New climate may benefit radio deal

The regulatory tone in Washington has changed since a failed effort to merge EchoStar and DirecTV, two satellite television providers, four years ago.

3 min read
Mel Karmazin, the chief executive of Sirius Satellite Radio, made a lot of phone calls seeking advice before he entered into a merger deal with XM Satellite Radio on Monday.

Maybe he should have called Charles W. Ergen, the founder and chairman of EchoStar Communications.

Ergen could have given Karmazin an earful about his failed effort to merge EchoStar with DirecTV four years ago, a deal that seems eerily similar to the one Sirius and XM have proposed.

Will the government see things differently this time?

Michael K. Powell, the former chairman of the Federal Communications Commission who blocked the EchoStar-DirecTV deal, is not so sure.

"I do think it could get through, but I don't think it's going to be an easy one," he said. "It's going to be incumbent on the companies to demonstrate that the analysis in EchoStar-DirecTV is different."

In opposing that deal, regulators--both from the FCC and the Justice Department--argued the merger would create a monopoly. EchoStar and DirecTV, on the other hand, argued that the market should be defined more broadly than simply satellite television and should encompass cable television operators and telephone companies providing video over phone lines.

When Sirius and XM announced their merger on Monday, they made a similar argument--that their market is much bigger than just satellite radio.

"In addition to existing competition from free 'over-the-air' AM and FM radio as well as iPods and mobile phone streaming, satellite radio will face new challenges from the rapid growth of HD Radio, Internet radio and next generation wireless technologies," the companies said.

There is no question that times have clearly changed: a decade ago, the argument for a Sirius-XM merger would have never had a chance.

Joel I. Klein, then the acting assistant attorney general in charge of the antitrust division, gave a speech to the radio industry 10 years ago this week, suggesting that merging terrestrial radio stations in the same market was "no different from a situation where all soft drink manufacturers would seek to merge and control 100 percent of that market. We wouldn't walk away from such a merger--and if you like soft drinks I should think you wouldn't want us to walk away--merely because there are lots of other beverages out there, such as milk, juice, beer, wine, et cetera."

But the regulatory tone in Washington has changed. Inside Sirius and XM, executives are bullish on government approval.

In a conference call with analysts yesterday, Karmazin said that "I would not have gone to our board," if he "didn't think there was greater than a 50-50 chance of approval." In fact, the deal's timing was driven in part by a feeling that the current administration was more likely to let the deal through and that it needed to be done before that window closed.

The Justice Department's surprising approval of Whirlpool's acquisition of Maytag--a deal that created the nation's largest manufacturer of appliances with more than 50 percent market share--has encouraged others to proceed with deals that might have seemed to pose regulatory problems.

But Sirius and XM should not necessarily take solace in the shifting attitude in Washington and the Whirlpool decision, some antitrust experts suggest, because the deal's fate may be decided by the FCC, which issued two sets of satellite spectrum to Sirius and XM in order to create competition.

At the time, the FCC defined free-to-air radio as a separate market from satellite because free-to-air radio, which included local programming like weather and traffic, was tightly regulated while satellite's content would be unfettered.

"Howard Stern couldn't do his current broadcast on radio," said Powell, who had fined Stern several times for some of his lewd talk on terrestrial radio before his program moved to Sirius.

Powell said that in the end, the deal's fate would lie in the evidence that both companies produce during the government's review. He said that while EchoStar and DirecTV publicly talked up an assortment of competitors like cable and telephone, when the government got its hands on the companies' documents about the way they internally defined their rivals, "it seemed that the only competitors who mattered were each other."

Of course, perhaps the largest factor in their decision will be the precedent regulators want to set. "If the Federal Communications Commission grants a green light for this transaction, the brakes will be off for similar telecommunications industry hookups," Carmi Levy, senior research analyst with Info-Tech Research Group, wrote to clients. If so, perhaps Ergen will get a second chance.