Sidak Releases Third Supplemental Declaration Criticizing Proposed XM-Sirius Merger

October 1, 2007

Criterion founder J. Gregory Sidak submitted his third supplemental declaration on the proposed XM-Sirius merger to the FCC today, which exposes gaping holes in the economic analysis submitted by XM and Sirius in support of their proposed merger. The report primarily responds to a recent FCC submission by Charles River Associates ("CRA"), which purports to show that a satellite radio monopoly would not be harmful because there is adequate competition from other media such as terrestrial radio (AM and FM broadcasting), iPods/MP3 players, Internet radio, and mobile telephones.

Professor Sidak demonstrates that none of the economic studies offered by XM and Sirius prove that the relevant product market is any larger than satellite radio services under the Department of Justice ("DOJ") and Federal Trade Commission’s long-established Horizontal Merger Guidelines. Therefore, because XM and Sirius are the only two competitors in the satellite radio industry, their combination would result in a merger to monopoly, clearly in violation of section 7 of the Clayton Act, which forbids mergers that may tend to lessen competition substantially.

According to the Horizontal Merger Guidelines, the definition of a product market depends on how consumers—in this case, satellite radio subscribers—would react to an increase in the price of satellite radio services. CRA rejects that approach entirely. According to Professor Sidak, "the CRA team is hostile to the fundamental analytical approach to market definition established in the Horizontal Merger Guidelines." Despite the fact that the market definition analysis in the Horizontal Merger Guidelines has been used by the federal courts and endorsed recently by the Antitrust Modernization Commission (created by Congress to study any needed changes to antitrust law), "CRA argues that the sheer dynamism of the satellite radio industry defies traditional market definition analysis," explains Professor Sidak. "That view is far outside the mainstream of legal and economic theory and practice in antitrust law." In April 2007, the Antitrust Modernization Commission expressly rejected the proposal that the Horizontal Merger Guidelines treat mergers in high-tech industries more leniently.

The Sidak report further demonstrates that the vast majority of CRA’s data consists of "supply-side" information that the Horizontal Merger Guidelines expressly exclude from use in defining the relevant product market. "The fact that entrepreneurs may be designing new audio devices in their garages does not inform the ultimate question of whether, over the next two years, SDARS customers would substitute away from SDARS to another audio device in response to a relative change in prices," said Professor Sidak.

Professor Sidak explains that, in addition to advocating the use of impermissible supply-side information, XM and Sirius advocate abandonment of the Horizontal Merger Guidelines in other important respects:

	According to the Horizontal Merger Guidelines, two years is the appropriate time horizon over which to evaluate possible anticompetitive effects. In contrast, Sirius and XM argue that they should be entitled to a longer window for analyzing whether their proposed merger may substantially lessen competition.
	According to the Horizontal Merger Guidelines, the definition of the relevant product market turns on whether a hypothetical monopoly provider of the service (in this case, satellite radio) could profitably raise price above the competitive level for an extended period of time. In contrast, XM and Sirius argue they are entitled to have the FCC and the DOJ deviate from the "small-but-significant-and-nontransitory increase in price" test (known in antitrust jargon as the "SSNIP test") so as to accommodate the supposedly unique circumstances of the satellite radio industry.
	According to the Horizontal Merger Guidelines, merger enforcement decisions should be based on trying to maximize consumer welfare. In contrast, XM and Sirius argue that they are entitled to have those agencies base their antitrust analysis on total welfare, equal to the sum of consumer welfare and producer welfare. In other words, XM and Sirius in essence take the position that their proposed merger should be approved if the private benefit to XM and Sirius shareholders exceeds the harm to XM and Sirius customers.

XM and Sirius have offered to freeze subscription fees at $12.95 for two years after the merger, but without freezing the amount and nature of content currently offered. So competitive harm from the merger would most likely take the form of new or increased commercial time on satellite radio channels. As Professor Sidak points out, "the prospect that a merged XM and Sirius would increase commercial time on satellite channels is not a matter of conjecture." In a September 17, 2007 investor conference, Mel Karmazin, CEO of Sirius, stated that he "would like to see advertising revenue eventually make up about 10% of Sirius’ total revenue, up from the current 4% to 5%." Sirius would be hard-pressed to increase commercial time by itself, as Sirius subscribers would likely switch to XM.

Professor Sidak finds that increasing commercials from three minutes to five minutes per hour could be profitable for the merged XM-Sirius. He calculates that, given these increased minutes of commercials, the annual consumer welfare losses for satellite radio customers would run in the hundreds of millions of dollars per year, reaching nearly $1 billion per year under certain plausible economic assumptions.

In an effort to build political support for the merger, XM and Sirius have offered to unbundle their current channel offerings, making some channels available on an á la carte basis. Professor Sidak shows that CRA fails to prove that unbundled á la carte offerings have any causal connection to the proposed merger. Under the Horizontal Merger Guidelines, "so long as they are not merger-specific, any alleged benefits associated with á la carte offerings cannot offset the demonstrated consumer welfare losses from higher prices or more commercials or both," said Professor Sidak.

The Sidak report also identifies a serious antitrust problem facing XM and Sirius that has escaped notice in analysis of the proposed merger by journalists and equity analysts, and in public comments filed at the FCC. Professor Sidak explains that XM’s and Sirius’s public statements that they will not provide channels on á la carte basis unless the government approves their merger is a breathtaking admission of critical antitrust significance. "It is an agreement not to compete over the pricing and unbundling of currently bundled content," he explains. "Rarely do price-fixing cases contain such conclusive evidence of a meeting of the minds between two competitors to refrain from competing with one another."

Such price fixing is a per se violation of section of 1 of the Sherman Act and should be immediately enjoined. "It is no defense to price fixing among two currently separate competitors that they are in the process of seeking government approval of a proposed merger to monopoly," Professor Sidak notes. According to Professor Sidak, XM and Sirius are exploiting the merger approval process to facilitate a horizontal price-fixing conspiracy in violation of section 1 of the Sherman Act. "The merger approval process before the FCC provides XM and Sirius the forum in which to publicly, and perfectly, collude over their future pricing strategies if the merger is rejected. And, of course, if the merger is actually approved, XM and Sirius will have succeeded in substituting a stable monopoly for an unstable duopoly. Heads, XM and Sirius win; tails, consumers lose."

Professor Sidak concludes, "This serious antitrust violation will remain even if the Commission rejects this proposed merger, and it justifies investigation by the Antitrust Division. It is staggering that the antitrust lawyers advising XM and Sirius permitted their clients to make these coordinated statements concerning their future pricing strategies."

To view the third supplemental declaration, click here.
To view the second supplemental declaration, click here.
To view the supplemental declaration, click here.
To view the original declaration from March 16, 2007, click here.