the beginning of the endgame for terrestrial radio--with the exception of syndicated talk. Once the new combined company establishes a format (or announces that it will support both platforms), subscriber growth will shoot up.

Steven Pearlstein: In the long run, there will be a handful of programming companies,a nd they will distribute their radio content across multiple platforms and distribution systems. Which is why you want to have competition remaining in all of those distribution channels -- terrestrial, satellite radio, wireless phone and Internet, etc.

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Washington, D.C.: It's not clear to me what happens now--is Consumers Union or some other group going to court to block the merger? I assume that'll happen, meaning there will likely be a temporary restraining order and another 3-5 years of legal wrangling. Could the FCC take action in the meantime to give us more a la carte options?

Steven Pearlstein: No, its probably a done deal now, other than some cosmetic conditions that the FCC will impose to show that it is looking out for consumers in some fashion.

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Philadelphia, Pa.: I think your article significantly overstates the market power of satellite radio. By removing the "contract" subscribers who receive satellite radio free with their new cars, subscriber growth for the two companies has been minimal, which means the share of radio listeners who think it's worth $13/month to listen to Howard Stern and avoid commercials is very small. With the inability of Sirius-XM to draw a significant number listeners away from traditional broadcasting, do you really think ANY peripheral radio outlet (internet, satellite, or whatever) has the power to increase prices when there is a widely-available free substitute? Your entire article hinges on the assumption that satellite radio doesn't compete with traditional radio, and while I understand that's the only viable argument for opponents of the merger, it's pretty weak.

Steven Pearlstein: It doesn't compete directly. One has commercials, the other doesn't. One has all sorts of jazz and blues and folk and classical, the other has very limited offerings in all of those. One has Howard and the other doesn't. Yes, they are both audio entertainment, but they are hardly perfect substitutes. And, more to the point, since I pay nothing for terrestrial radio, its hard to know how it provides very direct price competition. Do you think consumers have calculated the "value" of having choice and no commercials and decided that it is precisely $12.95 a month. I don't think so. That price was derived at by competing one satellite radio service against another, so that consumers had an apple to compare to an apple, not an apple to a pomegranite.

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Washington, D.C.: XM's website says that none of its satellite radios currently in use will become obsolete as a result of the merger. How credible is this statement? I know that if my two radios are not supported after the merger, I will cancel my subscription to XM-Sirius, or whatever the new company will be called. I will miss Bob Dylan's Theme Time Radio Hour (today's theme: fire) but I'll live. Thanks.

Steven Pearlstein: Eventually they will move to a single distribution network that will require at least half of the existing sets to be swapped out. The only question is who will pay for that -- you or the company? But that's several years down the road.

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Seattle, WA: How does the Sirius merger compare with the denied Whole Foods merger? Sirius and XM are 'the' market for satellite radio, but are grouped under 'entertainment.' Whole Foods sells food but was grouped under 'organic natural food retailers.'

Steven Pearlstein: It's a good question. The new standard defense of mergers now is that the market isn't the narrow market you think it is, but it is "all food" or "all audio entertainiment." Defined this way, of course, any merger looks like it passes muster. But, in fact, that is not the way consumers and competitors perceive the marketplace. They operate in narrow sub-markets, where the real competition takes place because the competitive products and services are most similar to each other. And what's so disappointing is to see the Justice Department embracing this wrong-headed analytical framework in XM-Sirius, just as the district court adoptedc it in Whole Foods-Wild Oats. Interestingly, the Federal Trade Commission, the other antitrust enforcement agency, has been better about not falling for the "its all one market" arguments.

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Washington, D.C.: Do you see subscribers having to shell out more cash for a subscription after the merger? If both companies are in the red, how else will they turn a profit other than by raising prices?

Steven Pearlstein: They'll hold prices pretty stable for a couple of years to avoid the political repercussions. And there is plenty to be gained by cutting duplicative costs in terms of marketing and overhead. They will also cut the number of total programs offered by the combined entity in half: in the near future, there will be only one set of programs offered through both channels. And because of bandwidth limitations, that single set of programs will be only slightly larger than either the existing XM or Sirius offerings.

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Washington, D.C.: What's your take on DOJ founding their approval upon the lack of interoperable radios? Doesn't that pretty much undermine the original 1997 conditions from the FCC?

Steven Pearlstein: Good point. The FCC had ordered the companies to develop an interoperable radio, but neither really wanted to because it would have only heightened the competition between them by allowing customers to easily jump from one service to another, playing one off against the other. So they dragged their feet, and have now been rewarded for dragging their feet by the Department of Justice.

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Princeton, N.J.: Respectfully, your opinion is all wet. Satellite radio is not a product you NEED to purchase, it's purely for entertainment purposes (unlike say, oil or utilities: two areas where the government has sanctioned de facto monopolies that have jacked up prices to no end). If the combined XM-Sirius raises prices, people will stop subscribing and the company will go out of business. In addition, to minimize the ubiquity of other forms of radio programming (last I checked every car in America comes equipped with regular old "free" radio) is to miss the revolution that is going on in technology (more and more cars are also coming equipped with iPod adapters). The true gall is in the hands of the NAB, who, while arguing that the combined company would be a monopoly, undermined its entire argument by pouring millions into burying the deal (if satellite does not compete with regular radio, why bother?). This from a lobbying group headed by Clear Channel, who literally ran a monopoly in many small cities and towns by owning every single station available. Please.

Steven Pearlstein: Ah, my conspiracist liberal friend from Princeton. You need to study up on monopoly pricing, which is premised on the idea that the only choice consumers have is either to buy the monopoly product at the monopoly price, or not buy it. That doesn't mean, however, that the monopoly price is the competitive market price. XM-Sirius will gradually raise its prices until it reached the point where any further increase in price generates less profit because of the loss of revenue. I don't know where that price is, and neither does XM-Sirius. But I can assure you it is higher than $12.95 a month.

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Falls Church, Va.: Boy, I want your job. Terrestrial radio doesn't compete with XM just because there are programming differences? That's like saying terrestrial radio stations (or satellite radio stations) don't compete with each other because their programming is different. And hello, there ARE commercials on XM, anyway. If there is money to be made in radio only, do you really think Direct TV or DISH network can't step into this market?

Steven Pearlstein: DirecTV has no license to participate in this market, and you can be sure that Sirius-XM will spend millions of dollars making sure that the FCC never grants that license. In fact, DirecTV offers either Sirius or XM as part of its offerings to its home customers, under contract. Guess what: the price Sirius-XM charges DirecTV is about to go up, because DirecTV can no longer play one supplier off against the other.

I didn't say terrestrial radio doesn't compete at all with XM. I said it is not a very direct competition because the two products are not very similar -- one subscription based, one advertising based. If they competed directly, and offered essentially the same product and service, then you'd be crazy to pay $12.95 a month to XM or Sirius. But 14 million people do pay it.

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Washington, D.C.: I continue to be perplexed why Wall Street, and major investors sing the praises of companies like XM and Sirius. They lost millions as stand-alones, and now after merging and purging they will lose less millions as a combined company. There has never been a working operating plan that shows either company making money. The merger will just soften the annual financial blow. Put the DOJ and FCC question to the side, and ask the hard question. When and how will Satellite radio show a substantial profit?

Steven Pearlstein: Its a good question and, of course, I'm in no position to answer it. But there are huge scale efficiencies to be gained from this merger, particularly once you can jettison one entire satellite and ground station distribution system.

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Alexandria, Va.: If one of the 2 companies simply went out of business, would the subscription price for the survivor be likely to increase by more or by less than it is likely to do under this merger?

Steven Pearlstein: In theory, the same.

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Washington, D.C.: Under your theory, shouldn't the Justice Department block Direct TV's exclusive NFL deal? You can't get out of market games any other way.

Steven Pearlstein: NFL, like MLB, is effectively a government sanctioned monopoly. As such, the government should look very skeptically at exclusive dealing arrangements by these monopolists.

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Reston, Va.:-Ahem- XM-Sirius has $2.5 Billion in liabilities at present, and is losing half a billion annually. It has less than a year's cash on hand now. Why do you think anybody would want to buy it in current form, or that it could start making money? You assume they didn't consider any other offers, when it seems more likely that nobody wants to have any part of something that loses so much money.

Steven Pearlstein: If your argument is that satellite radio is a natural monopoly, it is an interesting one, but if it is a natural monopoly, it should be regulated like other public utilities. I don't recall XM or Sirius having suggested it would subject itself to price regulation.

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Alexandria, Va.:"What you will see over time is that the price will rise and the service will deteriorate and become less innovative. Count on it."This seems to be an extension of your argument in your column that "great programming at affordable prices" is definitely going to go away following the merger. So great programming is not to be found on terrestrial radio, including NPR and other non-commercial stations, or through any other medium? Even if the price rises and services deteriorate, people will stop subscribing, and go somewhere else. You seem to say that once satellite radio stops innovating, consumers will run out of options. Do you really believe that satellite radio has no competition from regular radio, iPods, and other internet sources of content?

Steven Pearlstein: At this point, not much, no.

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Steven Pearlstein: That's all the time we have for today. "See" you all next week.

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