Sirius-XM: When monopolies are good for consumers

It was inevitable sooner or later, and now Mel Karmazin, of Sirius, has finally ~~decided to buy~~ agreed to merge with his great rival, XM. The decision seems to have been made on the basis that it'll be easier to persuade the FCC to agree to the merger now than it would be under a future Democratic administration – why should that be the case? And if the problem is that the two companies are the only companies licensed to offer satellite radio in the US, why can't they just agree to the FCC issuing another license?

The deal reminds me of the Sky-BSB merger in the UK in 1990. (I'm showing my age here.) And like that merger, it makes sense both financially and at a common-sense level. Competition between the two companies does not keep the price of a subscription down – rather, both charge $12.95 per month, which is pretty much the maximum that Americans will pay for radio. A merged company would (presumably) have much more programming for the same price, which is a good thing for consumers.

Weirdly, it's the protectionist broadcasters, who are lobbying against the merger, who are playing the part of the big evil corporations here – and not the would-be monopolists. As the WSJ notes:

Two years ago, the National Association of Broadcasters lobbied hard against XM's effort to acquire WCS Wireless LLC for $195 million. The deal would have given XM additional radio frequencies and allowed it to expand its service.
Broadcasters, however, complained that XM would use the acquisition to provide local programming, which isn't allowed under its current license. Ultimately, the deal fell through after languishing without action at the FCC for nearly a year.

The NYT has the color on how the deal was done:

Anxious about Mr. Karmazin and Mr. Parsons being spotted together, the two sides decided to meet in an inconspicuous spot: the Upper East Side apartment of one of Mr. Parsons’s bankers, Dennis S. Hersch, a former lawyer who joined JPMorgan Chase two years ago.
Mr. Karmazin met with Mr. Parsons for several hours in Mr. Hersch’s living room one morning in late December, these people said. They sat on sofas flanked by their advisers, James B. Lee and Mr. Hersch of JPMorgan Chase, which represented XM, and Paul Taubman of Morgan Stanley, which worked for Sirius. The men decided to pursue a deal.

How did I know Jimmy Lee would be involved somehow?

Posted by Felix at 9:58 EST

Comments

But in what way is XMSirius a monopoly? It's going to be the sole satellite-radio company, but as you note, that's not really the universe in which it's playing. The new entity's competitors are--and always have been--free, ad-supported broadcast radio stations.

Posted by: Matthew at 11:29 EST, February 20, 2007

The monopoly would be in the broadcast frequencies. If they were willing to give up some of those, I wouldn't see a problem with the merge, but without the frequencies no other licensee is possible.

Posted by: Lord at 13:37 EST, February 20, 2007

Rule of thumb, which I believe I first saw in David Friedman's Price Theory textbook: if you want to know whether a merger is good or bad for consumers, look at the response of the companies' competitors. If they oppose the deal, it probably creates efficiencies, creating a stronger competitor, and is good for consumers; if the support it, they expect the combined company to push up prices, which is good for them and bad for consumers.

Obviously, if the FTC or whomever else adopted this as a prescription, you'd get companies starting to game the system. Further, I see so much fallacious "what's good for business is bad for consumers and vice versa" reasoning that it's a bit disconcerting to see a situation in which it follows economic logic. Still, the argument seems quite solid to me (even if I didn't give it its best presentation), and, rather than correct my ignorance of this particular market, I'm willing to take the objection of radio behemoths as prima facie evidence that this is a good deal and should be allowed through.

Posted by: dWj at 19:58 EST, February 20, 2007