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Times Really Change

By | June 1, 2008

      A full year after initiating its review, the U.S. Department of Justice approved March 24 the proposed merger between satellite digital audio radio service providers XM Satellite Radio and Sirius Satellite Radio. The approval was granted without conditions.
      At the time of writing, the U.S. Federal Communications Commission (FCC), which has concurrent jurisdiction with the Justice Department to review the merger, has yet to issue its approval. The FCC generally does not issue outright rejections of mergers that the Department of Justice has first approved, confining itself to the imposition of conditions on approval such as divestitures, programming requirements and the like.
      The March 2007 edition of this column, “Times Change,” reviewed the prospects of the proposed XM-Sirius merger — which the companies unveiled in February 2007 — against the backdrop of the proposed 2002 merger of direct broadcast satellite operators DirecTV and Echostar. Those companies withdrew their merger in the face of apparently insurmountable Department of Justice and FCC opposition, although proponents of the DirecTV-Echostar combination argued unsuccessfully that a monopoly was not being created from a duopoly because the two companies in reality competed in a larger market of terrestrial cable television providers rather than just between themselves.
      However, we also took note of how, in June 1997, then-FCC chairman Reed Hundt called a hypothetical merger between AT&T and any of the regional Bell operating companies (RBOC) “unthinkable” on antitrust grounds. Hundt believed that the structural separation of AT&T’s long distance telephone services and the RBOCs’ local telephone services, which had been enshrined in the 1996 Telecommunications Act by the U.S. Congress a little more than a year before, was the very point of the 1984 AT&T divestiture.
      Chairman Hundt’s expectation was proved wrong when, at the end of 2006, the FCC and the Justice Department approved the merger of AT&T and RBOC BellSouth after first allowing RBOC SBC to acquire AT&T and take its name. In 1997, the FCC also granted licenses for satellite radio service to the companies now known as Sirius Satellite Radio and XM Satellite Radio. Speculation about the two operators merging intensified at the very time the AT&T-BellSouth merger was closing. However, early in 2007, current FCC Chairman Kevin Martin stated publicly that existing FCC rules prohibited a single company from holding the two satellite radio licenses and would therefore preclude a Sirius-XM merger.
      In this case, XM and Sirius have argued strenuously in support of their proposed merger that they operate in a wider competitive market of audio information and entertainment choices, a competitive landscape that includes iPods and other portable music players. This time, the Department of Justice explicitly accepted the proposition of a wider competitive market and also noted that the two companies did not even fully compete with each other since their systems are incompatible and subscribers, having bought one operator’s radio set, rarely switched to the other operator.
      What is the lesson from the differing results in the XM-Sirius and DirecTV-Echostar cases?
      First and foremost are the intervening six years between the two proposed mergers. Although the basic elements of digital terrestrial and space-based wireless and terrestrial wireline communications service were in place in 2002, the accelerating pace of cross-platform content and services distribution has made convergence, a trendy catchphrase in 2002, a reality today. The remaining consolidated former RBOCs — AT&T, Verizon Communications and Qwest — offer both long distance and local telecommunications services throughout their regions and compete against cable providers in offering triple-play packages that bundle voice, data and video services to subscribers. Satellite service now competes with terrestrial providers for direct video and audio broadcast, wireless telecommunications and residential broadband.
      Second, the two mergers are not identical, despite the surface appearances. A key issue in the analysis of DirecTV-Echostar was the lack of terrestrial cable service to many households in rural communities, meaning that the creation of a satellite-TV monopoly would have left subscribers in those regions without any pay-television choices. As then-FCC Chairman Michael Powell said at the time: “The case against approving the transfer [of licenses] application is particularly compelling with respect to residents of rural America who are not served by any cable operator.” Under that analysis, any proposed merger between satellite broadband providers might be affected more by the DirecTV-Echostar precedent than the XM-Sirius approval.
      Times change, and so do competitive markets.

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