Satellite radio is a fairly recent phenomena. Unlike the usual AM/FM radio, satellite radio offers hundreds of commercial free channels. It includes niche music formats (e.g. 60s music), out of market sporting events, and exclusive programming such as Howard Stern or Oprah & Friends. Thus, in February 2007, when the only two satellite radio providers, Sirius Satellite Radio ("Sirius") and XM Satellite Radio Holdings ("XM"), announced their plan to merge, the anticompetitive signs went up. Leading politicians and consumer groups urged the antitrust enforces to take action to halt the merger.
After investigating the competitive aspects of the Sirius-XM merger for over a year however, the Department of Justice Antitrust Division ("DOJ") announced on March 24, 2008 that it would not oppose the merger and closed its investigation. In doing so, the DOJ issued a lengthy closing statement explaining the reasons for its decision. It cautioned that the decision is fact-specific and readers should not draw overly broad conclusions from it as to how the Division is likely to analyze other mergers. The Closing Statement however, clearly reflects the Division’s intent and policy of analyzing mergers in terms of market realities rather than simplistic market share data.
The Closing Statement began by stating that the key issue is whether the XM-Sirius merger would enable the merged entity to profitably increase prices to consumers. It then identified several reasons why that was unlikely to occur.
First, it found that XM and Sirius did not compete with each other for either existing customers or for new subscribers through the new car channel. Existing customers are locked in to either XM or Sirius when they make their initial selection, the two systems are not interoperable, and the switching costs too great. Virtually all new car manufacturers had negotiated long term (lasting through 2012) sole source contracts with either XM or Sirius.
Second, as to new customers who sign up for service through the mass market retail channel, the DOJ found that other sources of audio entertainment were a sufficient substitute for satellite radio if the merged entity raised prices. These alternatives include traditional AM/FM radio, HD radio, and MP3 (iPods) players. The DOJ expressly stated that "evidence developed in the investigation did not support defining a market limited to two satellite radio firms."
Third, the DOJ cited the likely evolution of technology as an important factor as mitigating any anticompetitive effects of the merger. It stated new technologies, such as mobile broadband devices, would likely be competitive alternatives in the future and thus restrain any attempt by the merged entity to raise prices or otherwise engage in anticompetitive activities.
Fourth, the DOJ stated the merger would result in efficiencies, such as the consolidation of development, production and distribution efforts on a single line of radios thereby eliminating duplicative costs and achieve economics of scale. The DOJ concluded that "these efficiencies alone would be sufficient to undermine an inference of competitive harm."
Despite the DOJ disclaimers, the Closing Statement does provide useful guidance for future mergers. Perhaps most important, it reflects a policy of analyzing the anti-competitive effects of a merger on a qualitative, not quantitative, basis. It would have been simple for the DOJ to state, as have some courts and enforcers, that the unique aspects of satellite radio make it a separate market and then nix a merger between the only two companies in that market. Instead, the DOJ focused on switching costs, long term contracts, and alternative technologies to conclude the merger would not negatively impact either old or new customers. The Closing Statement also shows the importance of efficiencies in DOJ merger analysis even where, as here, "[i]t was not possible to estimate the magnitude of the efficiencies with precision due to the lack of evidentiary support provided by XM and Sirius." Finally, the length of the investigation itself, over a year after the Second Request was issued (April 12, 2007) shows that the DOJ carefully evaluated the competing claims before reaching the decision to close the investigation. All these factors, and perhaps other language in the Closing Statement, provide useful guidance on future transactions.