Wednesday, March 26, 2008

Concluding the XM-Sirius Merger Debate...

Yesterday, the Justice Department approved a merger between the only two satellite radio companies - XM Radio and Sirius Radio. The merger won't be complete until the FCC approves it as well, but this nevertheless signals a fundamental shift from previous policy, and should be applauded, but with caution.

The two companies have been pushing for this merger almost since they were created. Such a marriage between the only two companies offering satellite radio services would create a de facto monopoly affecting more than 17 million subscribers and worth nearly 5 billion dollars. The government, consumer groups, and broadcasters have opposed it in the past because they believed the would-be monopolist "will force up prices and reduce the programming now available from the two competing systems". The reasoning is quite clear: having two companies in competition with each other helps keep prices down and the amount and quality of services up; while eliminating that competition by granting a monopoly would raise prices and diminish the level of service.

On the other hand, XM and Sirius argue that the "monopoly" that would be created by a merger is essentially meaningless. Their logic is quite clear as well: satellite radio programming competes directly with traditional radio and television broadcasters, internet programming, and various other forms of media, therefore a merger would only enhance their ability to compete with more established actors. Prices would be held in check because otherwise consumers would simply drop the service and flock to terrestrial radio, TV, or the internet.

What's really at issue is how to define market competition in the Digital Age. Is satellite radio a distinctive market, or is it merely one part of a larger New Media market? How this is framed is crucial because that will ultimately determine the scope of governmental regulation.

The Justice Department has, at least for now, fallen on the side of the latter, asserting that the merger should be allowed to proceed because satellite radio is only one part of a larger New Media market. Consumer reactions initially seem very positive, as judged by the comments left on Digg. At least in the short term, many perceive the merger as providing them the ability to purchase more programming options, so that, for example, they no longer have to choose between Howard Stern, Oprah Winfrey, Major League Baseball, and the N.F.L. There are, however, intelligent calls for, among other things, not requiring existing customers to buy new equipment and to offer a la carte programming, meaning that people should be able to choose and pay only for the stations they actually want, and not be forced into buying bundled packages (as is the case with cable TV).

Fallout from the Justice Department's decision will also be felt in cyberspace. As the YouTubes, podcasts, and assorted other webcasters of the world gain in prominence and make better use of faster bandwidth connections, a ruling that asserts the primacy of a single large New Media market, defining market competition in broad terms, should produce unintended consequences for decades to come. Make no mistake about it, the very development of the internet itself is at stake by such regulatory decisions.

In the end, assuming the F.C.C. also approves the merger, consumers of satellite radio will be better off. But in order to ensure that market competition flourishes in New Media, the government must tread carefully and make sure not to regulate webcasters out existence, as it has occasionally attempted to do in the past.


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