Satellite Radio Merger Passes Justice Scrutiny

Just more than 13 months after the initial announcement, the merger between satellite radio companies Sirius and XM overcame its second-to-last hurdle on March 24 when the Justice Department gave its OK, saying it didn’t have any antitrust worries about the deal.

The DOJ signing off on the deal means Sirius’ proposed $5 billion buyout of XM needs only to pass muster with the Federal Communications Commission to become reality.

However, the FCC might be the merger’s biggest hurdle.

Back in 1997 when the FCC granted satellite radio operating licenses to Sirius and XM, the commission included the caveat that the companies could not merge. So far, the FCC hasn’t given any indication as to whether it will stick with that original condition. The government body didn’t comment on the Justice Department’s seal of approval, but FCC Chairman Kevin Martin has previously said that any merger would face a "high hurdle."

But that hurdle may not be as high as it once was, as most merger concerns were based on antitrust rules & regs. But now that the Department of Justice has green-lighted the merger, the FCC might have to raise issues other than antitrust matters if it wants to block the merger.

That Justice ruled in favor of the merger shows how much the radio business has changed since 1997, when the FCC said "thou shall not merge."

Of course, the main reason to forbid a merger between the two companies was to promote competition in the marketplace. Most antitrust rulings are designed to prevent one corporation from becoming the only company in any particular field. Back in 1997, having two companies slugging it out for satellite radio subscribers seemed like the way to go.

But the Justice Department sided with merger proponents who contend that neither company is a direct competitor to the other because subscribers are not likely to switch services. In fact, since neither service is technically compatible with the other, a customer of one service would have to reinvest in hardware in order to switch satellite radio services.

Instead, according to the Justice Department, satellite radio’s competition comes from sources like terrestrial radio, MP3 players and Internet radio.

Although the Department of Justice has approved the merger, plenty of people and organizations still oppose a new world satellite radio order.

Take Senator Herb Kohl, D-Wis, for example. The chairman of the Senate Judiciary Committee’s subcommittee on antitrust isn’t convinced the merger is a good thing.

"We are particularly disturbed by this decision, given the Justice Department’s record in recent years of failing to oppose numerous mergers which reduced competition in key industries, resulting in the Justice Department not bringing a single contested merger case in nearly four years," Kohl said in a statement.

The National Association of Broadcasters isn’t too keen on the merger either. The association pointed out that when Sirius and XM were vying for government approval, both companies promised interoperability and said they would design their systems so subscribers could easily switch between services.

But the interoperability both companies promised never materialized. Furthermore, the lack of such compatibility is what the Justice Department cited as a plus when it approved the merger.

"To hinge approval of this monopoly on XM and Sirius’ refusal to deliver on a promise of interoperable radios is nothing short of breathtaking," said NAB executive VP Dennis Wharton.

What does the Sirius / XM merger mean to consumers?

Both companies have said the merger would result in more pricing options and greater choices for customers. The most common example given is the $6.99 per month rate for 50 channels offered by one service, and the high-end $16.99 per month rate where subscribers keep one service and then pick channels offered by the other.

Another commonly cited example describes an option where consumers can cherry pick what they want from either service.

But to pick channels from both services, customers will have to reinvest in hardware. Both companies say equipment capable of receiving channels from both services is "in development" and will become available after the merger is approved.

Aside from a changing marketplace that now includes Internet radio, subscription music services, iPods and music-enabled cell phones, there’s another reason the FCC might favor a merger: Neither company is making money.

XM has more subscribers – 9 million or thereabouts. And even though XM gained 1.4 million subscribers and reported a 22 percent increase in revenue in 2007, it still showed a net loss of $682 million for the year.

Sirius also reported some growth. It signed up 2.3 million subscribers in 2007 and reported a 45 percent increase in revenue. However, it still reported a net loss of $565 million for 2007.

And since neither company is in it for charity, the FCC might have to consider which situation is worse. A world where the merger creates a mammoth satellite service capable of offering different tiers of programming at different prices.

Or a world where one company, maybe both, goes bottom up, leaving subscribers with nothing to point their satellite receivers at.

Sometimes you really do have to take into account which option is the lesser of two evils.


Sony BMG Prepping Subscription Service?

Recent remarks made by the CEO of Sony BMG Music Entertainment about the company preparing a subscription music service surprised more than a few recording industry watchers.

The remarks, made by CEO Rolf Schmidt-Holtz during an interview with newspaper Frankfurter Allgemeine Zeitung, described a service where downloads would be compatible with all players, including iPods.

It’s the iPod compatibility linked with a subscription service that caught everyone’s attention. Basically, only two kinds of digital music tracks are compatible with iPods – songs purchased from the iTunes Music Store that are protected by Apple’s proprietary FairPlay digital rights management system, and songs not protected by any DRM, such as the MP3s sold by Amazon MP3.

However, subscription services use DRM technology to limit download playability to the length of the subscription, meaning that any songs downloaded under a subscription plan stop playing once the subscription expires.

In other words, Schmidt-Holtz’s remarks about iPod compatibility hints that either his label has made a FairPlay licensing deal with Apple or his company’s subscription service won’t use DRM protection. But current subscription services rely on DRM technology in order to be, well, subscription services. Plus, Schmidt-Holtz also remarked that some tracks obtained through the subscription service may still be playable after the subscription expires, thus indicating that some tracks will cease to play after subscription cancellation.

But the iPod remark aside, you just gotta wonder if people will go for a label-operated subscription service. Unless, of course, the label running the service obtains permission from other labels to also include their music. After all, people are fans of bands and artists, not labels and boardrooms.

On the other hand, Schmidt-Holtz merely remarked about what his company is planning and the CEO did not volunteer any details about the subscription service. For all anyone knows, Sony BMG could be hatching the greatest subscription service ever offered. We’ll just have to wait to find out.

The Sony half of Sony BMG has been down this road before. It was only a few years ago when Sony operated its own online music store – Sony Connect – in support of its digital Walkman music players.

Neither Sony Connect nor the label’s proprietary copy protection, ATRAC, caught on with music fans already used to downloading unprotected MP3s or songs protected by Apple’s FairPlay or Microsoft’s DRM, and the label discontinued the online store in 2007.