FCC Approves of XM-Sirius Merger

Published November 1, 2008

In approving the merger of the two satellite-radio competitors XM and Sirius, the Federal Communications Commission decided the listening market was sufficiently diverse and cross-competitive that a monopoly couldn’t dominate by satellite-service alone.

But FCC also had to consider the potential for one new technology—nationwide satellite broadcasts—crowding out another: HD radio, which can provide digital signals in potentially superior sound and with multicast streaming capability.

The very idea that FCC can decide radio’s future bothers Adam Thierer, senior fellow and director of the Center for Digital Media Freedom at the Progress & Freedom Foundation.

“It’s troubling that some at the FCC want to treat satellite radio like the equivalent of a public utility,” Thierer said. “The agency should focus on freeing up more spectrum for new services, not expropriating others’ property for corporate welfare purposes.”

Mandating HD Radio

FCC was urged by some major players in the HD radio field—including iBiquity, the sole provider of HD radio technology, and the leading lights of public radio, including National Public Radio (NPR)—to mandate HD radio compatibility in all XM-Sirius receivers post-merger. Instead of doing that, FCC put out the question for comment and later decision rather than hold up the XM-Sirius merger.

An HD radio mandate, if adopted for XM and Sirius, would be added to a significant list of conditions already imposed on the deal—fines for violating earlier FCC conditions, availability of a la carte programs, and price controls for three years (at the $12.95/month rate in effect before the merger).

Off the record, though, iBiquity sources appear convinced FCC’s suggestion it might impose an HD radio mandate on XM-Sirius is a political gesture toward congressional supporters of the move—and also toward public radio, which has long-term business plans dependent on HD radio.

The issue of HD radio mandates could create an interesting problem because both HD radio and satellite radio are comparatively new consumer products. Both offer the potential for content customized for niche markets. XM and Sirius offer specialized channels devoted to jazz, country, and classical music, major league sports, and political coverage. HD radio, meanwhile, makes it possible for terrestrial radio stations to offer, for example, three different playlists simultaneously.

Finding a New Standard

HD and satellite radio are not inherently incompatible, but they are very different animals. One signal is transmitted by satellites, the other piggybacks on conventional terrestrial signals. Depending on where the market heads next, and on what other technologies emerge, either mode might become a new standard.

With its partners in the automobile industry, satellite could well become the dominant player in the car radio market. And if HD boosts its market share with terrestrial broadcasters, satellite may regret not having HD capability.

The concern for HD radio is that the satellite-HD compatibility requirement may be the only way for HD to break out of its current niche. The rich auto-radio market XM-Sirius has tapped would be critical to that.

Competing Commercial Interests

Some electronics manufacturers, such as Pioneer, don’t want to be saddled with an HD technology mandate for the next generation of satellite radio receivers, which would raise consumer costs with no guarantee the HD radio market will justify it.

iBiquity, say industry insiders, wants to direct its research and development efforts to satellite radio so broadcasting in only HD might become commercially viable.

In addition, public radio has invested heavily in HD radio capability and doesn’t want to lose out to the satellite market (where, in non-HD format, NPR has a significant presence). WETA, Washington’s public broadcaster, is not part of the campaign to mandate HD radio capability for XM-Sirius. Still, WETA General Manager Dan Devany expressed the hope at least local HD channels would be provided for on the next generation of XM-Sirius receivers.

Reading the Tea Leaves

FCC, in short, is being asked to make a prediction about the future of radio with fairly scant evidence to go on.

The Motley Fool is high on the market potential of XM Sirius, with not just the ability to offer customers true diversity in programming but also the occasional exclusive content unavailable elsewhere, such as The Howard Stern Show and Robert Aubry Davis’s VOX. HD radio boasts exceptional sound quality and easy compatibility with existing broadcast equipment and formats.

Both technologies have critics, too—satellite for the higher cost and requiring new electronics on both receiving and emitting sides; HD radio for limited range and slow rollout of content. Broadcasting HD channels is also said to diminish the quality and reach of the regular terrestrial signal on which it travels, and satellite radio also claims CD quality sound now, which is one of HD radio’s strongest marketing angles.

At this point it appears FCC faces the choice of either forcing market compatibility between HD and satellite or waiting to see how consumers react. In such a highly regulated market as radio, it’s not a question of free-market purity but which set of alterations to the market are imposed.

Already in its merger approval, FCC agreed to require XM Sirius not to engineer, or ask original equipment manufacturers to engineer, devices incompatible with HD radio service. And regardless of whether FCC orders satellite radio customers to subsidize HD radio, new innovations are already waiting in the wings with the potential to topple the market once again.

George A. Pieler ([email protected]) is senior fellow with the Institute for Policy Innovation. Jens F. Laurson ([email protected]) is editor-in-chief of the International Affairs Forum.