Supplemental Declaration of J. Gregory Sidak Concerning the Competitive Consequences of the Proposed Merger of Sirius Satellite Radio, Inc. and XM Satellite Radio, Inc.

Abstract

In this expert declaration, filed on behalf of the Consumer Coalition for Competition in Satellite Radio (C3SR), I analyze the application for authority to transfer control filed on March 20, 2007 by XM Radio, Inc., and Sirius Satellite Radio, Inc. ("Merger Application"). I also critique two reports submitted on behalf of XM and Sirius in support of their proposed merger: one by Professor Thomas W. Hazlett and another by Dr. Harold Furchtgott-Roth.

XM's and Sirius' use of the term "audio entertainment" - the product market in which XM and Sirius allegedly compete against terrestrial radio, mobile Internet radio, MP3 players, BlackBerries, and DVDs - is unprecedented in an antitrust context. My survey of antitrust and regulatory case law reveals that the phrase has never been used by an antitrust or regulatory authority in a way that is synonymous with the merging parties' usage of the term. XM and Sirius present no empirical evidence that those alternative audio entertainment devices constrain the pricing of satellite digital audio radio services (SDARS), which is the relevant antitrust inquiry. I also analyze new survey data of SDARS subscribers, which suggest that SDARS subscribers do not perceive terrestrial radio to be a close substitute for satellite radio.

The proposed merger of XM and Sirius would generate monopoly rent through higher subscription fees. It would create a monopoly provider of SDARS, which would operate completely free from the threat of entry by virtue of the fact that the FCC has no more spectrum to allocate for SDARS entrants. The FCC and the Department of Justice are being asked to confer upon XM and Sirius the power to charge monopoly prices for SDARS, and to excuse the two companies from the anticompetitive consequences of that merger on SDARS consumers because the merged company is willing to share a portion of its newly created monopoly rent with select political constituencies in the form of (incorrectly characterized) "merger-related benefits" - such as à-la-carte pricing. Other "merger-related" benefits include (1) locking in the existing monthly price at $12.95 for a fixed duration, (2) offering to bundle both the XM and Sirius packages for something less than twice the current price of one of them, (3) offering "rear-seat video," and (4) offering inter-operability. None of these offerings is merger-related, and none would offset the adverse merger effects.

In addition to higher prices for SDARS subscribers, the proposed merger would lead to more commercials for SDARS subscribers, which would further reduce consumer welfare. By eliminating an alternate, (largely) commercial-free SDARS provider, the proposed merger would allow the merged firm to inject commercials into their lineups without fear of customer churn. Indeed, the chief executive officer of Sirius told analysts that XM and Sirius would aggressively enter advertising markets if the merger were approved. Based on a stylized example, I estimate that the consumer harm from an additional five minutes of commercials per hour on the merged firms' lineup would likely exceed $1 billion per year.

Next, I explain that the FCC lacks authority to create a rate-regulated monopoly for SDARS, which the merging parties propose as a condition of merger approval. If the FCC attempts to regulate the prices of the merged XM and Sirius, it will necessarily be setting rates for the future - a legislative act that far exceeds the FCC's authority under current law. Therefore, the FCC would be acting unlawfully if it were to approve the Merger Application on the condition that price regulation be imposed as a matter of administrative fiat. Never, to my knowledge, has the FCC permitted an industry to consolidate into a rate-regulated monopoly when the market structure currently is unregulated and supports two competitors.

Finally, I explain why XM's and Sirius' argument that the opposition of National Association of Broadcasters (NAB) to the merger is proof that the merger is procompetitive is incorrect as a matter of logic, erroneous as a matter of economic analysis, and irrelevant as a matter of antitrust law. That argument underscores the merging parties' failure to acknowledge the complex nature of competition between SDARS (a subscription-funded service) and terrestrial broadcast radio (an advertiser-funded service) in what economists call a "two-sided market." By opposing the proposed merger, broadcasters are understandably concerned that a combined XM-Sirius would divert advertising dollars away from radio stations. Broadcasters fear that some advertisers (as opposed to consumers) perceive SDARS audiences and terrestrial broadcast radio audiences to be close substitutes for purposes of disseminating advertising messages. The merger proponents attempt to use factors concerning the market for radio advertising as a means to draw inferences about consumer perceptions of product substitutability on the other side of this two-sided market. But the fact that two suppliers (potentially) compete in the market for radio advertising does not imply anything about whether SDARS consumers perceive terrestrial broadcast radio to be reasonably interchangeable for SDARS.

For these reasons, XM and Sirius fail to carry their burden of proving that the proposed merger would advance the public interest. To the contrary, it is clear that the proposed merger would reduce competition and harm the public interest. The FCC should therefore deny the application for transfer of control.