Things to consider about satellite radio

The proposed merger of the satellite radio companies, XM and Sirius, is getting a lot of attention because of the size of the deal (Bloomberg reports its worth $4.84 billion), because of uncertainty about how federal regulators will view the deal, and because consumers might be hurt by the reduction in competition.
The companies have about 14 million subscribers between them, each paying about $13 a month or more. A rough estimate suggests the merger would result in a company with subscriber revenues of at least $2.18 billion a year. However, the Chicago Tribune says the companies lost a combined $7 billion getting started, and the new company would have about $1.6 billion in debt. The companies argue the merger is critical to their survival because of intense competition from programming on the Internet, cell phones, and broadcast radio.

Some questions for regulators

Regulators at the Federal Communications Commission must approve the deal, or it won't happen. It won't be easy for the FCC to evaluate the arguments that consumers are substituting all of those alternatives for satellite radio.
First, consumers pay to receive satellite radio, but not for advertiser supported radio or Internet programming. But the best way to tell if goods are substitutes is by measuring the relationship between the price of one good (satellite radio) and the demand for other goods (everything else). How do you measure the influence of price if consumers can get the substitute goods for free?
Second, the market for earthbound broadcasters is defined by the reach of their radio signal, but the market reached by a satellite is not limited this way. And there is no good way to define the geographic extent of a market on the Internet.
I'm skeptical that all of the other media being cited by the companies are substitutes -- many people who consume free radio would not be willing to pay for the same programming. This does not mean the companies' arguments lack merit, but it's in their interest to push their definition of the market to the limit.

What about consumers?

There are two possible ways consumers could be hurt. First, the merger probably will result in higher prices. Second, the range of programming might be reduced.
The second point first. Phil Rosenthal at the Chicago Tribune points out that XM and Sirius offer different programming -- one has Howard Stern, and the other Oprah, one has football, and the other has baseball. So customers who like particular genres, such as sports, have to subscribe to both XM and Sirius to get all of the programming they want. However, it's unlikely many people are actually willing to pay for both services, not to mention impractical.
Customers who want programs on the service they don't subscribe to would be better off if the merger goes through. The new company will probably offer all the programs now offered separately because elminating programming means the new company would lose customers.
As a general rule, increasing the range of programming at a merged company would increase the number of subscribers. For instance, sports fans and opera fans would subscribe if they could both find programs they liked for a price they were willing to pay.
This goes back to the first point. Prices will probably increase, but subscribers will probably get more programming. Customers should pay more if they are getting more.
But will the new prices be so high that they cannot be justified by the increased programming?
This might be the outcome if the new company can monopolize its segment of the radio market. And that is why the market definition that the FCC adopts will be so important to this proposed deal.