Lack of interoperable radio key to XM + Sirius merger approval

As it turns out, if XM and Sirius actually were to deliver on an earlier promise to make an interoperable radio, that fact might precipitate a reduction in consumer choice. That's the conclusion Monday from the Dept. of Justice.

In an unusually sideways argument from the US Justice Dept. this afternoon, the fact that both XM and Sirius satellite radio services have been unable to create an interoperable radio device for the foreseeable future, has been put forth as evidence that a merger between the two entities -- which the DoJ approved this afternoon -- would not reduce competition between them.

"XM and Sirius made some efforts to develop an interoperable radio capable of receiving both sets of satellite signals," reads this afternoon's DoJ statement. "Depending on how such a radio would be configured, it could enable consumers to switch between providers without incurring the costs of new equipment. The Division's investigation revealed, however, that no such interoperable radio is on the market and that such a radio likely would not be introduced in the near term."

An interoperable radio, the Dept. concluded, would typically be an after-market device that consumers would be reticent to purchase.

To prove its point, the DoJ cited the case of the automotive distribution channel. Both Sirius and XM have ongoing contracts with major automobile manufacturers -- XM with GM, Honda, Toyota, and Nissan; Sirius with Ford, Chrysler, and BMW. For a driver of a vehicle with either service installed to obtain an in-car, interoperable radio option would be a bit of a hassle -- as much so as switching one service for the other.

But certainly the in-car satellite radio is not the deciding factor for which automobile a consumer wants to purchase and drive, the DoJ concluded. So there's no real competition between the two services in the automotive field now, it went on, on the theory that drivers listen to whatever radio happens to be in the car of their choice. And since both XM and Sirius have sole-source contracts set until at least 2012, that sort of semi-non-competitiveness will be the case well into the next decade.

"There was no evidence that competition between XM or Sirius beyond the terms of these contracts would affect customers' choices of which car to buy," the DoJ's statement reads. "As a result, there is not likely to be significant competition between XM and Sirius for satellite radio equipment and service sold through the car manufacturer channel for many years."

Thus viewpoint depends, in the DoJ's opinion, on where you choose not to stand. If you think there may be competition between XM and Sirius in the automotive field, then that will continue to be the state of affairs for at least the next four years. If you think there isn't, then the fact that people buy cars based on their engines and not their radios, supports that interpretation as well.

But while the DoJ openly stated "the evidence does not demonstrate that the proposed merger of XM and Sirius is likely to substantially lessen competition," later, the Department conceded in the very same statement that "XM and Sirius would no longer compete with one another in the retail channel following the merger."

So just how minor is the retail channel for the two entities, by comparison to the direct automotive channel? It's minor enough, the DoJ said, by virtue of statistics showing sales declines over the last three years.

"Retail channel sales have dropped significantly since 2005, and the parties contended that the decline was accelerating," the statement reads. "However, retail outlets still account for a large portion of the firms' sales, and the Division was unable to determine with any certainty that this channel would not continue to be important in the future."

Thus if you choose to think retail sales are important, then yes, in that case, you may see a decline in the number of satellite radio competitors by an estimated 50%. But that doesn't mean there are no other sources for music in the world. For that bit of research, the DoJ branched out a bit.

"The parties contended that they compete with a variety of other sources of audio entertainment, including traditional AM/FM radio, HD Radio, MP3 players (e.g., iPods), and audio offerings delivered through wireless telephones," reads today's statement.

This afternoon, National Association of Broadcasters Executive Vice President Dennis Wharton dismissed the DoJ's early interpretation of its opinion on the matter as somewhat ludicrous.

"We are astonished that the Justice Department would propose granting a monopoly to two companies that systematically broke FCC rules for more than a decade," Wharton stated. "To hinge approval of this monopoly on XM and Sirius's refusal to deliver on a promise of interoperable radios is nothing short of breathtaking."