TechKnowledge No. 119

The Lesson of the XM/Sirius Merger

When satellite radio broadcasters XM Radio and Sirius Broadcasting announced plans for a merger way back in February 2007, few imagined that it would take nearly a year and a half for the Federal Communications Commission to announce its approval. The 17-month-long process illustrates how the FCC works on behalf of special interests to impede competition and innovation, and how poorly suited regulation of any kind is to the communications world. The slender reed of authority the FCC has to review mergers should be cut, once and for all.

Satellite radio has been a business model for less than a decade, and it only barely came into existence. The FCC auctioned the original satellite radio licenses in 1997 over the resistance of traditional terrestrial radio broadcasters, who got at least one concession: a bar on the two license holders from merging. Sirius and XM have struggled to make profits as stand-alone entities, though, and they hope that folding together most of their operations and management will save enough to make the business viable.

Under a self-imposed rule, the FCC is supposed to approve or reject mergers within six months, but it put off the start of the “shot clock” for four months - until June 2007. Chairman Kevin Martin finally submitted his approval plan to the other four commissioners more than a year later, in early July 2008.

After fine-tuning to garner a majority vote of commissioners, the list of concessions demanded by the FCC will sand Sirius XM’s gears for years to come: Eight percent of channel capacity must be set aside for minority-owned and public-interest programming, there’s a three-year price cap on their services, and the company must offer receivers capable of receiving both XM and Sirius programming. (The new company, though merged, plans to keep the two brands separate for a number of years in order to fulfill contractual obligations.)

Sirius XM must also offer radio stations on an “à la carte” basis - separate channels, priced individually - a hobby horse of Chairman Martin’s, who is also seeking to impose such a regime on cable television. As Adam Thierer discussed in a previous TechKnowledge, “à la carte” is a favorite of both religious-right and Naderite-left activists, but it would reduce the diversity of programming. Firms would not be able to experiment and nurture new programming by cross-subsidizing channels within a bundled offering.

One idea that didn’t make the final list, pushed by partisans of National Public Radio, would have required Sirius XM to include high definition (HD) radio receiving capability in their new receivers. Democratic FCC commissioner Jonathan Adelstein pushed the idea, as did Congressman Ed Markey (D-MA) and NPR itself - recipient of millions in taxpayer dollars to ramp up its HD broadcasting services. HD radio has barely been around a year, and prices on HD receivers are falling so rapidly that this proposal seems as unnecessary as it is unfair. Promoted well, there is every reason to think HD terrestrial radio will soon be as ubiquitous as satellite. There is no reason to hamstring the struggling satellite radio business by requiring it to support established broadcasters’ move into new technology.

What NPR and its political supporters sought, though, concedes an important point: Free terrestrial radio is a competitor of subscription satellite radio. The Justice Department’s Antitrust Division, which shares jurisdiction with FCC over mergers in the telecommunications and broadcasting industries, itself took more than a year reviewing the merger and signed off in March 2008. But at least the Justice Department acknowledged that satellite radio services do not just compete with each other, but with a broad array of possible consumer substitutes, such as AM and FM radio, CDs, iPods, and other MP3 players (many new cars now come with iPod docking systems), “Internet radio” webcasting over WiFi, cell phones and other handheld wireless devices, and the new digital HD radio receivers which allow old-fashioned broadcasters to send up to three digital channels of programming over the AM and FM bands bundled together with the extant analog channel.

Indeed, the audio-entertainment marketplace, if it may be called that, is evolving faster than even merger-inclined regulators realize. The Justice Department’s merger-approval memo, for instance, noted under “technological change” that one factor contributing to the approval was “the expected generation within several years of next-generation wireless networks capable of streaming Internet radio to mobile devices.”

Such services are already available. The “.mobi” top-level domain on the Internet was established in 2006, designed for just such a purpose, and some Internet radio streaming audio stations are already available on iPhones and other high-end wireless handhelds. Rock-bottom, cheaper-than-Greyhound bus services on the East Coast corridor already offer free Internet connections over wifi, enough bandwidth for at least radio-quality streaming audio. It is only a matter of time before the same amenities are available in cars as well, giving Sirius XM another run for its money.

Satellite radio aside, the communications market would be opened up to more competition by wholesale liberalization of spectrum policy. Licenses to use different parts of the spectrum should be bought and sold across business models and uses rather than limited to uses prescribed by the initial FCC licenses. Some spectrum could be dedicated to the commons and used for any purpose that doesn’t violate basic interference rules.

The retrograde command-and-control licensing system gives federal bureaucrats at the FCC and their special-interest friends a lever to exert control over the freewheeling world of satellite radio. Sirius XM’s biggest star, Howard Stern, left terrestrial broadcasting in part because of the ever-present threat of arbitrary “obscenity” fines from the FCC. Some of Stern’s more cynical friends and fans viewed this impossibly long merger review, which cost Sirius XM millions of dollars, as just more extortion and payback from Stern’s political enemies in Washington. Whether that was the reality or just perception, it highlights an inherent flaw in regulating the communications sector. The FCC should have no jurisdiction over telecom merger proceedings on First Amendment grounds alone. Never mind what a bad job it does with that authority.

After almost a year and a half of twisting in the wind, both executives and shareholders of Sirius and XM were desperate for any decision, no matter how many pounds of flesh FCC was going to extract. The combined company may survive. It recently reported narrowing financial losses.

All’s well that ends well? Not so much. Spectrum policy and telecom mergers should be depoliticized as much and as fast as possible so that neither continue to hinge on the demands of special interests and their politically appointed and elected allies. The innovation-crushing power of the FCC must go. The speech-curtailing power of the FCC must go. That is the lesson of the XM/Sirius merger.

Jim Harper is the director of information policy studies at the Cato Institute in Washington, D.C. To subscribe, or see a list of all previous TechKnowledge articles, visit TechKnowledge Newsletter - Technology and Telecom Studies.