The justice department has concluded consumers won't be hurt by the controversial proposal to merge both satellite radio companies, saying competition from other sources ensures consumers won't face higher prices if the deal goes through.
The decision, announced today, states competition between XM and Sirius is already limited because both companies rely on exclusive contracts to put radios in new cars and trucks, which attracts substantial numbers of new subscribers. Even if consumers find satellite radio attractive, the company offering the service probably doesn't influence the decision to buy an automobile.
The U.S. Department of Justice press release acknowledges XM and Sirius compete for retail sales to customers who install their own radios, but retail sales have "dropped significantly since 2005, and the parties contended that the decline was accelerating."
The companies must now get approval from the Federal Communications Commission to complete the merger, but today's action is certain to rekindle controversy about the proposal.
A Confusing Analysis
Last year I wrote about some of the problems for regulators trying to determine how a merger might affect competition. The justice department statement is uncomfortably vague about how such problems were resolved.
A key question under antitrust guidelines asks if a merger would "substantially lessen competition," allowing the merged firms to "impose at least a 'small but significant and nontransitory' increase in (the) price" of their products. This is usually interpreted to mean a merger should not reduce competition enough to allow sustained prices increases of 5 percent or more.
The guidelines require that the department consider what substitute products are available, potential cost reductions from a merger, and the possibility the firms might otherwise fail, leaving consumers without access to their products. The justice department's actual analysis isn't available, so my comments cautiously rely on the press release.
The press release states "there has never been" significant competition between XM and Sirius for existing customers, and competition for new customers is expected to decrease. Each company sells radios that only receive its broadcasts. Technology that would allow a customer to subscribe to both companies "likely would not be introduced in the near term."
This suggests the companies may be limiting the development of such technology, even though it would increase their subscriptions. For example, anyone who wants to hear broadcasts available from just one of the companies -- such as major league baseball or Howard Stern -- might be willing to subscribe to both for the right price.
My example comes from the press release, which oddly makes the opposite argument. Differences in exclusive content, the release says, make it less likely that consumers consider XM and Sirius substitutes. This would only be correct if subscribers are primarily interested in a single company's exclusive content.
But it's plausible that many baseball fans like Howard Stern. Many consumers probably want to listen to a range of programming, and make purchase decisions by comparing groups of channels offering desired programs. This makes it possible, for example, that some consumers are forced to choose either baseball or Howard Stern.
The press release seems to accept this broader argument when it describes MP3 players, terrestial radio broadcasts, and audio delivered on cell phones as competition if the satellite firms merge. It would be interesting to know what evidence shows that demand for satellite radio changes when there is a change in the price of MP3 players or cell phone music downloads, which is how economists decide if goods are substitutes. (Obviously, free radio broadcasts are a separate problem).
These alternatives probably do compete with XM and Sirius as a source of widely available programming, such as music. This is less likely to be true for content that is exclusively available from the satellite companies, such as baseball games outside the market where a consumer lives.
Reductions in cost
The justice department also says its investigation "confirmed that the parties are likely to realize significant variable and fixed cost savings through the merger." Those savings, the department says, will be passed to consumers as lower prices.
However, two conditions must be met before consumers prices are reduced. First, the promised cost savings must materialize. The history of mergers suggests such savings are easy to promise, and difficult to produce.
Second, a merged company with lower costs will not reduce prices unless it faces significant competition. This means the department's analysis of effects on competition must also be correct.
The press release ignores a larger question associated with cost -- will the satellite firms fail if they cannot merge? The firms have argued they must merge to survive, so it's troubling that the justice department did not address this issue.
It's quite possible the analysis is better than portrayed in the press release. As my earlier post noted, a merger is not automatically a bad idea.
However, the department probably had to use a lot of information provided by the companies because reliable alternatives aren't available. Merger decisions are also influenced by the ideology of the political appointees at justice who make the final call, and politics will play an important part when the merger proposal goes to the FCC.
For all of these reasons, today's decision needs a better explanation before it becomes fodder for the coming debate. Sadly, I doubt that will happen.