XM, Sirius Satellite Radio Merge


WASHINGTON (AP) - When the Federal Communications Commission auctioned off two exclusive licenses to create the satellite radio industry 10 years ago, it did not mince words on whether the competing providers could merge.

The agency said that one licensee will "not be permitted to acquire control" of the other. The clause was inserted to ensure "sufficient continuing competition" in the new business, it said.

But when dealing with the FCC, one should never say never.

"The FCC can undo anything it does," said Andrew Schwartzman, president and CEO of the Media Access Project, a public interest law firm in Washington. "However, when you change course, you need a good reason to do it."

On Monday, Washington D.C.-based XM Satellite Radio Inc. and New York City-based Sirius Satellite Radio Inc. announced a $13 billion merger, not including debt.

The companies will have to gain approval from the Justice Department as well as the FCC. Justice typically goes first in satellite mergers. If it blocks the deal, it's game over. But Schwartzman said that is unlikely to happen.

"My guess is this Justice Department will be willing to accept any plausible argument that is presented to it," he said. "The FCC is a much tougher case."

The Justice Department looks at how mergers affect competition. The companies will argue that since the industry was created in 1997, times have changed, and so has the market. It's no longer radio, it's "audio entertainment," which includes terrestrial radio, digital "high-definition" radio that offers better sound and more stations, Internet stations and even Apple iPods.

The FCC's review is different. The airwaves are owned by the public. Therefore the law requires that any transfers of control of licenses be done only if it serves the "public interest, convenience and necessity."

The exact meaning of those words has been debated since they first appeared in the Radio Act of 1927 and later in the Communications Act of 1934.

The companies' argument to the FCC, previewed Monday, will be that a combined satellite provider will offer a wider range of programming choices for listeners.

As for the ban on combining two licensees, if the companies can convince the Justice Department that there is competition from the nonsatellite radio market, it will help their case with the FCC.

"If they do that, I don't see how it's a problem for the FCC to say, 'We no longer need this rule,"' said Blair Levin, a telecommunications analyst with Stifel Nicolaus and the agency's former chief of staff under former FCC Chairman Reed Hundt.

The FCC also considers financial viability when deciding on license transfers. For two companies to be prevented from combining and then go out of business, for example, would not be deemed in the public interest.

Sirius and XM are not using that reasoning for the merger, but to date, they have built up considerable debt, have yet to turn a profit and watched their stocks decline more than 40 percent last year.

Levin doubts the companies would use that argument because they are not in danger of failing.

Public-interest groups so far are skeptical, says Schwartzman, but they have not come out against the merger. They will argue in favor of some safeguards on diversity and competition.

How these would work is yet to be determined, but it may include a requirement that the combined company provide space on its system for noncommercial, public interest programming.

The satellite radio industry was not saddled with public-interest obligations when it was created because it was a brand-new business. But that may change.

"If you can revisit the question about whether there should be one satellite radio service rather than two you can certainly revisit the question of whether there should be public service obligations," Schwartzman said.