Tuesday, June 26, 2007

No Economic Reason to Fear XM/Sirius Merger

The graph above shows Sirius Radio (red) and XM Radio (blue) plotted vs. the S&P500 over the last two years. Sirius and XM have lost 50-70% of their value at the same time that the general stock market has increased by about 25% in value.

Steve Chapman writes in today's Baltimore Sun about the proposed merger between Sirius and XM in an excellent article titled "In A World of Options for Consumers, Fear of Mergers is Misplaced," here is an excerpt:

"The alternative to one (merged) satellite radio company may not be two companies but none. The existing ones have accumulated some $7 billion in losses between them (see chart above). The merger may allow them to reduce costs, so they can eke out a profit and stay in business. Raising prices would not be easy, because consumers have plenty of affordable options. Music fans can listen to terrestrial radio, pop in a CD, find an Internet feed, turn on an iPod, flip to the cable TV music station or check out unknown talents on YouTube.

Web radio may not get as much attention as Howard Stern, but it has four times as big an audience as XM and Sirius combined."

MP: In the begining of satellite radio there was only one station (XM) for almost one year, and if one of the companies fails soon before merging, there would only be one station, so what's the big deal about having one healthy company now resulting from a merger? As Chapman points out, there is so much competition now for music (iPods, cable TV, Internet, AM/FM), that it would be ridiculous to oppose a merger because it might result in "anti-competitive behavior."

And we should never underestimate the "threat of potential competition," which can also act to impose strict discipline on a single "monopoly" provider, like a merged XM/Sirius. As long as there are low barriers to entry, XM/Sirius will feel the threat of potential competition from possible rivals like Apple? Like maybe an iPhone with satellite radio service?

(HT: Cafe Hayek)


At 6/27/2007 7:29 AM, Anonymous Anonymous said...

You have no evidence as to how the companies would behave once merged. That they are losing money hand-over-fist in competition today with each other does not mean they will continue to do so after merged.

Right now it is the content providers that are taking all the money. After the merger this will no longer be the case, eliminating millions in costs; will the merged company cut prices afterwords? Or will they raise prices?

Customers could make out on the merger, they might not. Too soon to tell.

At 6/27/2007 10:10 AM, Blogger juandos said...

Personally the merger between the two satellite broadcasters means less than nothing...

Considering the numbers of people who do listen to all forms of entertainment/news radio, what percentage of the listeners are paid subscribers to satellite radio?

I'm guessing its really quite small and will get smaller with the wider acceptance of hd radio ...

At 6/27/2007 12:07 PM, Blogger Mark J. Perry said...

This comment has been removed by the author.

At 6/27/2007 12:09 PM, Blogger Mark J. Perry said...

We know this for sure: If the merger is NOT approved, and both companies fail, consumers will be definitely worse off. If the merger is approved, consumers cannot reaaly be made worse off. If the merged XM/Sirius raises prices too high, consumers can voluntarily cancel their service, and go back to AM and FM, CDs, iPods, etc. The Dept of Justice might impose price caps for the merged company.

Probably what would happen is that a variety of pacakages would be offered (like cable TV), where subscribers could elect a basic music package, and then optionally pay more for premium channels like Howard Stern, NBA, MLB, etc.

At 6/27/2007 12:42 PM, Anonymous Anonymous said...

I work for the NAB on this issue, where of course we represent terrestrial radio stations. However, let me just make an argument on the level of XM and Sirius listeners.

Currently these two companies compete against each other in the development of new radios and for broadcasting. Don't like one, you can switch to the other.

But if the two merge, they'll have no competition at a national level, and no incentive to improve their radios.

I don't subscribe to satellite radio, but if I did I would be very nervous about this merger.

At 6/27/2007 2:00 PM, Blogger Mark J. Perry said...

I have had both XM and Sirius, and the music that I like (blues and jazz) is basically the same on both channels. For two companies to both asborb large fixed costs and offer essentially the same, identical music content on two different stations seems redundant and duplicative. If only one merged company offers blues and jazz channels, the fixed costs will go way down, which will support a stronger, healthier company in the long run.

And we can be sure of this: If the merged XM/Sirius is hugely successful and profitable, the redolent "smell of profits" will attract competition and entry like a honey bee to the nectar of a flower.

So either: a) a merged XM/Sirius does just fine as a single competitive company and offers such low prices that no competitors are attracted to enter, or b) there is such a huge market and there is so much money at stake that a dozen competitors enter the market.

Not to worry, consumers win either way. And why do we trust a government bureaucracy to know what is best in the marketplace for consumers? From today's WSJ:

"Some agency must qualify as the federal government's most squalid and disreputable. The FTC in recent decades has been a catalog of bureaucratic pathology."

At 6/28/2007 12:21 AM, Blogger Unknown said...

MJP, are you an economist or not? Both companies have already absorbed huge fixed costs, the satellites are already in orbit.

Down my street we have two gas stations sitting on opposing corners. This is undeniably redundant and inefficient, we only need one station, but that redundancy is the price paid by society to find out what the true price of gasoline is in this area.

Similarly, without a competitor we would have no idea what the true cost of satellite radio is.

Now, customers do not have a right to know the true cost, if the company owners wish to merge then let them. But if they cannot reach an agreement, the owners do not have a right to profits. It is not a harm to society to have all the competitors in a market losing money every year, as the harm suffered by the owners is reaped by either the content owners or the customers. It is possible that their business models are just too similar; maintaining ground repeaters is expensive and perhaps not worth the effort.

After one of the companies declares bankruptcy and is sold off to new owners, the new owners would not be saddled with debt and therefore would have the ability to experiment with new business models.

Perhaps both companies could become profitable if only they could release themselves from the initial debt payments of putting satellites into orbit.


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