Senator Kohl Urges FCC to Block Sirius-XM Satellite Radio Merger

May 23, 2007

The Honorable Thomas Barnett, Assistant Attorney General, Antitrust Division, United States Department of Justice

The Honorable Kevin Martin, Chairman, Federal Communications Commission

Dear Assistant Attorney General Barnett and Chairman Martin:

I write to you concerning the proposed merger between XM Satellite Radio and Sirius Satellite Radio, now under review at the Justice Department and the Federal Communications Commission. The Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights recently held a hearing to examine the competitive issues surrounding this merger, and we have now completed our examination of this transaction. I have concluded this merger, if permitted to proceed, would cause substantial harm to competition and consumers, would be contrary to antitrust law and not in the public interest, and therefore should be blocked by your agencies.

As you know, XM and Sirius are the only two providers of satellite radio service in the United States. If satellite radio is considered to be a distinct market, this merger is to a two to one merger to monopoly and should be forbidden under the antitrust laws. If satellite radio is a separate market, the combined firm will have the ability to raise price to consumers, who will have no choice to accept the price increase. Such a result should be unacceptable under antitrust law and as a matter of communications policy.

It is my conclusion that satellite radio is in fact a separate market. I reach this conclusion for the following reasons. Satellite radio is the only medium offering hundreds of radio channels (170 channels in the case of XM and more than 75 in the case of Sirius) with a tremendous variety of music formats, entertainment programming, live sports on a national basis and extensive news programming. Satellite radio is delivered in far superior sound quality to terrestrial radio and is largely commercial free. Satellite radio is a national service, delivered to consumers on a nationwide basis, and travels with listeners as they move about the country in their automobiles, where the majority of radio listening occurs.

No other audio service existing currently is a viable substitute for satellite radio. Unlike the national nature of satellite radio, terrestrial radio is locally based, and has a much more limited number of radio stations than satellite radio's channels in any local geographic market. Terrestrial radio cannot move with listeners as they travel to different cities, does not offer the variety of programming available on satellite radio (including, for example, out of town sports broadcasts or specialized music formats), and offers inferior audio quality.

Nor are newer technologies a substitute for satellite radio. MP3 players such as iPods cannot offer the programming offered on satellite radio, such as live news and sports broadcasts. And with the cost of music commonly priced at about one dollar per song, it would cost consumers many thousands of dollars to legally duplicate on an MP3 player the musical offerings available on satellite radio. Nor is wireless internet radio a competitive alternative today. There are very few devices to receive wireless internet radio presently available to consumers. Even more important, the technology to deliver wireless internet to listeners in their automobiles as they travel between cities (and to a large extent within cities) is virtually unavailable. No other technology available today is a substitute for the satellite radio.

The lack of a viable competitive alternative existing today to the satellite radio monopoly created by this merger is a sufficient independent reason to block this merger. The merger's proponents, however, argue that new technologies will in the future create competitive alternatives. However, only new entry that is "timely" is properly considered to be a competitive alternative under antitrust analysis. "Timely" means likely to be on the market within the next two years. No new technology satisfies this requirement. The deficiencies of the new technologies previously identified making these technologies an unsuitable competitive alternative are unlikely to be remedied in the next two years. While it is possible that wireless internet radio, for example, could become a viable competitive alternative sometime in the future, our concern is the marketplace today. Consumers should not suffer the price increases likely to result from a merger to monopoly because of a vague hope that new technologies may deliver new competitive alternatives sometime in the future.

In addition, the parties concede that, due to the enormous capital expenditure running into billions of dollars for new satellites, as well as the regulatory difficulties in obtaining new spectrum licenses, the parties concede that the entry of a new satellite radio service is unlikely. When asked by at our hearing on March 20, 2007, whether entry by another satellite radio company was likely, the CEO of Sirius, Mel Karmazin responded that "I do have a clear answer to that question. . . . You're asking whether I think there will be another satellite competitor, the answer will be, probably not." Without the possibility of new entry of a new satellite competitor, and without the existence of any true competitive alternative from any other audio service, the combination of Sirius and XM will result in a merger to monopoly.

Some public interest advocates have argued that the merger should be subject to binding conditions to protect competition and consumers as an alternative to being blocked. The conditions proposed include (i) a price cap on satellite radio service for a meaningful period of time after the merger; (ii) new pricing choices such as tiered programming; and (iii) the combined company making available a designated portion of its capacity (i.e., 5-10%) for educational, informational or independent entertainment programming over which it has no editorial control. However, I believe that none of these conditions would be sufficient to ameliorate the substantial harm to competition caused by this merger.

At our hearing, Sirius promised to enter into a price cap after the merger. In answers to written follow-up questions, Mel Karmazin stated that "[f]ollowing the merger, we will not raise either the $ 12.95 that each satellite radio company currently charges consumers, or the $ 26 dollars [sic] that it costs to get both services." He further agreed to this commitment as part of an enforceable FCC order or antitrust consent decree. See Karmazin Answer to Sen. Kohl's Follow-Up Question 1 (copy attached). However, I am concerned that even if either of your agencies were willing to enter into such a decree, enforcement of such a decree might mean that the satellite radio industry would be subject to intrusive governmental regulation for years to come. A competitive marketplace that would not require extensive regulatory oversight is far preferable, and such a competitive marketplace can only be assured by blocking this merger.

In sum, because this merger will result in a satellite radio monopoly, it will violate section 7 of the Clayton Act which forbids any merger or acquisition when "the effect of such acquisition may be substantially to lessen competition, or tend to create a monopoly." Elimination of the head-to-head competition currently offered by XM and Sirius leaving only a monopoly satellite radio service will likely result in higher prices and poorer service being offered to consumers. Satellite radio is a unique service for which none of the other audio services is a substitute. Uncertain promises of competition from new technologies tomorrow do not protect consumers from higher prices today. The antitrust laws should not countenance such a dangerous outcome. I therefore urge the Justice Department to bring a legal action to block this merger.

Further, because of the likely harm to competition and consumers, we believe this merger is not in the public interest, and we likewise urge the FCC to deny approval to this merger under the Communications Act. Nor has there any basis demonstrated for the FCC to eliminate its rule -- first promulgated when satellite radio was licensed in 1997 -- that there be at least two licensees for satellite radio.

I therefore urge that both of your agencies take all necessary actions to deny approval of this merger and prevent the creation of this satellite radio monopoly.

Thank you for your attention to this matter.

Sincerely,

HERB KOHL

Chairman, Subcommittee on Antitrust, Competition Policy and Consumer Rights