Sirius, XM Misread Interoperability Rule, Merger Order Says

The 1997 agency rule required Sirius and XM “to make an interoperable receiver commercially available,” the order said. Critics long have accused Sirius and XM of flouting FCC directives to develop an interoperable radio. Both claim the 1997 rule required only that they certify their final receiver designs as interoperable. Still, the FCC never “expressly acknowledged” that it agreed, XM said in its most recent 10-K filing to the SEC in February (CED June 17 p2) OR (CD June 17 p5). Tuesday’s declaration was the commission’s first to side with critics on interoperability.

The rule’s reference to a requirement that the companies certify a receiver design permitting “end users” to access all licensed satellite radio systems was key because “end users cannot use a receiver that is not commercially available,” the commission said. The 1997 condition that the final receiver design alone be interoperable “merely reflects the recognition that Sirius and XM still were designing receivers at the time,” the order said.

Still, the agency gave Sirius and XM a pass, concluding that it doesn’t think interpreting the interoperability rule as a design requirement was “unreasonable,” the order said. Nor did the commission ever “explicitly” require marketing of an interoperable receiver or decree that all receivers sold in interstate commerce be interoperable, it said. “Moreover, the commission never specified a deadline for compliance,” it said. It rejected calls by critics for an agency hearing on interoperability and to refer to the Justice Department for an antitrust probe redacted documents on interoperable radios.

Sirius and XM “voluntarily committed” as a combined entity to be offering interoperable radios at retail within nine months, the order said. “We believe that the merged entity will adhere to this voluntary interoperability commitment and bring its system into compliance with the commission’s interoperability rule, despite commenters’ view to the contrary,” the agency said. That commitment “is clear in its scope and deadline for implementation, which should remove any uncertainty as to what is necessary for compliance,” it said.

In a dissent, Commissioner Jonathan Adelstein blasted the order for finding Sirius and XM “not unreasonable” in wrongly interpreting the interoperability condition. The majority used that characterization “to excuse their earlier failure to develop and market interoperable receivers,” he said. The satellite networks’ “noncompliance created switching costs for consumers, and thus, limited pre-merger competition” between the companies. he said. Adding the nine-month interoperability condition “today is virtually meaningless, because the merged entity will have every incentive to offer interoperable devices anyway,” he said. “The point was to enforce the requirement before, not after, the merger. Doing it now is clearly a case of closing the barn door after the cows got out.”

The FCC is “unpersuaded” that iBiquity and backers made a case “of a merger-specific harm to HD Radio,” the order said, rejecting calls to require HD Radio reception in all Sirius XM receivers. Still, “important questions have been raised” on HD Radio’s competitiveness “that warrant further examination in a separate proceeding,” it said. The FCC will launch a notice of inquiry within 30 days on whether satellite radio receivers should have HD Radio capability, and whether HD Radio receivers should have satellite radio capability, it said.

The FCC also wants to know what it will cost car makers and CE companies to include HD Radio in devices, the order said. That’s evidently because Commissioner Deborah Tate, who voted for the merger, rejected the HD Radio mandate for fear of “the resulting increase in cost,” her statement said. “In considering this difficult issue, I consulted the auto industry, where satellite radio has established a strong foothold,” Tate said. “Without exception, the auto manufacturers I spoke with urged the Commission to forbear from imposing an HD chip requirement. Their estimate of the cost per car was, on average, two, three, or four times the cost suggested by iBiquity. With this level of disparity in information, it is impossible to do a proper cost-benefit analysis.”

Car makers are “struggling,” so Tate thought it “unreasonable to require them to assume a cost, or, even worse, pass a cost on to their consumers, for a technology that has not yet proven the strength of consumer demand,” she said. IBiquity declined comment. NPR, among the strongest backers of an HD Radio mandate, plans to be “actively engaged” in the notice of inquiry, it said. “Public radio has invested heavily in HD Radio,” Mike Riksen, NPR vice president for policy and representation, told us in a statement.

Foes couldn’t give the FCC sufficient data on how the satellite radio market differs from the audio-entertainment market claimed by XM and Sirius, so the commission couldn’t decide which was the relevant market, according to the order. There has been “little or no variation in prices for the various services at issue,” the agency said. XM raised its prices once but not Sirius. “Terrestrial [broadcast] radio has a zero [and thus unchanging] price. Without price variation, it is not possible for us to develop our own estimates of the elasticities of demand required for a quantitative definition of the market,” the FCC said.

The FCC released the consent decrees with the separate companies. The agency began investigating in 2006 whether XM and Sirius were selling non-compliant satellite radio receivers, it said in the consent decrees. On the other enforcement issue involving misplaced terrestrial repeaters, both companies voluntarily disclosed the problems to the commission, the consent decrees show.

The enforcement issues should have been handled before the license transfer application was approved, Adelstein said. “It is inconceivable to me that we would even consider approving such a merger with such a large and serious number of outstanding violations involved. That would have never crossed our minds if the transaction involved terrestrial broadcasters,” he said.

On another matter, an FCC spokesman wouldn’t comment on why more than 20 congressional letters were posted to the public docket (07-57) after the order was adopted. The latest was almost a week old when posted but some were several months old and some that had been posted earlier bore no explanation as to why a duplicate was being posted.