Tuesday, February 20, 2007

Sirius & XM Merger Analysis

The big business story of the week is that Sirius and XM proposed a merger of equals that will create a single satellite radio broadcaster in the US. In order for this deal to proceed the companies will need the FCC and Justice department to approve the merger. I am sure that we will see quite a bit of debate about whether the government should approve this merger. So I thought that I would take a look at some of the issues that we need to consider in this proposed merger.

Market Definition

Is the merger of Sirius and XM going to create a monopoly? Well that depends on the definition of the merged firm's market. Should we define it narrowly and deem the firm a monopoly or define it broadly and see the firm competing in a vigorous market?

Narrow Market Definition
Satellite Radio - currently only two firms

Broad Market Definition
AM & FM Radio
HD Radio
MP3 & CD

Stakeholder Perspectives

Both Sirius, XM, and a potential merged firm impact quite a few other stakeholders including customers, content providers, and competitors. Any potential merger will likely affect these stakeholders so we need to consider the impacts on each.

Customer Perspective
Prospect of monopoly rents
Mitigated by potential competition in broad market definition
Single company allows consumers to access all satellite radio content - MLB, NFL, College Football, Howard Stern...
Reduced confusion
Potentially lower commitment innovation

Content Providers
Single company allows for only one possible satellite radio partner
Each content provider has a monopoly on their content - so merged firm will gain only slightly more negotiating leverage.
Likely a push

AM/FM Broadcasters
Would prefer two weaker satellite radio competitors to a single stronger competitor

Government Role

Some people may argue that the government should not have a role in approving the merger of these two firms. However the reality is that neither one of these firms or any other radio or television broadcasters would exist with out the government regulating the broadcast spectrum to keep others from broadcasting in their spectrum. With that realization and with the realization that both of these firms understood that the government wanted two satellite radio competitors I think that it is perfectly reasonable for the FCC and the Justice department to review this merger. The reviewers should pay particular attention to how customers will be impacted by assessing the potential of the merged firms to raise the monthly costs to monopoly rents. Ultimately this gets back to the original question of how to define the market - either narrowly or broadly. If it appears that the firms would dramatically raise prices after a merger the deal should not go through, but if it appears that all the other competing technologies will force them to keep prices low then the government should approve the merger.

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