DOJ Wimps Out on Sirius-XM Merger: Will FCC do the Same?

In a popular skit on Saturday Night Live, comedians Amy Poehler and Seth Meyers describe outrageous things people did the previous week and shout, “What were they thinking?!” I had the same reaction to the Antitrust Division’s decision not to challenge the proposed Sirius-XM merger.

According to the Department’s press release, here’s what they were thinking: Sirius and XM really don’t compete now, so letting them merge into a monopoly wouldn’t change anything. That’s pretty much it. Once people select one of the two services, they are pretty much bound to use it, since their receivers won’t work with the other service. Thus the two providers don’t compete, despite the fact that any competent economist will tell you that it is rivalry for marginal — in this case, new — consumers that makes markets competitive.

It wasn’t supposed to be this way. In 1997, when the Federal Communications Commission (FCC) facilitated satellite radio service by setting aside spectrum and granting licenses, the idea was to establish two competing services. As a condition of approval, the FCC made clear that the providers were expected to develop receivers that were compatible with both services — “inter-operable,” in its language. The FCC chose not to dictate the precise design of the receivers, but left it to the providers to determine the best technology.

As we know, Sirius and XM each developed their own proprietary technologies. This proved to be an easy way of limiting competition: simply ignore the Commission’s inter-operability requirement and suffer no consequences. Yes, the FCC — and American consumers – were taken for a ride. If DOJ really believes the two services are not competitive, and that this lack of competition derives from a lack of receiver inter-operability, the appropriate response is to file charges under the Sherman Act to force the two companies to develop inter-operable receivers.

Review of the proposed merger now moves to the FCC, which will apply a “public interest” test. To curry favor with the FCC commissioners, Sirius and XM have promised to make several service changes. First, they will offer a narrower lineup of channels for a low basic rate and will offer additional channels on an a la carte basis. This is in keeping with the often-voiced opinion of FCC Chairman Kevin Martin that most subscriber-based services, especially cable TV, should be a la carte. Second, Sirius and XM promise to move especially controversial or indecent programming (Howard Stern and the like) out of the basic packages and make them a la carte. Third, they promise to freeze the prices of basic services for a period of time.

Other conditions for approval have been proposed. For example, making sure that current customers continue to receive subscribed content on their receivers. Also, imposing a deadline for the introduction of inter-operable receivers, should the merged firm continue to employ both technologies. There are even proposals to require the merged firm to carry a certain amount of “public interest” programming, as well as proposals to limit its relationships with vendors (exclusive dealing, for example).

The question that must be addressed by the Commission, in light of the refusal of the two providers to develop inter-operable receivers, is how can it possibly trust a merged entity to carry out its promises? How could it possibly enforce those promises? Require a bond of billions of dollars? Make licenses contingent on meeting those requirements? Threaten fines of devastating proportions? Aside from whether the FCC has the authority to do such things, we know they won’t happen. Promises are cheap, and, as we have seen, easy to break.

The better path would be for the FCC to say to Sirius and XM: go develop inter-operable receivers and let’s get some experience with that. Then, if you still want to merge, let DOJ reassess whether the proposed merger would lessen competition.

Even assuming approval and that the conditions imposed were lived up to by the merged firm, the FCC will have replaced two rival firms with a regulated monopoly. If experience be our guide, that is not a very promising path.