Barnett on Sirius-XM

Cite this Article
Geoffrey A. Manne, Barnett on Sirius-XM, Truth on the Market (March 24, 2008),

The Washington Post is reporting that the long-embattled Sirius/XM merger has received DOJ approval (FCC approval still pending) (HT: David Fischer).  About time, I’d say (it’s been two years).  See all of the ToTM posts on the topic here

Opposition to this merger has been rooted in what, to me, is a tortured conception of market definition:  If satellite radio doesn’t compete with terrestrial radio (to say nothing of Internet radio, podcasts and much more), then I’ll eat my hat (a ToTM tradition).

I do want to draw attention to something in the WaPo article, however, which I find quite disturbing (and, I hope, taken out of context).  WaPo reports,  

The Justice Department, in a statement explaining its decision, said the combination of the companies won’t hurt competition because the companies are not competing today. Customers must buy equipment that is exclusive to either XM or Sirius, and subscribers rarely switch providers.

“People just don’t do that,” Assistant Attorney General Thomas Barnett said in a conference call with reporters.

Excuse me?  Did the Assistant AG just seem to say that, because people who subscribe to Sirius rarely switch to XM and vice versa that the two companies don’t compete?  I’m pretty sure this must be a misquote.  Surely Barnett has read Demsetz and knows about “competition for the field.”  Even if no user ever switched between providers, competition between providers for each new user’s allegiance–to say nothing of competition for dominance in a network industry–would exert just as much competitive pressure as if users changed their service regularly. 

I agree with the result here, but if it was reached based on the premise that XM and Sirius simply don’t compete–rather than on the premise that they compete vigorously and with myriad other competitors in a properly-understood market–then it was wrongly decided.   

UPDATE:  Both Josh and David Fischer point me to the DOJ press release, available here.  The press release does clarify matters.  It seems that the DOJ does recognize competition between providers for new users, but still hangs its hat substantially on the notion that ex post competition is unrealistic in the automotive market (one perhaps wonders why the DOJ didn’t divide the markets by channel of distribution, a la the FTC in Whole Foods.  Not that I’m recommending it).  Here’s a sample:

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.

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.

[Meanwhile, in the retail market,] 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.

According to the DOJ, XM and Sirius have locked in sole-source contracts with all of the major car manufacturers through 2012, effectively ending competition in that market.  I’d say that’s fair enough.  The companies did compete for those contracts, and they can be presumed efficient (as the DOJ suggests).  Remaining competition is largely in retail, where a product market definition limited to satellite radio is unsupported.  Sounds about right to me. 

My only caveat:  I’m sure the allegedly high switching costs in the automotive market will come down substantially (and unexpectedly) as technology develops, introducing further competition.  I’m equally sure that the other satellite radio competitors are already, and will become increasingly, important in the automotive market, as well, further limiting any ability to extract monopoly rents.