March 2008

The satellite radio Merger - What Now?

The satellite radio Merger - What Now?

Following the US Department of Justice approval of the Sirius takeover of XM - as forgetting the PR guff Mel Karmazin will call the shots and that in practice is what it is in terms of all but the division of spoils amongst the shareholders - the major question outstanding is what if any conditions the Federal Communications Commission (FCC) should place on the merger.

In considering this question - and we were marginally on balance against the deal (See RNW Comment Feb 2007), we think the FCC should almost totally dismiss the interests of the merged company (which, after all, is getting what it wanted to its considerable potential financial benefit) and radio industry lobby (The NAB's submissions have in our view been ill thought out to put it mildly and Clear Channel's call for subscription services to be subject to FCC indecency and other regulation is contemptible) and concentrate on the interests of potential subscribers.

The prime condition: Multi-standard receivers.

One thing that emerged from the DOJ ruling was that in effect, because there had been no insistence on receivers being able to handle both satellite services, there was little competition between Sirius and XM as most subscribers remained with the service provided by the maker of their automobile or, having bought a receiver for fitting in an existing vehicle, did not then want to change the receiver.

That this had happened was in our view a significant failing of the regulators and it should not be allowed to continue. The implication of this is that future receivers should contain chips that can handle both signals and in our view remedying this shortfall should be a condition of the merger: Equipment will not be available for some time to do this but to speed things up and give the merged company (which we will term Satco for convenience) a compelling incentive to get its act together, we think the FCC should impose a condition that six months after the merger, Satco will have to replace - including fitting - any equipment subsequently sold by them that cannot handle both signals - and should have to put a suitable amount into an escrow account to cover the cost as it sells equipment with the funds concerned to be set aside for equal distribution to all subscribers should Satco fail in future and there is funding in this account.

Then there is the question of HD. The lobbying by terrestrial radio to force the satellite companies to fit HD chips into all receivers sold is we think over the top. However for the benefit of listeners it would be positive that receivers are available that will handle analogue and HD signals as well as the satellite signals.

In terms of this, we think that it would be quite reasonable to impose a merger condition requiring the satellite radio company to make technical information available to other companies so that they can manufacture such receivers if they so choose - since any such equipment is likely to be bought with a subscription in mind, we think that any technology licensing charges that might be involved should be borne by the satellite radio company rather than other manufacturers and we doubt whether in practice this would cause any hardship.

Then there is there is the question of HD availability for those customers who continue to use receivers supplied by the satellite company as part of a subscription deal. In this case we do think there should be at least one receiver option available from Satco that would handle all signals and that it would be reasonable to insist on such a model being available in the original equipment fitted by automobile companies. It would not be reasonable to force Satco to subsidize this however and thus any such model could be expected to cost more albeit the additional cost could be regulated such that it cannot be more than 10% above the additional hardware and licensing costs needed to manufacture the receiver.


Regarding content there has been considerable lobbying pressure to require that Satco make a significant part of its spectrum available to an outside organization, a condition that it seems to us could well throw a major spanner in the works as regards the various promises made as the future subscription packages that would be available to Satco subscribers.

Attractive though this idea may seem at first glance, it does not in the end look to us as if it would on balance provide a better service to would-be listeners, particularly in view of suggestions that this should be an advertising-funded free-to receive service- one likely in our view to be used as a Trojan by the terrestrial companies to argue for censorship of the whole satellite service. We therefore think it should be rejected. Satco's service should remain subscription.

In this case the potential suppliers of the services concerned are free as it is to pitch proposals for services that, if attractive enough, Satco would be foolish to reject without proper consideration and that in our view is as far as things should go.
And what about pressures from other organizations to impose conditions in terms of public service and minority interest services? These in our view should be treated the same way: They are a potentially dangerous interference with the marketplace and Satco business plan.
As for censorship - the filing by Clear Channel and others that the Satco service should be subject to the same indecency regulation that the FCC applies to terrestrial services boils down to just this and if the service remains a subscription one, which is what we would argue it should not even be attempted.

There is one area of content, however, where we think regulation should be eased not imposed. This is the area of local weather and traffic services where information provided may well be of safety interest and where already motorists have various options available. We take the view that where the information relates to an emergency the sensible approach is to ensure that satellite listeners receive as much information as terrestrial ones and that the prohibition on local terrestrial repeaters carrying different programming should be lifted under appropriate conditions and with appropriate safeguards (essentially continuing a ban on advertising and local programming). This could be done if need by via appropriate technology that will interrupt normal reception (as with the traffic alert system common FM stations in Europe - it interrupts, you can have it off, but you can't choose to tune to it, which should remove many of NAB's objections if they are being honest about reasons!).


That takes us to one area where we do think there is an argument for regulatory conditions. At the moment satellite radio is one area where most services are ad-free, a significant reason in the decision of many people to subscribe. There are no equivalent services from US radio and so far Internet services are not generally available whilst driving.

This being the case, we do think that it would be in the interest of listeners if advertising were to be formally curbed at least until there is general availability - including in remote and rural areas of advertising free music and news services. Regarding this we would see something on the lines of a minimum three-to-one deal - for any news, speech or music channels, at least two advertising-free services would have to be provided for one that had adverts. Mel Karmazin can then go ahead with trying to pile adverts into Howard Stern's show but would have to ensure that two other speech services had none.

Canadian services.

The above does not consider the implications for the services licensed in Canada and we would expect the Canadian Radio-television and Telecommunications Commission (CRTC) to try and ensure that it retains as many Canadian services as possible.
Since there are comparatively few of these and despite the pressures this may put on available spectrum, their efforts seem quite reasonable.

Our overall conclusions.

Overall we are not in favour of a heavy hand in regulation of the new company but we do think that a number of conditions aimed at giving listeners the maximum choice in terms of both equipment and reception would be both reasonable and, given the savings that are expected to accrue from the deal, affordable.

Prime amongst these is the issue of ensuring that equipment is available that can receive all services for a driver whilst on the roads and a strong second is ensuring that a reasonable balance of advertising-free services is retained, since there are no equivalent services available whilst on the move and the technology that would make them possible is a long way away.

What we are not in favour of is forcing non-subscription services from other providers into the mix or making what we think should remain a subscription service adhere to the rules that free-to-air broadcasters have to obey.

What you think? Please E-mail your comments.

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