The Lesson of the XM/​Sirius Merger

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When satellite radio broadcasters XM Radio and SiriusBroadcasting announced plans for a merger way back in February2007, few imagined that it would take nearly a year and a half forthe Federal Communications Commission to announce its approval. The 17-month-longprocess illustrates how the FCC works on behalf of specialinterests to impede competition and innovation, and how poorlysuited regulation of any kind is to the communications world. Theslender reed of authority the FCC has to review mergers should becut, once and for all.

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

Under a self-imposed rule, the FCC is supposed to approve orreject mergers within six months, but it put off the start of the"shot clock" for four months - until June 2007. Chairman KevinMartin finally submitted his approval plan to the other fourcommissioners 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'sgears for years to come: Eight percent of channel capacity must beset aside for minority-owned and public-interest programming,there's a three-year price cap on their services, and the companymust offer receivers capable of receiving both XM and Siriusprogramming. (The new company, though merged, plans to keep the two brands separate for a number ofyears in order to fulfill contractual obligations.)

Sirius XM must also offer radio stations on an "à lacarte" basis - separate channels, priced individually - a hobbyhorse of Chairman Martin's, who is also seeking to impose such aregime on cable television. As Adam Thierer discussed in a previousTechKnowledge, "à la carte" is a favorite ofboth religious-right and Naderite-left activists, but it wouldreduce the diversity of programming. Firms would not be able toexperiment and nurture new programming by cross-subsidizingchannels within a bundled offering.

One idea that didn't make the final list, pushed by partisans ofNational Public Radio, would have required Sirius XM to includehigh definition (HD) radio receiving capability in their newreceivers. Democratic FCC commissioner Jonathan Adelstein pushedthe idea, as did Congressman Ed Markey (D-MA) and NPR itself -recipient of millions in taxpayer dollars to ramp up its HDbroadcasting services. HD radio has barely been around a year, andprices on HD receivers are falling so rapidlythat this proposal seems as unnecessary as it is unfair. Promotedwell, there is every reason to think HD terrestrial radio will soonbe as ubiquitous as satellite. There is no reason to hamstring thestruggling satellite radio business by requiring it to supportestablished broadcasters' move into new technology.

What NPR and its political supporters sought, though, concedesan important point: Free terrestrial radio is a competitor ofsubscription satellite radio. The Justice Department's AntitrustDivision, which shares jurisdiction with FCC over mergers in thetelecommunications and broadcasting industries, itself took morethan a year reviewing the merger and signed off in March 2008. Butat least the Justice Department acknowledged that satellite radioservices do not just compete with each other, but with a broadarray of possible consumer substitutes, such as AM and FM radio,CDs, iPods, and other MP3 players (many new cars now come with iPoddocking systems), "Internet radio" webcasting over WiFi, cellphones and other handheld wireless devices, and the new digital HDradio receivers which allow old-fashioned broadcasters to send upto three digital channels of programming over the AM and FM bandsbundled together with the extant analog channel.

Indeed, the audio-entertainment marketplace, if it may be calledthat, is evolving faster than even merger-inclined regulatorsrealize. The Justice Department's merger-approval memo, forinstance, noted under "technological change" that one factorcontributing to the approval was "the expected generation withinseveral years of next-generation wireless networks capable ofstreaming Internet radio to mobile devices."

Such services are already available. The ".mobi" top-level domain onthe Internet was established in 2006, designed for just such apurpose, and some Internet radio streaming audio stations arealreadyavailable on iPhones and other high-end wireless handhelds.Rock-bottom, cheaper-than-Greyhound bus services on the East Coastcorridor already offer free Internet connections over wifi, enoughbandwidth for at least radio-quality streaming audio. It is only amatter of time before the same amenities are available in cars aswell, giving Sirius XM another run for its money.

Satellite radio aside, the communications market would be openedup to more competition by wholesale liberalization of spectrumpolicy. Licenses to use different parts of the spectrum should bebought and sold across business models and uses rather than limitedto uses prescribed by the initial FCC licenses. Some spectrum couldbe dedicated to the commons and used for any purpose that doesn'tviolate basic interference rules.

The retrograde command-and-control licensing system givesfederal bureaucrats at the FCC and their special-interest friends alever to exert control over the freewheeling world of satelliteradio. Sirius XM's biggest star, Howard Stern, left terrestrialbroadcasting in part because of the ever-present threat ofarbitrary "obscenity" fines from the FCC. Some of Stern's morecynical friends and fans viewed this impossibly long merger review,which cost Sirius XM millions of dollars, as just more extortionand payback from Stern's political enemies in Washington. Whetherthat was the reality or just perception, it highlights an inherentflaw in regulating the communications sector. The FCC should haveno jurisdiction over telecom merger proceedings on First Amendmentgrounds alone. Never mind what a bad job it does with thatauthority.

After almost a year and a half of twisting in the wind, bothexecutives and shareholders of Sirius and XM were desperate for anydecision, no matter how many pounds of flesh FCC was going toextract. The combined company may survive. It recently reportednarrowing financial losses.

All's well that ends well? Not so much. Spectrum policy andtelecom mergers should be depoliticized as much and as fast aspossible so that neither continue to hinge on the demands ofspecial interests and their politically appointed and electedallies. The innovation-crushing power of the FCC must go. Thespeech-curtailing power of the FCC must go. That is the lesson ofthe XM/Sirius merger.