Third Supplemental Declaration of J. Gregory Sidak Concerning the Competitive Consequences of the Proposed Merger of Sirius Satellite Radio, Inc. and XM Satellite Radio, Inc.
Federal Communications Commission
88 Pages Posted: 3 Oct 2007 Last revised: 5 Jan 2014
Date Written: October 1, 2007
In this declaration to the Federal Communications Commission (FCC), I give my expert opinion on the report submitted by Professor Steven C. Salop, Dr. Steven R. Brenner, Dr. Lorenzo Coppi, and Dr. Serge X. Morisi of CRA International on behalf of XM and Sirius in support of their proposed merger ("CRA Report"). I conclude that the CRA Report is deficient in the area of market definition because it fails to offer any direct demand-side evidence that alternative audio services constrain the price of satellite digital audio radio services (SDARS). The best inference that CRA can offer consists of alleged supply-side responses among providers of alternative audio entertainment services. But as the Merger Guidelines make clear, supply substitution generally - and supply substitution that occurs in different industries in response to non-price factors in particular - cannot inform market definition.
This report is organized as follows. Part I analyzes CRA's argument that SDARS customers perceive alternative "audio entertainment" devices to be close substitutes to SDARS. The vast majority of CRA's inferences are based on supply-side information, which is barred by the Merger Guidelines when defining product markets, except in rare cases in which decisions by sellers can serve as a proxy for how buyers would react to a relative change in prices. The fact that entrepreneurs may be designing new audio devices in their garages does not inform the ultimate question of whether, over the next two years, SDARS customers would substitute away from SDARS to another audio device in response to a relative change in prices. CRA tries to pass off this potential supply-side information as a proxy for evidence of demand responses among SDARS subscribers to price changes. The scant demand-side evidence presented by CRA also fails to inform the relevant question of substitution away from SDARS in response to a relative change in prices. SDARS customers activate or deactivate their subscriptions for specific reasons, none of which is a change in the relative price of SDARS to some alternative audio device.
Part II reviews CRA's critique of my declarations in this proceeding. Having reviewed the logic and the information that CRA presents in support of these claims, I conclude that none of them is correct. In its critique, CRA reveals some fundamental misunderstandings of the application of the Merger Guidelines. For example, according to CRA, the relevant switching costs are not those of existing SDARS customers, but instead the switching costs of potential SDARS customers. There can be no doubt that the cross-price elasticity of demand of potential SDARS customers is more sensitive than that of existing SDARS customers. But the only class of customers whose elasticity matters for defining the relevant product market under the Merger Guidelines is existing SDARS customers.
Part III analyzes CRA's novel and wholly theoretical concept called "dynamic demand," which is explained in a seven-page appendix filled with six equations. Because SDARS providers face this so-called "dynamic demand," CRA argues that the traditional small-but-significant-and-nontransitory increase in price (SSNIP) test for market definition must be altered to account for long-run profit considerations. Despite its extensive experience in merger cases, CRA fails to cite a single instance in which a court or an agency altered the SSNIP test in this way. Indeed, in the last six high-profile mergers reviewed by the FCC, the SSNIP test was applied without any alterations. CRA also relies on the concept of "dynamic demand spillover" to salvage an unprecedented efficiency justification that is not cognizable under the Merger Guidelines, including the erroneous claim that the proposed merger of XM and Sirius would accelerate investment in interoperable radios (which XM and Sirius say will not be available for years, even with the merger). However, as explained below, it is not consistent to argue on the one hand that the other types of audio entertainment compete with SDARS, but on the other that the merger solves the problem of "dynamic demand spillover."
Finally, I show that CRA failed to prove the erroneous claim that the á la carte offerings that XM and Sirius have proposed are merger-specific efficiencies. So long as they are not merger-specific, any alleged benefits associated with á la carte offerings cannot offset the demonstrated consumer welfare losses from higher prices or more commercials or both. Moreover, the public statement jointly made by XM and Sirius that they will not provide satellite radio channels on an á la carte basis unless the Commission approves the merger is a breathtaking admission of critical antitrust significance: It is a price-fixing agreement between horizontal competitors. It is an agreement not to compete over the pricing and unbundling of currently bundled content. Rarely do price-fixing cases contain such conclusive evidence of a meeting of the minds between two competitors to refrain from competing with one another. Such price fixing is a per se violation of section 1 of the Sherman Act. It is no defense to price-fixing among two currently separate competitors that they are in the process of seeking government approval of a proposed merger to monopoly.
This expert report is filed in my individual capacity as a consultant to the Consumer Coalition for Competition in Satellite Radio and not on behalf of the Georgetown University Law Center, which does not take institutional positions on specific regulatory, adjudicatory, or legislative proceedings.
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