SIRI/XMSR: I've Got Surowiecki on My Side

NB: my distillation of the online conversation around the SIRI/XMSR merger has generated the following conclusions:

• Are there new revenues to be had through the merger, by offering a more attractive, integrated content offering and through sophisticated, targeting local advertising? Yes.

• Is there the potential for massive cost savings due to reduced duplication of infrastructure, joint purchasing, and more efficient promotional spending? Yes.

• Will consumers benefit by having a more financially healthy provider offering a wider array of content, and with the resources necessary to continue investing in new and better programming? Yes.

• Does the creation of a single satellite radio provider dampen the competitive landscape, especially in light of the rise of powerful asynchronus media alternatives such as iPod+iTunes+Podcasts+Vodcasts+++? No.

• Does this mean that even in light of supporting a merger that seemingly concentrates power in the hands of a single service provider, that, in fact, both shareholders and consumers might be better off? Yes.

So this evening I am leafing through my latest issue of The New Yorker and I come upon a little missive by Mr. Wisdom of Crowds himself, James Surowiecki, on nothing other than one of my most favorite topics of late, the SIRI/XMSR merger. Now James is one of those big-brained, yet incredibly accessible thinkers whom I respect a great deal, and always pay attention to what he says. And interestingly enough, if you read my points above they are remarkably in-line with his analysis. Now he is most concerned with the issue of competition, anti-trust and benefits to the consumer, and the points I've raised go beyond that. But I think you'll find his analysis both interesting and instructive, and his logic and perspective are legion. And, pleasantly, intuitively sensible as well. I apologize in advance for the sizable citation - it's just that his stuff is so damn good.

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The idea that if mergers were bad for competition they were bad for the economy was intuitively appealing. But it wasn’t always accurate, as a group of law professors and economists, usually called the Chicago School, set out to show in the nineteen-seventies. Much antitrust regulation, they argued, did not benefit the economy but just protected small businesses; it could even make consumers worse off. (Most obviously, economies of scale allow bigger companies to produce more for less, which can lead to lower prices.) This meant that regulators should scrutinize deals through a different lens: if a merger reduced competition but enhanced “consumer welfare,” it should be approved. Later economists have complicated these arguments—there’s now a post-Chicago School—but the idea that mergers should be measured by their impact on “consumer welfare” remains central to antitrust law.

Even by these standards, though, the XM-Sirius deal looks sketchy, since monopolies created by merger are usually bad for consumers. So why does the deal have any chance at all? It comes down to the question of what market XM and Sirius are in. If it’s just satellite radio, then they are competing only with each other and the deal would be sure to send prices soaring. But it makes more sense to see XM and Sirius as part of the bigger radio and digital audio markets and thus in competition with AM/FM, HD, and Internet radio. In that case, even a merged company would have only a small percentage of radio listeners, and competition would limit its ability to raise prices.

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A recent study by the Future of Music Coalition found that four companies received fifty per cent of all radio advertising revenue and had nearly fifty per cent of all listeners. Even among competitors, there is often tremendous overlap in music playlists; in this environment, XM and Sirius, which offer real diversity across three hundred channels, are a gain for consumer choice. And there’s no reason to think that this diversity would ebb after a merger; no one wants to pay thirteen dollars a month to hear the same songs he could have got free from his local KISS-FM.

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The National Association of Broadcasters, which represents commercial radio stations, has lobbied hard against the deal, arguing that XM and Sirius compete only with each other. But the very fact that broadcasters are fighting the merger demonstrates that they view Sirius and XM as a threat.

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Broadcasters understand that a merger between Sirius and XM would help extend satellite radio’s reach, making it a more formidable competitor. Many consumers have hesitated to subscribe to satellite because they didn’t know which company would survive. And desirable content is split between the companies: if you want major-league baseball and Bob Edwards, you need XM, but if you want N.F.L. games and Howard Stern, you need Sirius. Allowing Sirius and XM to merge would eliminate this problem in one stroke. And that would significantly increase the competitive pressure on traditional radio stations, perhaps forcing them to abandon their cookie-cutter model. Paradoxically, by reducing choice you could stimulate more diversity. Sometimes, it seems, you can have fewer competitors but more competition.

In sum, the competitive landscape is not fairly defined by simply looking at satellite radio but by looking at other forms of audio communication - AM/FM, HD, Internet radio, whatever. And by viewing the merger in this larger context, it becomes pretty easy to see how both consumers benefit (better product, with competition to keep pricing fair) and shareholders benefit (through additional revenue opportunities and massive cost savings), and that the model is backed up by the "consumer welfare" standard of antitrust law. So the National Association of Broadcasters should stop wasting their clients' money and focus on what they should be doing - delivering a better product to their audience. Because, in general, it really, really sucks.

For reference purposes, here are some of the posts I've written previously on SIRI/XMSR:

• 02/26/2007: SIRI/XMSR Revisited: An Advertising-driven Google in the Sky?
• 02/25/2007: Three from the NYT: On Strategy, Culture and Boredom
• 02/21/2007: Sirius and XM: A Synchronus Merger in an Increasingly Asynchronus World?
• 02/13/2007: Let's Get Sirius: Howard's Da' Bomb, But...