It took too long, but Justice understood Sirius-XM market perfectly

A few months back I was visiting with my sister-in-law in Western Missouri. I offered to tag along as she drove for a few errands. I also wanted to get a feel for her spanking new Hyundai. While waiting in the car I fiddled with the radio that included an XM Satellite Radio. I couldn’t tune in anything except the conventional local stations.

As we continued on to the next stop I ask her why she apparently was not subscribing to the service that came with the car. She explained that it really wasn’t worth the expense to her. She listened to some programming during the initial three month trial and liked some if it. “But I have plenty to listen to from the local stations. And I like to listen to books on tape [actually CDs these days] I get from the library.”

And that, at the very micro level, is why the Justice Department was on target in its ruling that XM and its perceived rival, Sirius, could merge without damage to the competitive landscape.

When the $13 billion merger was first announced last February, I wrote here that “such a merger reduces competition less than it first seems." A few days later I referenced a letter to the editor of The Wall Street Journal from a former XM user who had his own personal take on how broad the competition for subscription radio was at ground level.

With 96% of Americans listening to free, local radio once a week and three-quarters tuning in daily – and satellite radio, at $12.95/month, occupying less than 1% of the market—it’s hard to argue that the “public interest” is ill-served by the demise of one of two players in that space.

The Justice Department took much too long to get to their end point, longer than ruling on the $80 billion merger between Exxon and Mobil in 1999, but it was, in the end, quite succinct with its findings:

• The key conclusion was that “the [Antitrust] Division found that the evidence did not support defining a market limited to the two satellite radio firms that would exclude various alternative sources for audio entertainment.” That is, the relevant market is not satellite-delivered radio signals, but the full range of delivery mechanisms for audio. These include the well-established legacy radio stations, of which there are 20 to 40 available to most Americans; the CDs players that are in most autos and homes; the iPods and MP3 players that are ubiquitous, so much so that new autos include USB or docking mechanisms for them; Internet radio, giving consumers access to thousands of programming choices globally, and budding technologies such as HD radio and wireless Internet that can provide mobile access to “radio” programs, Podcasts, and the like. For example, Figure 1 shows specifically that in the youth market, radio is a declining medium, at the expence of MP3.

• There is little likelihood of future competition between XM and Sirius. Although the two initially vied for differentiation by signing up big name exclusives (e.g., Howard Stern for Sirius, Oprah Winfrey for XM), the two have found the larger challenge was to convince consumers that they should be willing to pay for any sort of “radio” service. Both services get the bulk of their subscribers through car radio use. Each has exclusive contracts with auto manufacturers, running through 2012. As the two services are technologically incompatible, Justice’s analysis is that few users of one service go to the expense of ripping out one services radio to install the other, even if the subscription price of one would a few dollars lowers.

• Both XM and Sirius have been losing hundreds of millions of dollars annually. The Justice Department “estimated the likely variable cost savings – those savings most likely to be passed on to consumers in the form of lower prices – to be substantial.” Given the extent of competition for users’ ears—and the reality that much of that is free—Justice rightly implies that a healthy surviving competitor is best than two hobbled ones.

As I wrote in my analysis last February, one of the most significant pieces of evidence that the satellite radio providers were correctly viewed in a broader competitive landscape than just satellite was the loud and well-funded opposition of the National Association of Broadcasters, representing terrestrial radio stations. They understood that XM and Sirius were direct competitors. They would prefer two weak competitors over one strong one. The NAB spent $4.3 million on lobby in the first half of 2007 alone (on a variety of issues beside s the XM-Sirius merger).

Members of Congress who quickly criticized the Justice Department decision either did not read it or do not understand economics or are pandering populists. Or maybe they are bending to the lobbying of the NAB. Sen. Herb Kohl, chairman of the Senate Antitrust Committee, said “We believe the elimination of competition between XM and Sirius is contrary to antitrust law and the interests of consumers.” How does he define the audio market?

House Telecommunications & Internet Subcommittee chairman Ed Markey issued a statement that said in part, “The Bush administration has apparently never seen a telecommunications merger it doesn’t like." Having followed Mr. Markey’s congressional career for 25 years, I could easily turn this around: It seems that he has never seen and such merger that he did like.

Ultimately, subscriber radio needs to convince consumers to pay for something for which there are near-substitutes for free. Howard Stern may be unique, but there many other radio voices—think Imus—who are free. A station of all Mozart all the time may be unique, but it can be replaced by a half dozen CDs in the car’s player. Or maybe 200 Frank Sinatra tunes on the MP3 player that can be carried around as well as plugged into the car audio system.

Satellite radio has to overcome the Penny Gap hurdle I wrote about recently here. I’d say my sister-in-law saw the market just about right. Justice could have just spoken to her and made the same ruling.

Why Cable Prices Seem To have Increased So Rapidly

When a candy bar manufacturer has higher costs it can raise prices by giving less. The 3 ounce bar becomes the 2.75 ounce bar. This in effect is an 8% price increase. But the increase is not as painful because our expenditure stays constant.

The print media can do the same to a point. They can reduce the news hole (ratio of editorial content to advertising), even reduce the number of pages, while keeping price the same. It may take time before consumers realize they are getting less. But as long as out-of-pocket prices don’t increase, the pain seems minimal.



The cable business has a different model and consumers have different expectations. Since towns, then cities, started being wired for cable, the providers have been giving us more—like a bigger bar, fatter publication—and been increasing prices commensurately. At first the increases in programming were very visible. In the 1970s and especially in the 1980s, cable subscribers went from having four or five channels to 10 or 20. Starting from such a small base, it was simple to have 100% and 200% increases in channels. First it was the “superstations,” such as WTBS and WGN. These were FCC licensed broadcast stations serving Atlanta and Chicago, respectively. They were among the first to use satellite to get national distribution. Then came cable-only networks, such as CNN and ESPN. It was explicit that there was far more choice even as the price went up.

To continue the junk food analogy, it was as if a candy bar went from 2 ounces to 4 ounces and from $.50 to $1.00. On a per ounce basis it is the same price. Just as crucial, it felt heftier in the hand. Now, consider further small increments in the candy bar, adding an additional quarter ounce each year. The larger the bar, the less physically obvious the change appears. Customers might not realize that it went from four to four and a quarter ounces. A 6% price increase would seem to be just that—-more money, though the cost per ounce stayed the same. Indeed, when the candy bar got to a certain point, many buyers might yell, “Enough. I don’t need so much chocolate.”

Much the same in the cable biz: Despite the apparent hikes in the cost of cable, the cost per ounce- er, ah-- the cost per channel has actually slightly trailed the cost of living index for the industry as a whole, as seen in the accompany chart, from the FCC’s report on cable prices released 15 months ago.

Still, adding a channel to the 40 or 50 that populate the more prevalent basic tiers is less obvious than it was in 1985 when there were far fewer. And, though many subscribers may see not benefit in adding, say, the Fine Living Network it may be quite welcome in a few hundred thousand households.

So, like the consumer pleading for no more increases in candy bar size, even at the same per ounce price, some consumers might prefer to see a halt in adding channels if that could moderate price increases. Here is where my analogy breaks down. Whereas more candy may not be so healthy, having access to more choice on cable could be. Or at least not unhealthy. Just as having access to the seemingly limitless diversity of material available now via the Internet, the availability of so many channels on cable provides opportunity for access even if, as individuals, we rarely take advantage of all that’s there. Even within a household, the bundle of channels each member uses may have little overlap (if my family is close to typical). While a la carte selection—unbundling—may seem attractive, there are many good social, cultural, not to mention economic, reasons while there is less there than may seem obvious. I’ve taken on the bundled/unbundled issue previously.

Like many of you, I’m a bit resentful when, like clockwork, Comcast notifies me of another 6% price hike. But unlike the folks who scream about the greed of media conglomerates, I checked out Comcast’s latest financials. Last year it had an 8.3% profit on revenue—good but certainly not obscene monopoly profits. It has $30 billion in long term debt. The few shares of Comcast stock I own (a legacy of some old AT&T stock, which spun off its cable holdings, which were acquired by Comcast) are worth today less than five years ago. So much for big fat greedy media companies. I’ve already looked at switching to satellite, but I’ll wait for Verizon’s FiOS to come to my neighborhood and decide who will get my business.

Either way, it will be a big candy bar at the same old price per ounce.

Is it a "Confidential" or "Free and Open" Society?

Though a bit off-topic from the usual subject matter of this Blog, I couldn’t resist highlighting the following statement from Martha K. Levin, executive vice president and publisher of the Free Press, which published James Risen’s 2006 book, State of War.

Mr. Risen, a reporter for The New York Times, was issued a subpoena by a federal grand jury apparently to try to force him to reveal his confidential sources for material in the book about the Central Intelligence Agency.

The Times reported that Ms. Levin’s statement said that “the ability to publish confidentially sourced information about our government’s practices and policies is one of the bedrock principles of a free and open society.”

I wonder if she is aware of the juxtaposition of “confidentially sourced information” with “free and open society.”

Retiring WSJ Managing Editor Says High Profits Created Newspaper Industry’s “Golden Age”

Today is the last day on the job for Paul Steiger, who has been the managing editor of The Wall Street Journal, for the past 16 years. That’s an impressive run by any standard.

Last Saturday the Journal published his valedictory on the front page under the headline “Read All About It: How newspapers got into such a fix, and where they go from here.” (Sub. still required)

It is a marvelous recap of where we've been and a forthright how-we-got-here, a no-tears tree-top look at the newspaper industry. Having been writing about the industry and its love-hate relationship with technology and consolidation since 1973, I have found that journalists are often the least objective when writing about their own industry. He smartly captured the ebb and flow in a way that the vast majority of Journal readers-- who have not followed every wrinkle and trend -- would understand.

But in the midst of this guided tour guided, Steiger makes an observation that would surprise many media reformistas. First he describes what journalism was like when he started out:

As a kid reporter in the '60s, I heard tales from newsmen and photographers about how, just a few years earlier, they had sat in cars, engines running and radios tuned to police bands, trying to get an edge in covering the next murder. The national and international news would be handled by the wire services. Lurid local photographs on page one were what sold newspapers in that era.

A certain fast-and-loose, devil-may-care attitude often prevailed. I remember walking past a photographer's open car trunk and noticing that he carried a well-preserved but very dead bird among his cameras and lenses. The bird, he explained, was for feature shots on holidays like Memorial Day. He'd perch it on a gravestone or tree limb in a veterans' cemetery to get the right mood. Nowadays such a trick would get him fired, but in the 1950s, this guy said, there was no time to wait for a live bird to flutter into the frame.

But then, he says, something happened. Starting in the 1960s the industry “morphed into a series of mini-monopolies. This came about first as “mounting costs forced a shakeout -- mergers and newspaper closings that typically left one city paper preeminent in the morning market and another in the evening.’ Then the evening papers ran into troubles, “crushed by a phenomenon that can be summed up in two words: Walter Cronkite. More and more families gathered in front of the tube at the dinner hour.”

This is how Steiger characterizes the results of a newly prosperous newspaper industry:

Many of these information behemoths invested heavily in quality, expanding their reporting locally, nationally and internationally. This was good business as well as a boon to readers, because it raised barriers to entry for would-be competitors.

The result was a golden age of American journalism. In New York, Washington, Chicago and Los Angeles, of course, yet also in Boston, Philadelphia, Miami, Milwaukee, Atlanta, St. Louis, Des Moines, Louisville, St. Petersburg and more, daily papers were willing to send reporters far afield in pursuit of stories exposing corruption or explaining the world. Newspapers opened or expanded Washington bureaus and added reporters abroad. Some stationed them not just in London, Moscow and Tokyo but in places like Sydney and São Paulo.

As their financial strength and staff size increased, they became fearless in pursuing corruption.

The “golden age of journalism.” Profitable newspapers had the resources to invest more into their product. Intuitive? Or counterintuitive?

Isn't competition what we seek as the mechanism to ensure that the juices flow? Shouldn’t more competition – not less—be associated with the golden age of journalism?

Although he is not writing about competition per se, in his chronology Steiger provides some answers:

• “The news operations of the three main television networks in those days followed a similar pattern. As profits grew, they added to staff and launched foreign bureaus and investigative projects. The Sunday-night magazine program CBS launched in 1968, "60 Minutes," set a new standard for expensively produced and deeply reported video journalism.”

• “Cable TV added a new worry, because here was a medium that could target smaller, exclusive audiences and thus pose a greater challenge to print.”“Then in the 1990s came the digital networks and the Internet, unleashing forces that would ultimately undermine newspaper business models that had been so supportive of journalism.”
  
  
• Finally: “The decisive blow may have been Google's, with its powerful search engine that would either give you a quick answer to a question you had or steer you to sites that could. The irony, of course, was that some of the most useful of those sites were newspapers’.”

More could be added to Mr. Steiger’s description of the forces and trends. But the basic pieces are there. So, what are the lessons learned?

First, that profitable organizations have the wherewithal to spend to maintain and improve their products or services. I've written about this before. Some may take the money and run—a short term maximization philosophy. But many—probably most judging by Steiger’s list of newspaper cities—will look for longer term profit “optimizing” strategies. And for two or three decades that worked well for the newspaper publishers and their millions of stockholders.

Second, competition works. But critics and regulators must recognize the shifting boundaries of the market. Competition for newspapers was coming not necessarily from other newspapers, but from media that were partial substitutes: broadcast television, then cable networks, then online providers. They were and are competing for advertiser revenue, consumer personal consumption expenditures—and consumers’ time. Cumulatively they have taken a toll.

(Paul Steiger is now editor in chief of Pro Publica, “an independent, non-profit newsroom that will produce investigative journalism in the public interest.”)

Senate's Media Ownership Crusade: Ignores Research, Will Have Unintended Consequences

Perhaps the most disappointing aspect of the Senate’s latest misguided efforts to prevent the Federal Communications Commission from doing its job is the ignorance—or worse—ignoring— by the Senators of the solid data available to guide it. In a hearing on November 8 on "Localism, Diversity, and Media Ownership," the Senate Committee on Commerce, Science, and Transportation loaded up the testimony with advocates of greater regulation. But they once again turned a blind eye to years of research that have failed to show any pervasive ill effects of the existing media ownership structure. They fall back on anecdotes and “fear” of potential behavior while barely giving lip service to the inevitable and largely positive effects of a rapidly changing media landscape.

Senators Dorgan and Lott, Inouye and Obama, Feinstein and Snow—Democrats and Republicans-- insist on the quaint notion of “locally-owned” media, when there is no sustained body of research that demonstrates that locally owned newspapers, radio or a TV stations provide more, better or more diverse information than corporately owned media entities. The press release from Sen. Dorgan asserts that “’locally-owned' means they're invested in their communities and care about their well-being,” when reputable research does not sustain that.

The Senators applauded the position of Seattle Times owner Frank Blethen, who argued against lifting the newspaper/TV cross-ownership ban, just at the time that newspapers are fighting for their survival and TV stations are facing declining viewership.

The policy they are pursuing is populist to be sure: Thanks to the efforts of the advocacy group the Free Press and the unexamined assumptions of many journalists there is an overwhelming misperception that the mass media are becoming more concentrated, when the numbers show they are not. And there is no denying that if one asked 1000 adults at any mall “Should we allow for greater concentration of media ownership” their response would be an overwhelming “No.” And do you still beat your wife?

A few years ago the Project for Excellence in Journalism, overseen by Tom Rosenstiel, a respected former journalist, conducted a major empirical study that looked at the relationship between local TV station ownership and quality in the news. I have mentioned this study often, including in my last study of media ownership. The Project’s own conclusion was that “overall the data strongly suggest regulatory changes that encourage heavy concentration of ownership in local television by a few large corporations will erode the quality of news Americans receive.” And given the expectations of the constituency of the ongoing Project, that is presumably what it expected to find on initiating the study.

But the authors felt compelled to add some caveats (to me they sounded grudgingly added, but give credit for admitting to this). “Taken together, the findings of the study suggest the question of media ownership [as it affects local television news] is more complex than some advocates of both sides of the deregulatory debate imagine.”

Among the study’s findings:

•Stations with cross-ownership—in which the parent company also owns a newspaper in the same market—tended to produce higher quality newscasts.
• Ownership type made no measurable difference in terms of the diversity of people depicted in the news and little difference in the range of topics a station covered. In general, there is striking uniformity across the country in what local television stations define as news.
• Stations owned by the largest groups produced higher quality early evening newscasts than those owned by the smaller groups. Smaller station groups tended to produce higher quality late evening newscasts than stations owned by larger companies.
• Network affiliated stations tended to produce higher quality newscasts than network owned and operated stations.
• Local ownership offered little protection against newscasts being very poor and did not produce superior quality.
• Stations of privately-owned companies and publicly-owned companies did not perform significantly differently from each other.

Even within these overall conclusions there is something for everyone. For example, the notion of “quality” is highly dependent on the criteria used and how they are weighed. Although small company stations were found overall to have higher quality than those owned by the largest companies, those owned by this latter group rated highest on the criteria of “offering communities a variety of viewpoints in their newscasts.” And medium-sized owners were better than smaller owners when it came to enterprise reporting and the greatest localism.

I noticed that Rosenstiel was not included on the Senate’s panel. It would have been logical, as his group has some useful insights and research. Perhaps he was busy. But although the Project for Excellence in Journalism is likely in sympathy with the goals of the Senate committee, he might also have felt obligated to report findings that fly in the face of the biases of the Senators.

I have explored this territory extensively in my Media Myths study. Adam Thierer has a book with a similar theme. We have both noted that there is at least as much anecdotal evidence that local owners can be far more one sided and biased than corporate owners who tend to be more willing to be responsive to the market than to pet causes and ideologies. The latter has been well documented from publishers such as Walter Annenberg when he owned The Philadelphia Inquirer, William Loeb, owner of the Manchester (NH) Union-Leader, Col. McCormick’s Chicago Tribune and, of course the legendary William Randolph Hearst.

Nor is there convincing evidence that minority or women owned media – particularly broadcast television--are any more likely to program much differently than majority or male-controlled media. The economics and the incentives are the same for all and the research I have seen on this confirms this.

None of this is to say that media combinations are to be encouraged by regulation. What it does say is that any laws or regulation that substantially prevent market forces from operating at this time would have few, if any, known effects in promoting the goals of these legislators. And the unintended consequences—such as speeding the demise of some newspapers or blocking the introduction of local TV news where there is none now—could seriously impede the very objectives sought by the Senators and those egging them on.

This is a movement driven by emotion and populism. It is a stand that politicians like because it has no budget consequences but panders to the electorate as a bipolar issue. It is far more complicated, infected by finer shades of gray than have been presented to the mass audience. The motivation behind the Media Ownership Act of 2007 and the pressure being put on the FCC is based on misconstrued perceptions at best, a conscious avoidance of solid research at worst. It would be terrible policy, untimely law.

Slate's Shafer "Defends" Murdoch. But it's Really About Encouraging Choice and Diversity

Jack Shafer, who authors the Pressbox column for Slate, wrote “In Defense of Rupert Murdoch” last Friday that Murdoch is “not as bad as some people make him out to be—people like Federal Communications Commission member Michael J. Copps.” In an open letter to the FCC Chairman Kevin Martin, Copps says that in buying Dow Jones, “For residents of the local New York metropolitan area, it will also mean that a single company operates two of the area's most popular television stations and two ofits most popular newspapers.”

Shafer reminds Copps—and the rest of his readership:

Copps—or the blockhead on his staff who wrote the letter—neglects to acknowledge Murdoch's never-ending role in increasing media competition and media diversity. For example, the main reason there are four big broadcast networks for Copps to complain about is somebody staked billions to establish and build the fourth network, Fox. That somebody would be Rupert Murdoch.

Shafer picks apart Copps' knee jerk and tired litany of presumed horrors of the combined News Corporation and Dow Jones. He concludes:

In the most laughable passage in his letter, Copps bemoans the damage to "localism" Murdoch poses. The last time I checked, the Wall Street Journal didn't have a metro section, so what the hell is he talking about?

I’m pleased to see a mainstream media critic demonstrating the hypocrisy, naiveté and frequent elitism in the media reformista (Shafer’s term) movement. I have been making many of the same points in articles and in this Blog here and here about the constructive role News Corp. has played in creating the very diversity of content that the self-styled reformers have called for. He risked his and his stockholder’s capital to start that fourth broadcast network in 1986—a challenge no other media company, union, cooperative, foundation or entrepreneur had been willing to try in over three decades. The Fox Network was not to everyone’s liking—but that’s exactly why it was important. It provided something different than other networks. The cable-based Fox News Network was the same: a competitor to the “monopoly” CNN that has succeeded by being different. We all benefit from the greater choice.

It’s not really about defending Murdoch. He’s a big boy and does not need my help or Shafer’s help. But News Corporation is a case study for how market forces and self interest—if given some space-- can create the variety of content that Copps and the self-styled reformistas think they can accomplish from tighter controls. It's a message that the elites don't understand-- the reality that the content is not culturally or ideologically to their liking is exactly the point. That's the essence of differentiation.

Murdoch has maintained an entrepreneur's mentality-- while having the resources of an enterprise that can supply the venture capital in-house.

WOTM FAQ #4: Is the debate about media concentration you are having with other scholars fun and stimulating?

A FAQ series featuring some real questions I have answered from time to time.

It’s been awhile since I last added to my FAQ. The above is based on the opening line of a recent email I received from a graduate student. Following is my response.

I can assure you that the subject of media competition and its effects is not a simple academic debate among scholars. This is a high stakes issue. The measurement of media competition-- indeed the definition of what this means-- has policy implications for a wide range of players as well as for society at large. The folks who style themselves as media reformers I believe are more interested in creating a media environment that would be LESS diverse, more beholden to small time moguls with ideological agendas and more ridden with bias than anything we have now. Today the many large companies are most publicly held (the public being the pension funds that teachers, union members, and the rest of us invest our savings in), that are far more transparent than mom and pop entities are, and, by and large, are interested in profitability rather than steering the political or cultural content in any specific direction. I prefer to have the owners as merchants, not missionaries.

News Corp. is often held at the bogey-man by the reformistas. Yet News Corp. has been one of the major providers of choice and diversity in the media business.

-- In the 1980s, it was Murdoch's company that created the fourth broadcast network that media critics had been pleading for over decades.
--In the 1990s, News Corp. risked more of its money to start a second competitive all-news and information network.
-- In the current decade News Corp. continues to subsidize a money losing New York Post newspaper, when other publishers are cutting and running.

One reason this does not impress the so-call media reformers is that the content of these outlets is not what they think "the people" should have ready access to. What they all have in common is that they present us consumers with real choices, with media diversity in the most pragmatic sense.The Fox Network initially went down market, when the reformers assumed a new network would be more elitist. Fox News may or may not be conservative, but it is certainly different than CNN or MSNBC: that's diversity. The New York Post is not my idea of a great newspaper-- but New Yorkers already have the Times and Newsday and the Daily News. The Post is a real choice. Not mine, but for hundreds of thousands of readers. If owning Dow Jones will help News Corporation launch-- again with its own money at risk-- a competitive financial news network to compete with CNBC, then how do we lose?

I don't know if these comments fit into your research, which apparently is looking at a global context. I am merely reinforcing what I hope you have leaned from these "debates": that there is more to media competition than a string of percentages of audience share, who has how much revenue and lists of who owns what.