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
USBor 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.
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
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.