Questions linger over satellite radio merger

WASHINGTON (AP) - April 2, 2008 That may be true, but it's not what government regulators intended.

Justifying its decision, the Justice Department said customers of XM Satellite Radio Holdings Inc. and Sirius Satellite Radio Inc. generally stick to one service once they have signed up, because if they want to switch, they have to buy a new radio. XM's receivers don't get Sirius signals, and vice versa.

When the Federal Communications Commission approved rules that created the business in 1997, it insisted that the two licensees "certify" that their radios would receive both services. The rule was meant to promote competition by making it easy for consumers to switch between satellite radio providers.

"At the very least, consumers should be able to access the services from all licensed satellite DARS (digital audio radio service) systems and our rule on receiver inter-operability accomplishes this," the FCC's 1997 decision reads.

Eleven years later, that goal has been all but abandoned. Subscribers to XM buy one type of radio, subscribers to Sirius buy another. Auto makers install one system or the other, depending on which company they have an exclusive contract with.

The failure to deploy radios that work with both systems was cited by the Justice Department as part of its justification to clear the merger.

It said "there has never been significant competition" between the companies for customers who already subscribed to one of the services. While the companies "made some efforts" to develop an interoperable radio, it said, "no such inter-operable radio is on the market and that such a radio likely would not be introduced in the near term."

Gene Kimmelman, vice president for federal and international affairs for Consumers Union, nonprofit publisher of Consumer Reports magazine, accused the government of failing to protect consumers.

"If the DOJ truly believes the failure to develop an inter-operable radio is diminishing competition between XM and Sirius, it should be promoting aggressive steps to market that inter-operable radio rather than allow the two companies to combine into a monopoly," he said.

Thomas O. Barnett, assistant attorney general for antitrust at the Justice Department, told The Associated Press that the interoperable radio issue was a part of the investigation, but he declined to pass judgment on what the companies' FCC obligations were.

"We focused on what was actually happening in the marketplace and what was likely to happen in the marketplace going forward," he said.

"The parties did in fact develop an inter-operable radio and my understanding is they have one," he continued. "But there's a difference between developing something and market acceptance of something."

The companies subsidize the cost of equipment, which reduces the upfront cost to subscribers. An inter-operable radio might lead to a more expensive radio, Barnett said, and it would be unclear who would subsidize the cost.

The $5 billion buyout of XM by Sirius still needs approval from the FCC, which prohibited a merger when it granted satellite radio operating licenses in 1997. The companies argue that the prohibition was a "policy statement" rather than a "binding commission rule."

The companies say that ample competition is provided by other forms of audio entertainment, including "high-definition" radio, Internet-based radio stations and even devices like Apple Inc.'s iPod, an argument the Justice Department found convincing.

The FCC has the authority to block the sale or impose conditions on pricing or program offerings.

Mel Karmazin, who would assume the role as chief executive officer of the merged company, told a House subcommittee that the two companies have spent $25 million and successfully developed an inter-operable receiver, but manufacturers are not interested in making it.

"We've developed it, we've lived up to our license. There's not a question," he said.

There is nothing in the license that says the company has to subsidize such a radio and bring it to the market. And to expect the companies to do that on their own isn't realistic, Karmazin said.

It is uncertain when the FCC will act on the merger, and the agency declined to comment for this story.

FCC Chairman Kevin Martin said when the companies announced the merger that "the hurdle here, however, would be high" for the companies to receive approval because of the agency's no-merger rule. The companies will have to demonstrate that "consumers will be clearly better off with both more choice and affordable prices."

On Nov. 2, the agency sent extensive requests for documents to both companies, including a request for them to "provide a description of all efforts to develop and commercialize inter-operable satellite radio receivers and any difficulties in such development and commercialization."

Through the end of 2007, Washington, D.C.-based XM reported 9 million subscribers and New York City-based Sirius reported 8.3 million subscribers.