MUSIC|MEDIA|DESIGN

It’s hard to imagine a worse disaster for the media world than the proposed XM/Sirius merger. In spite of the hoopla, assurances, and analysis, on every level, this deal stinks by definition. While we firmly reject “zero-sum” economic models, we recognize real benefits in competition. There’s plenty of pie to go around, as long as the pie keeps growing. Competition and risk drive innovation, which in turn enables growth. Lack of competition results in market stagnation. Stagnant markets not only don’t grow, but evaporate! Take a closer look at how this merger will affect the media market.

Consumers will be hit first, if not worst, by this change. First and foremost, subscription prices will be disconnected from a real market. After you’ve invested in special hardware to listen, especially in-dash systems, you are more likely to accept a non-stop stream of small increases over time. Like health care costs, the lack of direct competition and the false appearance of choice (does DBS really compete with free radio?) mean there will be no disincentive for regular price increases.

Direct Broadcast Satellite systems are enormous technological undertakings, requiring enormous capital outlays. Since the turn of the century, XM and Sirius have continuously pushed the technology, increasing channels and quality, while making subscriptions affordable. As a result of their competition, XM has developed technology superior to their sole competitor, Sirius. Meanwhile Sirius focused on new content models, developing programming that differs from conventional radio, alongside more open talk formats, like Howard Stern’s shows, which drove subscriptions. While a merger will certainly reduce infrastructure costs, and improve Sirius’ technology and XM’s programming, the incentive to innovate in either arena will largely disappear. Today both companies deliver superior programming compared to most terrestrial broadcasts, by any measure, because they must out-do each other in the race for subscribers in a mutually exclusive market. After a merger the competition returns to earth. DBS will have to be better than broadcast radio and cable/web based “music choice” channels and home made podcasts, but the strongest competitor for each company will vanish overnight. So much for innovative programming.

Investors of both companies are also losers. While competition meant significant risk for all shareholders, it guaranteed significant reward for those of at least one company. In the worst case, the weaker broadcaster might collapse entirely, but with good management and innovation it shouldn’t be hard (much less impossible) for them to survive on less than half of a market much larger than todays. The nearly inevitable outcome of their current battle is more receivers and subscription for both, the only question is who gets more. Competition is harder than riding the gravy train for sure, but it grows the train and creates more gravy. Here’s what we know for sure: Given that there are THREE major TV networks, a few more major radio networks, dozens of cable system operators, hundreds of cable networks and literally thousands of individual broadcasters in the US alone, there are more than enough subscribers for two satellite radio systems.

It appears the management of both companies are colluding to drive down the cost of programming. The status quo has given B list celebs and radio personalities enormous raises, relative to their previous earnings on terrestrial networks. Launching and maintaining a system of satellites, not to mention creating, marketing and supporting receivers and constantly developing software is not an inexpensive proposition. The merger’s immediate effect on that investment is to severely discount one of the two company’s ground-side technology (which amortized over time becomes a long term drag on profits). There are some savings in administration, and some potential savings in consolidating facilities. But the biggest savings of all are to be found when it’s time to negotiate talent contracts and deals. Given the state of terrestrial broadcasting and podcasting, for the real stars, DBS has suddenly become a one horse town. The same is true in music: Satellite already has a better deal than webcasters, but if their music channels become star-making vehicles as radio once was, expect that deal to improve.

This deal has no winners, but it’s not really about that. It’s an early venture in “dataculture”, and like early agriculture, there are some bugs to work out of the model. These competitors have recognized the facts presented here, and determined that while the rewards accrue slowly but steadily, risk is a constant. XM and Sirius have decided that since upside growth is largely fixed (audience can never exceed population) they are better off sharing the rewards, than driving up the cost of goods through competitive pressures and adding to their risk. This merger is all about eliminating the possibility of losing at an opportune moment in time (before the next round of talent bidding and technology upgrades begin).

So what’s the problem? First, one of these companies stands to “win” in today’s market, and in the process define the norms for both company’s future survival. Merging eliminates the rewards for the winners entirely, while guaranteeing the “losers” investment is no longer at risk (removing all possibility of rebound or turnarounds that happen all the time in every market). Similarly consumer choice will be eliminated, putting it entirely on government regulators to protect their existing investment in hardware, and subscription decisions they’ve already made. Finally artists and creative talent suffer severely when there is no competition. Entertainment monopolies are among the most difficult to police and prosecute once they get rolling, and their effect on the market has historically never been positive. This deal really smells bad for everyone other than the executives and big-time investors who are using it to hedge past bad bets.

Dave Davis
Media Designer . Sound Images