The Department of Justice’s Antitrust Division issued the following
statement today after announcing the closing of its investigation into the
proposed merger of XM Satellite Radio Holdings Inc. with Sirius Satellite Radio
Inc.:

“After a careful and thorough review of the proposed transaction, the Division
concluded that the evidence does not demonstrate that the proposed merger of XM
and Sirius is likely to substantially lessen competition, and that the
transaction therefore is not likely to harm consumers. The Division reached
this conclusion because the evidence did not show that the merger would enable
the parties to profitably increase prices to satellite radio customers for
several reasons, including: a lack of competition between the parties in
important segments even without the merger; the competitive alternative services
available to consumers; technological change that is expected to make those
alternatives increasingly attractive over time; and efficiencies likely to flow
from the transaction that could benefit consumers.

“The Division’s investigation indicated that the parties are not likely to
compete with respect to many segments of the satellite radio business even in
the absence of the merger. Because customers must acquire equipment that is
specialized to the satellite radio service to which they subscribe, and which
cannot receive the other provider’s signal, there has never been significant
competition for customers who have already subscribed to one or the other
service. For potential new subscribers, past competition has resulted in XM and
Sirius entering long-term, sole-source contracts that provide incentives to all
of the major auto manufacturers to install their radios in new vehicles. The
car manufacturer channel accounts for a large and growing share of all satellite
radio sales; yet, as a result of these contracts, there is not likely to be
significant further competition between the parties for satellite radio
equipment and service sold through this channel for many years. In the retail
channel, where the parties likely would continue to compete to attract new
subscribers absent the merger, the Division found that the evidence did not
support defining a market limited to the two satellite radio firms that would
exclude various alternative sources for audio entertainment, and similarly did
not establish that the combined firm could profitably sustain an increased price
to satellite radio consumers. Substantial cost savings likely to flow from the
transaction also undermined any inference of competitive harm. Finally, the
likely evolution of technology in the future, including the expected
introduction in the next several years of mobile broadband Internet devices,
made it even more unlikely that the transaction would harm consumers in the
longer term. Accordingly, the Division has closed its investigation of the
proposed merger.”

Extent of Likely Future Competition between XM and Sirius

The Division’s analysis considered the extent to which the two satellite radio
providers compete with one another. Although the firms in the past competed to
attract new subscribers, there has never been significant competition between
them for customers who have already subscribed to one or the other service and
purchased the requisite equipment. Also, competition for new subscribers is
likely to be substantially more limited in the future than it was in the past.

As to existing subscribers, the Division found that satellite radio equipment
sold by each company is customized to each network and will not function with
the other service. XM and Sirius made some efforts to develop an interoperable
radio capable of receiving both sets of satellite signals. Depending on how
such a radio would be configured, it could enable consumers to switch between
providers without incurring the costs of new equipment. The Division’s
investigation revealed, however, that no such interoperable radio is on the
market and that such a radio likely would not be introduced in the near term.
For example, in the important automotive channel, such a radio could not be
introduced in the near term due to the engineering required to integrate radios
into new vehicles. The need for equipment customized to each network means that
in order to switch from XM to Sirius, or vice versa, a subscriber would have to
purchase new equipment designed for the other service. In the case of a
factory-installed car radio, switching satellite radio providers would have the
additional disadvantage of requiring an aftermarket radio that would be less
integrated into the vehicle’s systems. Data analyzed by the Division confirmed
that subscribers rarely switch between XM and Sirius.

As to new subscribers, XM and Sirius sell satellite radios and service
primarily through two distribution channels: (1) car manufacturers that install
the equipment in new cars and (2) mass-market retailers that sell
automobile aftermarket equipment and other stand-alone equipment. Car
manufacturers account for an increasingly large portion of XM and Sirius sales,
and the parties have focused more and more of their resources on attracting
subscribers through the car manufacturer channel. Historically, XM and Sirius
engaged in head-to-head competition for the right to distribute their products
and services through each car company. As a result of this competitive process,
XM and Sirius have provided car manufacturers with subsidies and other payments
that indirectly reduce the equipment prices paid by car buyers to obtain a
satellite radio. However, XM and Sirius have entered into sole-source contracts
with all the major automobile manufacturers that fix the amount of these
subsidies and other pertinent terms through 2012 or beyond. Moreover, there was
no evidence that competition between XM or Sirius beyond the terms of these
contracts would affect customers’ choices of which car to buy. As a result,
there is not likely to be significant competition between XM and Sirius for
satellite radio equipment and service sold through the car manufacturer channel
for many years.

The Division’s investigation identified the mass-market retail channel as an
arena in which XM and Sirius would compete with one another for the foreseeable
future. Both XM and Sirius devote substantial effort and expense to attracting
subscribers in this arena, with both companies offering discounts, most commonly
in the form of equipment rebates, to attract consumers. Retail channel sales
have dropped significantly since 2005, and the parties contended that the
decline was accelerating. However, retail outlets still account for a large
portion of the firms’ sales, and the Division was unable to determine with any
certainty that this channel would not continue to be important in the future.

Effect on Competition in the Retail Channel

Because XM and Sirius would no longer compete with one another in the retail
channel following the merger, the Division examined what alternatives, if any,
were available to consumers interested in purchasing satellite radio service,
and specifically whether the relevant market was limited to the two satellite
radio providers, such that their combination would create a monopoly. The
parties contended that they compete with a variety of other sources of audio
entertainment, including traditional AM/FM radio, HD Radio, MP3 players (e.g.,
iPods®), and audio offerings delivered through wireless telephones. Those
options, used individually or in combination, offer many consumers attributes of
satellite radio service that they may find attractive. The parties further
contended that these audio entertainment alternatives were sufficient to prevent
the merged company from profitably raising prices to consumers in the retail
channel – for example, through less discounting of equipment prices, increased
subscription prices, or reductions in the quality of equipment or service.

The Division found that evidence developed in the investigation did not support
defining a market limited to the two satellite radio firms, and similarly did
not establish that the combined firm could profitably sustain an increased price
to satellite radio consumers. XM and Sirius seek to attract subscribers in a
wide variety of ways, including by offering commercial-free music (with digital
sound quality), exclusive programming (such as Howard Stern on Sirius and “Oprah
& Friends” on XM), niche music formats, out-of-market sporting events, and a
variety of news and talk formats in a service that is accessible nationwide.
The variety of these offerings reflects an effort to attract consumers with
highly differentiated interests and tastes. Thus, while the satellite radio
offerings of XM and Sirius likely are the closest substitutes for some current
or potential customers, the two offerings do not appear to be the closest
substitutes for other current or potential customers. For example, a potential
customer considering purchasing XM service primarily to listen to Major League
Baseball games or one considering purchasing Sirius service primarily to listen
to Howard Stern may not view the other satellite radio service, which lacks the
desired content, as a particularly close substitute. Similarly, many customers
buying radios in the retail channel are acquiring an additional receiver to add
to an existing XM or Sirius subscription for their car radio, and these
customers likely would not respond to a price increase by choosing a radio
linked to the other satellite radio provider. The evidence did not demonstrate
that the number of current or potential customers that view XM and Sirius as the
closest alternatives is large enough to make a price increase profitable.
Importantly in this regard, the parties do not appear to have the ability to
identify and price discriminate against those actual or potential customers that
view XM and Sirius as the closest substitutes.

Likely Efficiencies

To the extent there were some concern that the combined firm might be able
profitably to increase prices in the mass-market retail channel, efficiencies
flowing from the transaction likely would undermine any such concern. The
Division’s investigation confirmed that the parties are likely to realize
significant variable and fixed cost savings through the merger. It was not
possible to estimate the magnitude of the efficiencies with precision due to the
lack of evidentiary support provided by XM and Sirius, and many of the
efficiencies claimed by the parties were not credited or were discounted because
they did not reflect improvements in economic welfare, could have been achieved
without the proposed transaction, or were not likely to be realized within the
next several years. Nevertheless, the Division estimated the likely variable
cost savings – those savings most likely to be passed on to consumers in the
form of lower prices – to be substantial. For example, the merger is likely to
allow the parties to consolidate development, production and distribution
efforts on a single line of radios and thereby eliminate duplicative costs and
realize economies of scale. These efficiencies alone likely would be sufficient
to undermine an inference of competitive harm.

Effect of Technological Change

Any inference of a competitive concern was further limited by the fact that a
number of technology platforms are under development that are likely to offer
new or improved alternatives to satellite radio. Most notable is the expected
introduction within several years of next-generation wireless networks capable
of streaming Internet radio to mobile devices. While it is difficult to predict
which of these alternatives will be successful and the precise timing of their
availability as an attractive alternative, a significant number of consumers in
the future are likely to consider one or more of these platforms as an
attractive alternative to satellite radio. The likely evolution of technology
played an important role in the Division’s assessment of competitive effects in
the longer term because, for example, consumers are likely to have access to new
alternatives, including mobile broadband Internet devices, by the time the
current long-term contracts between the parties and car manufacturers expire.

The Division’s Closing Statement Policy

The Division provides this statement under its policy of issuing statements
concerning the closing of investigations in appropriate cases. This statement
is limited by the Division’s obligation to protect the confidentiality of
certain information obtained in its investigations. As in most of its
investigations, the Division’s evaluation has been highly fact-specific, and
many of the relevant underlying facts are not public. Consequently, readers
should not draw overly broad conclusions regarding how the Division is likely in
the future to analyze other collaborations or activities, or transactions
involving particular firms. Enforcement decisions are made on a case-by-case
basis, and the analysis and conclusions discussed in this statement do not bind
the Division in any future enforcement actions. Guidance on the Division’s
policy regarding closing statements is available at: http://www.usdoj.gov/atr/public/guidelines/201888.htm.

This is great news and all we need now is word from the FCC. Some are saying this week some are saying longer. I’m thinking after reading this we are very close!

Check back soon for any updates!

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