Statement of the Department of Justice Antitrust Division on its Decision to Close its Investigation of XM Satellite Radio Holdings Inc.'s Merger With Sirius Satellite Radio Inc.

Evidence Does Not Establish that Combination of Satellite Radio

Providers Would Substantially Reduce Competition

Mar 24, 2008, 01:00 ET from U.S. Department of Justice

    WASHINGTON, March 24 /PRNewswire-USNewswire/ -- 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."
     During the course of its investigation, the Division reviewed millions
 of pages of documents, analyzed large amounts of data related to sales of
 satellite radios and subscriptions for satellite radio service, and
 interviewed scores of industry participants.
     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 (R)), 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 was 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:

SOURCE U.S. Department of Justice