FCC Granted Monopoly to Sirius-XM, Customers Pay The Price Again and Again

In 2008, the Bush Administration’s Department of Justice green-lighted a proposed merger between XM Satellite Radio and Sirius Satellite Radio, claiming that even though the combined company would have a satellite radio monopoly in the United States, it wasn’t really a monopoly. Just under a year ago, “the Federal Communications Commission imposed a three-year cap on prices, set aside 8 percent of their channel capacity for minority and noncommercial programming, and agreed to pay $19.7 million for past FCC rule violations,” according to a report published by CNET. The companies also agreed to bring interoperable radios to the market within a year.

Since the finalization of the merger, a lot has changed in the world of a merged Sirius XM, and much not for the better.

After one year, it has become evident the Department of Justice Antitrust Division and the FCC have once again failed to live up to their responsibilities to appropriately regulate and provide oversight, as they are required to do by their own policies.

The failure is particularly galling on the part of the FCC, which had promises from both companies to never seek a merger and accept the fact they should not launch their business plans if they cannot succeed as competitors. When the founding premise of satellite radio competition can be so easily swept aside by the FCC, is it any surprise the public interest could be easily swept into the nearest dustbin with it?

Subscribers to both services discovered the first side effect of the merger was an increasingly merged programming lineup which alienated many long time subscribers. XM’s devotion to on air personalities, who were lauded for their depth of knowledge about the music on the channels they programmed, was a major attraction for customers to pay $12.95 a month for the service. Sirius’ attractive lineup for rock and dance music, along with partnerships with National Public Radio, the Canadian Broadcasting Corporation, World Radio Network, and other important public and private networks provided cachet to a service that provided fewer channels than XM, and wasn’t as commonly found installed in new cars.

The combined lineup upset XM subscribers as a wave of cost cutting forced out many well-regarded programmers and on-air talent, changed the scope of several music channels, and telegraphed the founding programming philosophy of XM was being supplanted by that of Sirius, which critics have accused of being “too mainstream” and “too similar to the sound of corporate commercial radio.” Sirius subscribers weren’t terribly impressed with XM’s channels being dropped into their lineup either. Both services had developed unique personalities that created subscriber loyalty. The combined entity alienated many.

The Devil is Always in the Details

The FCC apparently needs better lawyers, because the terms of the merger were designed to protect consumers from rate increases and monopoly abuse. Post merger, it became obvious the lawyers Sirius XM had were better than the ones the FCC used. Sufficient loopholes in the approved merger agreement existed for the combined company to begin systematically raising rates almost immediately, yet “somehow” still remained within the scope of the merger agreement.

• Sirius XM raised rates March 11, 2009 $2/month for “add-on” radios (extra radios attached to a single account). Formerly, subscribers could add additional receivers for $6.99 per month. The new rate: $8.99 per month.
• On that same date, online streaming access, allowing subscribers to listen to many Sirius XM channels online, became a “pay option” for $2.99 per month. It was formerly free with your subscription.
• Original XM subscribers wishing to cancel a multi-year subscription package who subscribed for less than one year found a new $75 cancellation fee charged to their account, reducing the refund for the unused portion of a subscription.
• Effective in April, customers upgrading their radios (or replacing broken or stolen units) discovered a new “transfer fee” for switching radios amounting to $14.95.

Most recently, the leaking of an internal company document provides new insight into Sirius XM’s daring disregard for the spirit of the FCC merger agreement — the company will now add a new “copyright fee” line on subscriber bills and increase their price by up to $2 per month (+ $1 for each additional radio) effective July 29, 2009.

The FCC did allow for Sirius XM to pass along any increases in copyright royalty charges charged by the music industry during the three year rate freeze. Their rates did increase this year, but only by $0.064 per subscription. Sirius XM is interpreting the merger agreement as permission to breakout the entire copyright fee from the monthly subscription price and bill it as a separate charge. But doing the math illustrates that doesn’t add up to $2 per month. The Copyright Royalty Board is assessing a 6.5% royalty rate, which amounts to $0.84 per month. Some readers on XMFan, an online forum, are speculating, the remaining $1.14 is presumably going into the company’s pockets:

The FCC order approving the merger states:

“After the first anniversary of the consummation of the merger, the combined company may pass through cost increases incurred since the filing of the combined company’s FCC merger application as a result of statutorily or contractually required payments to the music, recording and publishing industries for the performance of musical works and sound recordings or for device recording fees.”

The filing date of the merger application was March 20, 2007.

The royalty rate in effect on March 20, 2007 was 6%.

The royalty rate in effect on July 28, 2009 is 6.5%.

Therefore, it appears that, under the terms of the FCC order, the only “cost increase” that SXM can “pass through” is 0.5%, which is about 7 cents per month on a $12.95 subscription. If they think they can add a $1.98 monthly fee, they are out of their minds.

Companies like Sirius XM assume they can get away with it because regulatory authorities have either unknowingly left loopholes in merger agreements, or simply refused to aggressively enforce those agreements. Regulatory policy for telecommunications services has failed for at least the last decade, at an accelerating pace.

The Clinton Administration’s support for the 1996 telecommunications deregulation law started us down the slippery slope, removing regulatory controls and oversight for virtually every segment of the telecommunications industry. The Bush Administration only accelerated the “free market” approach which resulted in a “free to abuse and plunder through monopoly control market.”

The Obama Administration and the new Congress has a chance to make substantial changes to the direction of telecommunications policy that allows these kinds of abuses, be them from merger-mania in the broadcasting industry, duopoly control of broadband in most American cities, or giving carte blanche to a satellite radio monopoly. “Free market” policies are a fraud without healthy competition, and the firmly entrenched companies now providing service will lobby, sue, stall, or deceive to protect those interests at almost any cost. In the absence of healthy competition, where competitors provide substantially equivalent service options to consumers throughout a community, regulation is and should be the appropriate safety valve to protect us from the inevitable abusive pricing, service and availability that surely follow.