FCC Order Nixed Sirius-XM Merger, NAB Memo Says

The memo, to NAB Pres. David Rehr, is by David Solomon, a partner in Wilkinson Barker Knauer, NAB’s Washington-based outside law firm. Solomon, deputy gen. counsel at FCC when it published the DARS order, sidestepped our query on his role in drafting the order. “The discussion in my memo about the Commission’s 1997 satellite DARS order relies on the language used by the Commission in the order, which speaks for itself,” Solomon told us.

It would be “entirely inconsistent” with the Commission’s “pro-competitive DARS stance” to allow Sirius and XM “to combine into a monopoly enterprise,” Solomon told Rehr, citing paragraph 170 in the order: “Even after DARS licenses are granted, one licensee will not be permitted to acquire control of the other remaining satellite DARS license. This prohibition of transfer of control will help assure sufficient continuing competition in the provision of satellite DARS service.” That the FCC “contemporaneously published this requirement” in the Federal Register gave it “binding legal effect as an ‘uncodified’ substantive rule,” Solomon said.

That conflicts with XM statements that there’s no such rule on the books. When the FCC licensed satellite radio service in 1997, it wasn’t “asked to rule on whether a satellite radio merger would serve the public interest,” XM said in an employee memo filed at the SEC. The 1997 order said the FCC wanted 2 satellite radio providers “because it thought the companies would compete primarily with each other,” XM said: “Thus, the FCC did offer its view, based on competitive conditions at the time, that combining the 2 existing satellite licenses would not serve the public interest. Since that time, the options for audio entertainment have expanded greatly and the FCC’s policy statement simply no longer reflects the reality of today’s audio marketplace.” XM didn’t comment on Solomon’s memo.

Solomon dismissed Sirius-XM claims that the market has changed, justifying a merger. “Whatever changes have occurred in the marketplace since 1997, the fact remains that XM and Sirius are the only 2 nationwide, multichannel mobile audio programming services,” Solomon told us.

Neither would allowing the merger jibe with “decades of Commission precedent and congressional policy favoring competition over monopoly,” Solomon said in the memo. The FCC rejected the DirecTV-EchoStar merger on similar grounds, he said: “For precisely the same reasons, XM Radio and Sirius should not be permitted to create a nationwide satellite DARS monopoly. A merger here would be particularly problematic, given that satellite DARS is just in its early stages of development.”

Consumers “would suffer” from rising prices if Sirius and XM merged, Solomon said. That a satellite radio “monopolist” would be “the single entry point for nationwide mobile audio programming could also reduce program diversity,” he said: “Customers could also suffer from technical incompatibility problems caused by the merger. For example, the receivers used by one company aren’t compatible with the other company’s system, so consumers might need to purchase new receivers as a result of the merger.” Sirius CEO Mel Karmazin has said Sirius and XM would negotiate with exclusive content partners to make programming available to all subscribers post-merger. A merger also would speed development of an interoperable radio, which has been “commercially challenging” for Sirius and XM to bring to market as separate companies, Karmazin has said (CD Feb 21 p2).

Sirius and XM are guilty of “significant” FCC violations, compromising their “requisite ‘character’ qualifications” as FCC licensees, Solomon said. They've failed to market an interoperable receiver, their licenses demand, he said. They also violated FCC equipment rules with receivers that still cause “signal bleed” interference on AM-FM radios, he said. Sirius and XM also have violated FCC rules under the special temporary authority granted for using terrestrial repeaters, he said. Only 2 weeks ago, the Commission sent XM a letter of inquiry on its terrestrial repeaters. XM disclosed the letter in an SEC filing.

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“We are skeptical” Sirius and XM will be able to show consumers will be better off with more programming choice and more affordable pricing post-merger, the N.Y. Times said in its Sat. lead editorial. XM and Sirius “compete vigorously for customers, talent and corporate partners,” the paper said: “Both even charge the same rate, $12.95 a month, a price that might well rise if there was no competition.” XM and Sirius aren’t “widget makers,” the Times said: “Radios carry important discourse and debate - they are vital to the free exchange of ideas protected by the First Amendment. Recent experience shows that media consolidation usually leads to more homogeneous content, politically as well as artistically, and it rarely benefits the consumer or the country.” Also at issue is “what precedent would be set if regulators accepted the broadest possible definition of audio competition, and whether that could lead to even more mergers in radio,” it said: “No less troubling are reports that the companies believe that they have an incentive to merge before the Bush administration and its overly friendly-to-business regulators leave office.”