Go Ahead, Try To Argue The 3to2 Principal
April 1, 2007
There are many who want to make a direct comparison of the proposed Sirius and XM merger to the failed merger of Direct TV and Echostar. We often even say that the Direct TV and Ecostar attempt sets precedence in this case, and that the 3to2 principal applies to Sirius and XM.
While a comparison may seem very similar at first blush, the deeper you look into the comparison, the further away from similar you will find yourself.
1. The first item to note is the timeframe involved. The Direct TV and Echostar proposal happened in 2002. While that may not seem like a long time, a lot has happened technologically in the last five years…..in particular in the audio entertainment field.
2. The 3 to 2 principal. This principal centers around the fact that most areas had 1 cable provider and 2 satellite television providers. If the merger of Direct TV and Echostar were to be allowed, the choices offered to the people would go from 3 providers to 2 providers. Seems logical…..for television.
With the Sirius and XM merger, the competitive landscape differs dramatically from that of television. Most content on radio is not centered around live entertainment, but rather the playing of songs. People love to hear their favorite songs, and do not mind hearing those songs on a frequent basis. In television, people are not clamoring to watch the same episode of Survivor every day, or even more than once. Music is played again and again over prolonged periods of time. This enables the competitive landscape to include virtually ANY means by which people can receive audio entertainment. This is why I-Pods are included as competition. This is why cell phones are included, and also why internet radio is included. Thus, those that say the 3to2 principal applies are discounting a large segment of companies and devices that deliver content to consumers. With television, it could realistic to see that people get their video content from 3 main sources. Cable, Direct TV, and Echostar. Video rentals have a place, but they are not a means by which consumers get up to date information, and there is typically a lag between when something airs on television and when it becomes available on video in some way. This is not the case with audio entertainment. People can access songs and content in many ways, and all are capable of delivering good quality sound.
3. Now, the next logical step is the live content available on radio. In this format, one can realistically remove the I-Pod from the competition list. I-Pods do not deliver live content. However, Internet and cell phones would still remain. Now consider that terrestrial radio centers around localized content, and you will see that they have a built in protection of their service. Satellite radio is a national service. This is an aspect where Sidak, author of the C3SR and NAB backed Criterion Economics Report and the NAB fall on their faces. They want you to set aside reality and lump all terrestrial radio stations as if they are a single entity. They need to do this to argue the 3to2 principal. What they are asking you to do is ignore that radio stations themselves are competitors. This simply does not fit reality. Terrestrial radio stations are VERY COMPETITIVE with each other, and wrangle for ratings every day of the week. If KISS 107.9 FM went silent today, listeners would gravitate to WJMN 94.5 FM. You see, a consumer has viable substitution to another company that still exists within the subset of terrestrial radio. If Your Local cable company went dark today what would a consumer do? Therin lies the difference. Simply stated, the 3to2 principal simply does not hold water in the Sirius and XM merger. Those that ask you to believe that the 3to2 principal are in effect asking you to set aside reality, ignore the internet, ignore cell phones, ignore I-Pods, and ignore the fact that there are MANY terrestrial radio stations.
4. Another aspect in this comparison that people often miss is that Cable, Direct TV and Echostar are all subscription services. They all pay for content, and pay for distribution of that content. Terrestrial radio has a vast library of content that they do not pay for. Terrestrial radio can play song after song after song, and never shell out a dime. Satellite radio not only has to pay for the songs they play, but they also have to subsidize the installation of radios in the marketplace. When was the last time you saw any terrestrial radio station shell out money to an OEM so that a radio would be installed in a car? The cost of doing business and getting a service up and running does and should get due consideration in the process. Many people tend to forget this aspect when considering the Sirius and XM merger issue. Now, let me be clear here. There are substantial costs without dealing with ANY talent. For a moment, forget about Stern, MLB, NFL, Oprah, etc. Simply consider the costs of building and launching satellites, building out repeater networks, royalties for songs, and cost subsidies to get satellite radios installed in vehicles, or placed on store shelves. All of these costs get due consideration. Opponents of the merger try to gloss over this aspect of consideration by focusing attention onto Stern, the NFL, etc. Don’t be fooled.
The point of this article is not to say that there is no place for a comparison to the Direct TV and Echostar deal. In fact, there is a comparison, and that deal should be considered closely when looking into the Sirius and XM merger. By looking at the failed satellite television merger, officials will be forced to see and acknowledge that there are indeed substantial differences in the Sirius and XM deal that indeed exist, and indeed need consideration. Proponents of the Sirius and XM merger do not need to fear this comparison……they should actually embrace it. It goes a long way into supporting and illustrating what the competitive landscape is.
To those that say the 3to2 principal applies in this merger, I have a simple response…….
SHOW ME ANY MARKET WITH ONLY ONE TERRESTRIAL RADIO STATION, NO INTERNET ACCESS, NO CELL COVERAGE, AND ABSENT OF MP3 PLAYERS AND WE CAN START THE DEBATE.
Labels: 3to2 principal, merger, sirius, xm
4/01/2007 09:48:00 AM
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Could someone tell me exctly where we are in the merger talks. I am not sure what is fact and opinion sometimes here. The comment where the person says this is bad news for SIRI and the stock will go below $3 on Monday has me freaked out. Is he refering to facts or what?
By April 01, 2007 2:56 PM
Here is where the merger is.
By SSG, at April 01, 2007 5:50 PM
1. Application has been filed with the Department of Justice (DOJ). DOJ decides on the anti-trust issue.
2. Application has been filed with the FCC.
These government entities review the merger application, seek public opinion, look at the competitive landscape both now and into the future, look at past cases, and decide upoin the issue.
3. Sirius and XM are in hopes of getting a decision this year.
At this point many things can be perceived as both good and bad. This will impact the prices of the equities. No one can say for certain the liklihood of the merger being approved, but there will be many opinions.
Unfortunately this leaves investors with deciding who is offering the best case, or best information regarding the subject. That can be a tricky task. My advise is read everything you can, look for common points, and understand the source ofg any piece of information, where it came from and if their is a bias in the information. We here at SSG, for the most part, are for this merger. You will see slightly differing opinions because more than one person writes here.
As to the stock going below $3 on monday......no one knows what monday will bring.
Great article. I wish Sirius/XM would publicize the points made in this article to silence some of the critics.
By April 03, 2007 2:41 PM
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