Department of Justice OKs satellite radio merger, but isn't real clear about why

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.

What's Next

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.

FCC Chairman Makes Lemonade from Lemon (at least for now)

The Federal Communications Commission today voted to tighten regulation of cable companies, and ease regulation of newspaper and broadcast companies. The votes are a triumph for FCC Chairman Kevin J. Martin, who last month suffered a temporary defeat when he brought the cable proposal up for a vote.

Today's victory on the cable issue may also be temporary given strong and continuing industry resistance. But for now Martin appears to have reconciled the complex array of competing interests at stake in both of these votes.

The importance of competition

Competition is at the heart of all the arguments voted on today. Newspaper companies argued increasing competition for advertising revenue makes obsolete a rule against owning a broadcast station in the same market. Huge numbers of readers disagreed, arguing the restriction preserved competition covering local news, increasing the range of information and ideas available in those markets.

The FCC voted to ease the cross-ownership restriction in the 20 largest markets.

Cable companies argued they need to get larger because subscribers have more and more alternatives in the new media world. Consumer groups and Chairman Martin disagreed, arguing cable rates keep rising and subscribers don't have access to the full range of possible program choices.

The FCC voted to keep individual cable companies from reaching more than 30 percent of the national market. This is expected to have an immediate effect on Comcast.

Reasons to be skeptical on cross-ownership

My immediate reaction is mostly to the cross-ownership vote. The competitive problem for newspapers is not local radio or television stations, but new forms of media such as the Internet and cell phones. Putting resources into broadcast stations is an odd response, especially when you consider some newspaper companies such as The New York Times and Belo recently divested their television stations.

The expense of acquiring radio and television stations will also force newspaper companies to cut operating costs, so be skeptical of claims that these companies will increase news coverage in these markets.

More broadly, the competition arguments rely on differing definitions and models. Newspaper companies, and both sides in the cable argument, are using economic models concerned with efficient use of limited resources, and providing goods and services at the lowest possible cost.

Supporters of cross-ownership restrictions are using a First Amendment model concerned with expanding the range of ideas, and the emergence of a workable consensus on matters of public concern.

FCC Chairman Caves, Economics of Lobbying Prevail (sort of)

The effort to impose new cable television regulations that renewed discussion of selling subscriptions to individual channels has apparently collapsed under strong pressure from cable companies.

However, potential changes in ownership restrictions and other regulations, not the sale of individual channels, were behind the collapse. Reports this morning say a Nov. 27 meeting of the Federal Communications Commission delayed a decision on the new rules because of a dispute over data showing how many people actually subscribe to cable.

If more than 70 percent of consumers have access to cable -- a number that is not in dispute -- and more than 70 percent of them subscribe, the FCC will have legal authority to limit ownership of cable companies. FCC Chairman Kevin J. Martin argues the 70 percent subscriber threshold has been met, but the industry and other members of the commission disagree. (Chloe Albanesius at PCMag.com does a good job explaining details of this argument about subscriber data.)

A Battle to Capture the FCC

The cable companies' effort to block new regulations at first appears to be a textbook example of why regulators often favor the interests of the industry they regulate. However, this is a case where the interests of three major media industries are at stake.

Clearly, if you own a cable company, you don't favor regulations that restrict which systems you can buy. Cable companies are also a relatively small group compared to millions of subscribers and advertisers also affected by ownership rules.

That means there are relatively low costs of organizing cable companies to talk to each other, negotiate a common position on the proposed regulations, and then hire people to contact government officials and argue their case. What I've just described, of course, is an industry association. Cable is represented by the National Cable & Telecommunications Association.
It costs far more for consumers or advertisers to create similar organizations. Advertisers tend to consider themselves part of an industry represented by an industry association, and not the larger group of all businesses that advertise on cable.

There are too many consumers to organize into a single group, even with instant communication. Some Washington groups, like the Consumers Union, do represent consumers and have been active on this issue. But these groups don't represent cable subscribers and their interests in the exclusive way that the industry association represents cable owners.

The difference means the industry probably has more focus, and resources, available to lobby the FCC. The effort to block new regulations included a meeting with top White House officials.

There are More Than Two Sides in This Fight

Groups representing another powerful industry are also in this fight. Chairman Martin says the new cable regulations will increase competition, lowering prices and increasing the range of voices on cable television.

However, Martin separately wants to change a long-standing regulation limiting newspaper company ownership of broadcast television stations. This rule prohibits a newspaper from owning a television station in the same market to ensure there are multiple media voices with diverse views.

Martin accepts newspaper industry arguments that the cross-ownership rule should be relaxed because of competition from new forms of media. The newspaper industry, of course, has its own association to lobby for its interests, the Newspaper Association of America.

Commissioners like Jonathan S. Adelstein, who might agree with Martin on cable, suspect he will use the cable changes to also push for a relaxation of the cross-ownership rule, decreasing competition in newspaper and broadcast markets.

Cross-ownership also evokes a strong response from the public. Consumer groups, such as the Media Education Foundation and Common Cause, are working to keep the cross-ownership rule. But consumer groups also support Martin's proposed changes for cable.

So, perhaps yesterday's collapse was inevitable. This is not a case where just one industry is trying to capture the FCC. Instead, multiple well-organized industries are competing against each other to capture the FCC. Meanwhile, less well-organized consumers are taking different sides depending on the issue in dispute.

Thinking About Buying Cable a la Carte

The Federal Communications Commission is making serious noises about new regulations for cable television, including allowing subscribers to buy channels one at a time. This idea is likely to have strong superficial appeal for anyone paying for channels that they never watch -- a group that may include most cable subscribers.

But, as Joe Nocera points out in his New York Times column, if a la Carte programming becomes a reality, subscribers are likely to regret it on the morning after. He writes artfully about the politics and likely effects of a la Carte, but leaves some larger questions untouched.

The proposal is supported by consumer groups, groups worried about sex and violence, and FCC Chairman Kevin J. Martin. This is one of several major regulatory changes being considered. The FCC is also revisiting rules on cable ownership, access to cable channels for producers of independent programs, and rules barring companies from owning newspapers and broadcast stations in the same market.

But the change in subscriptions would have the most immediate effect on consumers. Nocera does a nice job explaining why a la Carte programming would leave many subscribers paying more than they do now.

Fewer Subscribers Will Increase Cable Prices

Networks charge cable operators a fee based on the number of subscribers. Cable operators can spread the cost of, say, The History Channel across everyone who pays for the bundle that includes this channel, even if many don't watch programs about history. That keeps each subscriber's cost below the amount that would be charged if only those who watch The History Channel subscribed. This is true even for for channels with wide appeal, Nocera reports:

"Take, for instance, ESPN, which charges the highest amount of any cable network: $3 per subscriber per month. (I’m borrowing this example from a recent research note by Craig Moffett, the Sanford C. Bernstein cable analyst.) Suppose in an à la carte world, 25 percent of the nation’s cable subscribers take ESPN. If that were the case, the network would have to charge each subscriber not $3, but $12 a month to keep its revenue the same."

The proposal faces stiff opposition in congress. This is probably because legislators don't want to risk the wrath of voters if predictions like the one for ESPN prove correct.

Do Market Economics Favor a la Carte?

But what is good for cable subscribers and good for congress may not be good economics. A basic principle of market economics holds that people should only pay for things they want. If people have to pay for things they don't want, it creates distortions in the distribution of goods and the use of resources to produce those goods. Consumers end up getting more than they really want of some things, and not enough of others.

This argument suggests we may be getting too much programming about history, and too much programming about sports. (You decide which networks we don't get enough of.)

Sophisticated supporters of a la Carte are likely to make this argument, and it will carry some weight. That is because the argument holds true unless cable programs fall into the category of goods that are exceptions to some general rules of market economics.