[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
COMPETITION AND THE FUTURE OF
DIGITAL MUSIC
=======================================================================
HEARING
BEFORE THE
ANTITRUST TASK FORCE
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
FEBRUARY 28, 2007
__________
Serial No. 110-3
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
______
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COMMITTEE ON THE JUDICIARY
JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California LAMAR SMITH, Texas
RICK BOUCHER, Virginia F. JAMES SENSENBRENNER, Jr.,
JERROLD NADLER, New York Wisconsin
ROBERT C. SCOTT, Virginia HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina ELTON GALLEGLY, California
ZOE LOFGREN, California BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas STEVE CHABOT, Ohio
MAXINE WATERS, California DANIEL E. LUNGREN, California
MARTIN T. MEEHAN, Massachusetts CHRIS CANNON, Utah
WILLIAM D. DELAHUNT, Massachusetts RIC KELLER, Florida
ROBERT WEXLER, Florida DARRELL ISSA, California
LINDA T. SANCHEZ, California MIKE PENCE, Indiana
STEVE COHEN, Tennessee J. RANDY FORBES, Virginia
HANK JOHNSON, Georgia STEVE KING, Iowa
LUIS V. GUTIERREZ, Illinois TOM FEENEY, Florida
BRAD SHERMAN, California TRENT FRANKS, Arizona
ANTHONY D. WEINER, New York LOUIE GOHMERT, Texas
ADAM B. SCHIFF, California JIM JORDAN, Ohio
ARTUR DAVIS, Alabama
DEBBIE WASSERMAN SCHULTZ, Florida
KEITH ELLISON, Minnesota
[Vacant]
Perry Apelbaum, Staff Director-Chief Counsel
Sean McLaughlin, Deputy Chief Minority Counsel/Staff Director
------
Antitrust Task Force
JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California STEVE CHABOT, Ohio
RICK BOUCHER, Virginia RIC KELLER, Florida
ZOE LOFGREN, California F. JAMES SENSENBRENNER, Jr.,
SHEILA JACKSON LEE, Texas Wisconsin
MAXINE WATERS, California BOB GOODLATTE, Virginia
STEVE COHEN, Tennessee CHRIS CANNON, Utah
ANTHONY D. WEINER, New York DARRELL ISSA, California
ARTUR DAVIS, Alabama J. RANDY FORBES, Virginia
DEBBIE WASSERMAN SCHULTZ, Florida STEVE KING, Iowa
LAMAR SMITH, Texas, Ex Officio
Perry Apelbaum, Staff Director-Chief Counsel
Sean McLaughlin, Deputy Chief Minority Counsel/Staff Director
C O N T E N T S
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FEBRUARY 28, 2007
OPENING STATEMENT
Page
The Honorable John Conyers, Jr., a Representative in Congress
from the State of Michigan, Chairman, Committee on the
Judiciary, and Chairman, Antitrust Task Force.................. 1
The Honorable Lamar Smith, a Representative in Congress from the
State of Texas, and Member, Antitrust Task Force............... 2
WITNESSES
Mr. David K. Rehr, President and CEO, National Association of
Broadcasters
Oral Testimony................................................. 21
Prepared Statement............................................. 23
Ms. Gigi Sohn, President and Founder, Public Knowledge
Oral Testimony................................................. 42
Prepared Statement............................................. 44
Mr. Mark Cooper, Director of Research, Consumer Federation of
America
Oral Testimony................................................. 56
Prepared Statement............................................. 58
Mr. Charles E. Biggio, Wison, Sonsini, Goodrich and Rosati
Oral Testimony................................................. 69
Prepared Statement............................................. 72
Mr. Mel Karmazin, CEO, Sirius Satellite Radio
Oral Testimony................................................. 83
Prepared Statement............................................. 85
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Prepared Statement of the Honorable Sheila Jackson Lee, a
Representative in Congress from the State of Texas, and Member,
Antitrust Task Force........................................... 4
APPENDIX
Material Submitted for the Hearing Record
Response to post-hearing questions submitted by the Honorable
John Conyers, Jr. to Mel Karmazin, CEO, Sirius Satellite Radio. 121
COMPETITION AND THE FUTURE OF
DIGITAL MUSIC
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WEDNESDAY, FEBRUARY 28, 2007
House of Representatives,
Committee on the Judiciary,
Washington, DC.
The Task Force met, pursuant to notice, at 3:05 p.m., in
Room 2141, Rayburn House Office Building, the Honorable John
Conyers, Jr. (Chairman of the Task Force) presiding.
Mr. Conyers. Good afternoon.
The first hearing of the Antitrust Task Force for the 110th
Congress will come to order.
I welcome all of our Members, especially our Ranking
Member, Steve Chabot of Ohio, who will be joining us
momentarily.
The very first hearing of our Antitrust Task Force involves
a discussion of the issue of competition in digital media as
exemplified by the proposed merger of Sirius and XM Radio.
We come to this hearing with an open mind. But we recognize
that the companies have the obligation to convince the
Congress, the regulators and, most importantly, the American
people, that this combination will improve the competitive
playing field and benefit consumers.
And so, here are the concerns I would like to lay on the
table.
The critical issue in this hearing to me is whether the
relevant market is all forms of digital music and retail music
and radio, or simply satellite radio. Proponents of the merger
would note that the retail music industry exceeds $12 million
in annual revenue, includes more than 230 million people who
listen to ordinary radio, and 50 million people who listen to
Internet radio, more than 100 million iPods are going around
the country, but yet there are 14 million satellite radio
subscribers.
If we are to define the market as broadly as merger
supporters advocate, what sort of precedent are we setting for
other businesses?
Now, several commentators have suggested that the reason
this deal is being pushed is that the present Administration's
appointees will be able to give their approval before the next
election.
Excuse me for being so candid about this consideration. And
from at least one perspective, this merger can be said to turn
a duopoly into a monopoly circumstance.
And, finally, my concern is about the potential for non-
interoperability of competing technologies. How are we going to
ever get the consumers who have already purchased equipment for
either XM or Sirius to be able to use the equipment in a post-
merger world? These consumers could be left high and dry and
there could be complications that we hope to examine about how
this could be made technologically smooth.
I look forward to a full and frank discussion with our
distinguished witnesses and urge that we all be as concerned as
we can for the public interest issue that overlies this
hearing.
Our witnesses are David Rehr, the president and CEO of the
National Association of Broadcasters. Our next witness, Ms.
Gigi Sohn, president and founder of Public Knowledge, a
nonprofit public interest organization that focuses on issues
involving intellectual property as it applies to the
communications sector. Our third witness is Mark Cooper,
director of research at the Consumer Federation of America, who
has testified on numerous occasions about communications and
media matters. Our fourth witness is Mr. Charles Biggio,
partner of a very prominent firm and who has himself served as
Deputy Assistant Attorney General in the Antitrust Division in
earlier Administration. And finally, Mr. Mel Karmazin, CEO of
Sirius Satellite Radio, previously president of Viacom.
And since our Ranking minority Member has been unavoidably
detained, I now recognize the full Committee Ranking Member,
Mr. Lamar Smith of Texas.
Mr. Smith. Thank you, Mr. Chairman.
Let me just augment what you have said. The Ranking Member
of the Task Force, the gentleman from Ohio, Mr. Chabot, has
been detained at the House Administration Committee where he is
testifying on behalf of the Small Business Committee, that he
is also Ranking Member of. So that is the reason for his
absence.
And in his absence, I too want to thank you for convening
this first hearing of the Antitrust Task Force.
Vigorous, unimpeded competition sustains our economy and
keeps it strong. It leads to innovative products that better
our lives and keep prices low. The Judiciary Committee has a
long history of oversight to ensure that American markets
retain healthy competition.
This hearing gives us the opportunity to examine one of the
newest technologies emerging in our economy. In the last
decade, the options for receiving music, sports, news and other
programming have increased dramatically. Consumers also have
the choice of two satellite radio companies, XM and Sirius.
These companies provide hundreds of channels of unique
programming options to millions of customers nationwide.
Listeners have access to numerous choices in music, news,
sports and talk programming that would have been unimaginable
even 10 years ago. Often these programming options come without
commercial interruption and without the content restrictions
that exist on terrestrial radio.
Now those two companies have announced that they want to
merge. They argue that a combined company would allow them to
compete more effectively against broadcast radio, the Internet
and a number of emerging technologies. They argue that
efficiencies in the merger will allow them to provide even more
choice to consumers at a competitive choice.
Critics of the merger contend that this will reduce the
number of satellite radio offerings from two to one and that
approval of the merger would amount to a Government-sanctioned
monopoly. They further argue that this merger would allow the
combined XM-Sirius to raise subscription prices to consumers
without providing any new or innovative services for those
higher prices.
Mr. Chairman, it is important we not prejudge the proposed
merger. We are at the beginning of a very long process. Both
the Federal Communications Commission and the Department of
Justice will review this proposal. I trust that both the FCC
and the DOJ will do a thorough job of reviewing the evidence
and will also take into consideration the oversight findings of
this Task Force.
With that in mind, Mr. Chairman, I too look forward to
listening to our witnesses and I yield back the balance of my
time.
Mr. Conyers. Thank you very much, Mr. Smith, for stepping
in in such a timely fashion.
We will accept all other opening statements to be inserted
in the record, without objection.
[The prepared statement of Ms. Jackson Lee follows:]
Prepared Statement of the Honorable Sheila Jackson Lee, a
Representative in Congress from the State of Texas, and Member,
Antitrust Task Force
Mr. Conyers.T1 Mr. David Rehr, president of NAB, you are on
for 5 minutes.
TESTIMONY OF DAVID REHR, PRESIDENT AND CEO,
NATIONAL ASSOCIATION OF BROADCASTERS
Mr. Rehr. Thank you, Mr. Chairman. Good afternoon,
everyone, and thank you for the opportunity for me to be here
today.
I want to commend you, Mr. Chairman, Ranking Member Chabot
and Ranking Member Smith on the Judiciary Committee and the
Members of the Antitrust Task Force for exploring the issues
surrounding what is in effect a Government-sanctioned monopoly.
In my time today, I would like to make five points.
Number one, the national satellite radio market is
currently a two-company duopoly trying to become a Government-
sanctioned monopoly.
Number two, such a monopoly would violate FCC rules and
precedent, congressional policy and antitrust principles.
Number three, this Government-sanctioned monopoly would
undermine audio content competition, not enhance it.
Number four, even worse, two entities that have a pattern
and practice of violating the terms of their FCC licenses
cannot be trusted with monopoly power.
Five, finally, by their own admission, both XM and Sirius
are not failing companies and should not receive a Government
bailout.
First, the national satellite radio market is currently a
two-company duopoly trying to become a Government-sanctioned
monopoly. There are two companies in the market for nationwide
multi-channel mobile audio programming services. They are
asking to become one company.
They want the power to set subscription rates without
constraint from a competing service. They want the power to
eliminate the need to compete with each other to acquire
programming and talent. They want the power to demand exclusive
deals and the ability to cross-subsidize to unfairly compete
against local radio broadcasters. And the fact is, this
monopoly would reduce innovation for services and equipment for
consumers since there will be no competition in the defined
market.
Two, such a monopoly would violate FCC rules and precedent,
congressional policy and antitrust principles. The FCC
specifically refused to sanction a monopoly when it establish a
national radio service in 1997, saying licensing at least two
providers will help assure that subscription rates are
competitive as well as provide for diversity of programming
voices.
Ironically, the argument for greater competition came from
Sirius, then called CD Radio. They argued that multiple
providers were necessary to ``assure intra-service
competition.'' They said more players would have ``compelling
market-based incentives to differentiate themselves from
competitors.''
Perhaps most telling, Sirius explicitly stated that no
satellite provider should never be permitted to combine with
another provider because ``such a development would have
serious anticompetitive repercussions.''
In fact, in 1997, at the urgings of the parties, the FCC
explicitly prohibited any such future merger, stating one
licensee would not be permitted to acquire control of the
other. The only parallel circumstance to this instance is when
the FCC refused in 2002 to permit a merger of the only two
nationwide satellite television companies, EchoStar and
DirecTV. The commission rejected this merger by a unanimous
vote.
The commission found that the antitrust laws are hostile to
proposed mergers that would have these impacts on competitive
structures because such mergers are likely to increase the
incentive and ability to engage in anticompetitive conduct.
Moving from a duopoly to a monopoly, as is the case here,
would also be inconsistent with congressional policy favoring
competition over monopoly as expressed in the 1996
Telecommunications Act and with long-standing enforcement of
Federal antitrust laws.
Three, this Government-sanctioned monopoly would undermine
audio content competition, not enhance it. A satellite radio
monopolist could undermine competition by using its national
market power to force content providers, like sports
programmers, to deal only with them. It could also use cross-
subsidies to engage in anticompetitive behavior against local
radio broadcasters.
Four, two entities that have a pattern and practice of
violating their FCC licenses cannot be trusted with monopoly
power. Both companies certified 10 years ago that they would
comply with an FCC rule to develop a device that works with
both services. Still today, 10 years later, no consumer device
is available.
Both companies routinely violated FCC Part 15 rules, which
govern the production and distribution of receiver equipment.
Both companies routinely and regularly violate FCC technical
rules. XM operated more than 142 repeaters at unauthorized
locations.
Mr. Conyers. Mr. Rehr, you are the first witness to go over
time.
Mr. Rehr. I am sorry.
Let me conclude by saying, point five: Some have suggested
the merger is necessary for the survival of these companies,
but by their own admission, this is not true.
Thank you, Mr. Chairman. And thank you.
[The prepared statement of Mr. Rehr follows:]
Prepared Statement of David K. Rehr
Mr. Conyers. Thank you very much.
We welcome now Ms. Sohn.
TESTIMONY OF GIGI SOHN, PRESIDENT AND FOUNDER, PUBLIC KNOWLEDGE
Ms. Sohn. Thank you, Chairman Conyers, Ranking Member
Chabot, Ranking Member Smith and other Members of the Task
Force for inviting me to discuss the merger of XM and Sirius
Satellite Radio.
The proposed merger presents a dilemma for public interest
advocates. On one hand, the only two providers of satellite
radio service, which have vigorously competed for the past 5
years, are seeking to consolidate, raising questions about the
impact on prices and choice for consumers. On the other hand,
this vigorous competition has led to a spending war for new and
better programming, leaving both competitors weakened in a
world where Internet radio, broadcast and HD radio, cable radio
and other multi-channel music, entertainment and information
services have become increasingly popular.
Regardless of the financial woes of the companies and any
change in the market structure, the salient question is this:
will consumers be better off.
I believe that if the merger passes antitrust scrutiny,
consumers will be better off if the merger is approved subject
to conditions that protect consumer choice, promote diverse
programming and keep prices in check.
The antitrust questions raised here are very complex and
ultimately depend on information to which public knowledge does
not have access. For instance, the foremost question is how
narrowly or broadly defined the relevant market? While I
believe the market should be defined more widely to include a
wide variety of radio, wireless, mobile and multi-channel music
services, it is unclear whether consumers would turn to those
services if satellite radio prices were raised.
Anecdotal evidence suggests that there is nothing shortage
of substitutes. On the other hand, we cannot ignore the fact
that there are real differences between satellite radio and its
competitors. Consumer data and other evidence would be helpful
in determining whether these competitors are indeed substitutes
and would constrain prices.
Should the merger survive antitrust scrutiny however, I
believe that the public interest would be served by permitting
the merger subject to conditions that promote diversity,
preserve consumer choice, and keep prices in check. I have
reached this conclusion for several reasons.
First, consistent losses and flattening subscribership at
both companies make it less likely that they will take a chance
in alternative programming and programming that meets the needs
of underserved communities. A combined subscriber base would
allow the new company to distribute the high fixed cost of a
satellite system across a larger consumer base, reducing the
cost for the subscriber and enabling new programming and/or
lower prices.
Second, consumers would gain access to channels that they
could not receive unless they subscribed to both services.
Third, eliminating duplicative channels will create more
capacity for new and diverse programming.
Still, the magnitude of this merger warrants strong
protections. Thus, it should only be approved subject to three
conditions.
First, the new company should make available to its
consumers a la cart and tier programming choices.
Second, the new company should ensure program diversity by
making available 5 percent of its capacity for noncommercial,
educational, informational programming. This would resemble
section 335 of the Communications Act, which requires DBS
providers to reserve 4 percent to 7 percent of their channel
capacities for such uses.
Third, the new company should be prohibited from raising
prices for 3 years after the merger is approved.
I would like to conclude by raising two other concerns.
First, public knowledge strongly opposes any merger
condition involving limitations on the ability of the consumers
to record these satellite radio services. Such a condition
would be tantamount to repealing the Audio Home Recording Act
which specifically protects a consumer's ability to record
digital music.
Second, we also strongly oppose any merger condition that
would limit satellite radio from providing local programming.
Broadcasters' opposition to this merger is incredibly
hypocritical given their own current regulator efforts to
consolidate and their desire to prevent satellite services
providing local content is anticompetitive in its own right.
Even assuming that broadcasters take seriously their
statutory duty to serve local communities with programming that
serves their needs, there is no reason why in 2007 any media
service should have a Government-granted monopoly over local
programming.
Instead, Congress and the FCC should consider permitting
satellite radio to provide more, not less, local programming.
To finish, I just want to add that it is curious that for
an industry that claims that it wants a ``level playing
field,'' it seeks not only to restrict satellite radio and its
programming but also refers to efforts to require them to pay
performance royalties to artists as a tax. And this may be the
only time that I agree with the recording industry, and thanks
to the broadcasters we do, but I think that is an outrage and
Congress should look at it.
I want to thank the Task Force again for inviting me to
testify. I look forward to your questions.
[The prepared statement of Ms. Sohn follows:]
Prepared Statement of Gigi B. Sohn
Mr. Conyers. Thank you so much.
Mr. Cooper, welcome.
TESTIMONY OF MARK COOPER, DIRECTOR OF RESEARCH, CONSUMER
FEDERATION OF AMERICA
Mr. Cooper. Thank you, Mr. Chairman, Members of the Task
Force. I appreciate the opportunity to testify on the proposed
merger between XM and Sirius.
Ms. Sohn wants to regulate the resulting monopoly. We
haven't yet given up on competition. The merger of the only two
satellite subscription radio companies should raise a red flag
for both antitrust officials and communication regulators whose
job it is to promote competition and consumer choice in the
marketplace.
Not only are XM and Sirius prohibited from merging as
condition of their licenses, the growth of satellite
subscription at very substantial monthly charges and consumer
equipment costs over the past few years demonstrate that this
is a service which in fact can be distinguished quite clearly
from other things that are out there.
We believe companies who seek to merge so soon after they
came into existence after they promised not to merge, after
they demonstrated that subscription can gain a significant
audience, carry an enormous burden to show that regulators
should abandon the normal rules of antitrust oversight to allow
such a merger as this, a merger to monopoly.
We remain unconvinced by the excuses we have heard to
justify this merger. The product in geographic characteristics
of satellite radio are easily identifiable. Satellite is
national, mobile, and programmed. Those are the essential
characteristics. You have added two more today, Mr. Chairman,
or Ranking Minority Member. There are generally advertising-
free and content-unrestricted.
They have put products in the world that are require
consumer purchases of large bundles of over 100 channels. The
alternatives that the companies suggest or substitute do not
possess these characteristics. This is a unique set of
characteristics and further entry into this market is limited
by the need to have a license to broadcast over a spectrum that
can get the job done. There are only two such licenses.
Consumer switching costs are substantial. This is a classic
case of a distinct product with competitive problems. Two is
not really enough for good competition. Remember, there is an
expression in economics: Four is few, and six is many. We are
talking about two and three in most cases these days.
The track record of inter-modal competition disciplining
competitive use is poor at best. Bank shot competition, where
people compete indirectly with badly matched products, has not
disciplined pricing abuse. I submit that cable TV is a perfect
example where satellite and over-the-air have failed to protect
the consumer from abuse. Head-to-head competition is what gets
the job done. Inter-modal competition is a very, very poor
second best.
The suggestion that free over-the-air radio will discipline
price increases is ludicrous. They raised prices a few years
ago by 30 percent. Free over-the-air didn't do it when they
were competing head-to-head. What makes you think it is going
to discipline prices when they aren't even competing head-to-
head with well-matched products?
Perhaps the most outlandish of all the claims being
circulated by the merging parties is the argument that
consumers will be better off with a benevolent monopolist than
vigorous competitors. We reject that ultra-short-term view. In
that view, competition is defined as wasteful since redundant
facilities lie unutilized. Monopolists' claims to serve
everyone while using fewer resources and promising not to abuse
the resulting market power.
Without the stick of competition, however, the costs
savings simply will not be passed through to consumers and
innovation will slow rather than speed up. It is competition
that is the driver of innovation in our economy; competition is
the best form of consumer protection. And head-to-head
competition is the best form of competition.
Offers of conditions on this merger really, we don't give
much credence to. The recent track record of conditions on
mergers has been abysmal and the satellite radio industry has
already demonstrated that the promises and commitments it makes
to interoperability, to noninterference, to nonuse of
terrestrial repeaters, all shows that they will be difficult to
oversee if we adopt that approach.
So we are not talking conditions anymore. We want to give
competition a chance. If the authorities change their mind, we
will have plenty time to figure out what conditions should be
imposed.
Finally, a satellite radio merger to monopoly is to really
about an avalanche of mergers. If the antitrust authorities in
Federal communication oversight adopts such a loose definition
of products and markets to allow a merger to monopoly on the
basis of inter-modal competition, then a tsunami of mergers
will ripple through the digital products space at the worst
possible moment. From our point of view, there is a humongous
hurdle that the merging parties have to overcome and they
haven't even begun to put facts on the table that would lead us
to believe there is any way to make this a socially responsible
merger.
Thank you.
[The prepared statement of Mr. Cooper follows:]
Prepared Statement of Mark N. Cooper
Mr. Conyers. Thank you, Mr. Cooper.
Mr. Biggio, we welcome you for your testimony at this
point.
TESTIMONY OF CHARLES BIGGIO, WISON, SONSINI,
GOODRICH AND ROSATI
Mr. Biggio. Thank you. I would like to thank the Chairman,
Ranking Member Chabot, Ranking Member Smith, for the
opportunity to testify on the antitrust aspects of the merger
between XM and Sirius.
This merger obviously raises important policy and law
enforcement considerations, but whether the combination of XM
and Sirius is a two-to-one merger to monopoly or a merger in a
much larger market is a question of fact, and right now we
don't have the facts necessary to determine the legality of the
merger.
The facts will come out. However, merger review is
essentially a law enforcement exercise and the enforcement
agencies, the Antitrust Division in particular, along with the
Federal Communications Commission, are best equipped to find
the relevant facts and my recommendation is that no firm
conclusions be formed about this merger until the agencies have
completed their review.
It is important to note that a merger need not create a
monopoly in order to violate section 7 of the Clayton Act. At
the same time, a merger that results in very high market shares
and high market concentration does not automatically violate
section 7.
Mergers in concentrated industries can be lawful if the
market conditions are such that the merger would in fact have
no anticompetitive effect. So the XM-Sirius merger may violate
section 7 even if it turns out not to be a two-to-one merger to
monopoly. And at the same time, it may pose no competitive
threat, even if the market ultimately is defined as highly
concentrated.
The evaluation of this merger will start with an evaluation
of the nature of competition between XM and Sirius. They have
been vigorous competitors and it is fair to ask the question of
whether eliminating the competition will lead to higher prices
or lower quality. In answering this question, the Antitrust
Division and the Federal Communications Commission will look at
how competition between the two services has affected price and
quality and then ask whether the other alternatives advanced by
the parties are likely to produce the same competitive
outcomes.
The key question is whether the competition between XM and
Sirius is the factor determining the subscription price for the
two services and the quality of the product being offered, or
whether some or all the other alternatives will provide a
comparable competitive check.
Now, ordinarily markets are defined narrowly to include
only those products that have a meaningful impact on price.
Mergers between close competitors or next-best substitutes are
usually problematic because other products may not be
sufficiently viable substitutes to impose a significant price
constraint. Once the close substitutes merge, there may be
substantial room for price increases before the pricing
constraint offered by a more remote substitute kicks in.
The key aspect of merger analysis is identifying the best
consumer to test the significance of possible competitive
substitutes. Markets are defined by the marginal consumer.
Thus, even if many consumers would not substitute away from
satellite radio to some other product in the face of a price
increase, the market could still be defined broadly to include
other products if enough marginal satellite radio customers
would switch. And the key point is that the marginal customers
need not predominant in order for the market to be defined
broadly.
We all have our own individual views of what we would do or
wouldn't do if prices for satellite radio would go up after
this deal. It is a classic problem in merger review, to
substitute anecdotal and subjective opinion for hard evidence.
The real answer lies in a rigorous economic evaluation of
whether enough consumers would switch in the face of an effort
to raise prices post-merger. It is a highly technical question
that the parties and the Antitrust Division and the FCC can
work out during the investigation.
I would also like to comment quickly on some of the
possible benefits of the merger that Mr. Karmazin has outlined
in his statement. I agree that these benefits, if substantiated
and shown to be possible only through the merger, would weigh
heavily in favor of the deal. However, in making their merger
benefits case, I think the parties would have to answer some
pretty tough questions.
First, Mr. Karmazin contends the merger will increase
choice, but the parties will have to explain how choice is
increased when the merger will eliminate one of the key choices
now available. The parties will have to explain how competition
in some important way is an impediment of choice, because
ordinarily competition maximizes choice.
In particular, the parties argue that the merger will allow
subscribers to get XM and Sirius content with one subscription,
but they will have to explain why the differentiation between
XM and Sirius is a bad thing that can be fixed only by the
merger. Ordinary, the kind of exclusive deal that makes Howard
Stern available only on Sirius is justified because the
exclusives are the best way for a competitor to add
subscribers. But here the argument seems to be that the
marketing strategy requiring exclusive content is actually
impeding subscriber acquisition.
If so, the parties will have to explain why the merger and
not the elimination of exclusive programming is the only way to
achieve this benefit. And the parties will have to explain why
having a single firm bundle content into differentially priced
tiers is better than having competing firms with differentiated
content.
The competitive significance of the consumer being able to
get the pull range of content from a single firm cannot be
evaluated without also understanding how that single firm will
bundle and price that content after the elimination of a
competitive.
Ultimately, XM and Sirius will have to articulate merger
benefits that the two firms could not have achieved themselves
as independent firms competing in the marketplace. While there
appears to be plausible efficiencies that will be generated by
the merger, some of the claimed benefits will need to be
further evaluated.
The best way to get the answers to these questions will be
through the merger review process conducted by the Department
of Justice and the Federal Communication Commission, by looking
at the real world factors that go into the marginal consumer's
calculation of what he or she will pay for satellite radio. And
the evidence will come from the parties' documents and an
evaluation of how and why consumers choose to spend their money
on satellite radio.
Thank you very much. I would be glad to take any questions.
[The prepared statement of Mr. Biggio follows:]
Prepared Statement of Charles E. Biggio
Mr. Conyers. Thank you so much.
Mr. Karmazin, it is all yours now. You are the final
witness, and you have been referred to more than once here.
TESTIMONY OF MEL KARMAZIN, CEO,
SIRIUS SATELLITE RADIO
Mr. Karmazin. Well, thank you very much. And good
afternoon.
Thank you very much, Chairman Conyers, Congressman Smith,
Congressman Chabot and the Members of the Antitrust Task Force,
for this invitation to talk to you about the pending merger
between XM and Sirius satellite radio.
I am speaking today on behalf of both companies. With me
here today is Gary Parsons, chairman of XM.
With your permission, I think what I would like to do,
because I think it would be more meaningful, is to abandon my
opening comments, which I will be happy to make them available
to you, and spend a little bit of time talking about this
merger and what we think it means for consumers and the public.
So far, I agree with everything that was said. I think it
is the very early stages of this merger. I can tell you that we
look forward to working with Congress, working with the
regulators, and convincing everybody that this merger is in the
best interest of the public.
I think that our obligation is going to be twofold. We will
have an obligation to demonstrate that this merger is not
anticompetitive. I hear that we will probably be working with
the DOJ and I am convinced that we will give them enough
information and they will get their own information to make
that determination.
I can tell you for sure that satellite radio competes with
the 10,000 terrestrial radio stations. We compete with over the
1,000 HD radio stations on the air today. We compete with the
Internet for Internet radio. We compete with all kinds of
services that, interestingly enough, weren't available at the
time when our licenses were given.
So, you know, the idea of comparing where we are from a
technology point of view today and comparing it to where it was
10 or 12 years ago, when statements were made, we think is sort
of not very consumer-friendly because the world has changed.
So number one, we know that both with the Justice
Department and with the FCC, we are going to have to convince
them that this is not anticompetitive. I think even more
important, if there is something more important than that, is
that I believe in order to convince Congress and the regulators
that this deal should be approved, is that we are going to have
to demonstrate that this is in the consumers' best interest,
because if we cannot convince everybody that this is in the
consumers' best interest, then this merger will not be
approved. And I am confident that the members of the FCC, if
they didn't believe it, would not vote for it and we wouldn't
get antitrust approval.
We are absolutely convinced that this merger is in the
consumers' best interest. This merger will give people more
choice than they have before and lower prices and, very
importantly, less confusion. So if you think about the way it
is today without the merger, there are two different radios
that a consumer needs to buy. It would be like buying one for
AM radio and one for FM radio. But it was obviously determined
that a receiver that would get both services would be in the
consumer's best interest.
There is a great deal of confusion in the marketplace
because they are interested, when they buy a car and they go
and buy a General Motors car and that comes with an XM radio
and that XM radio doesn't enable the consumer to pick up the
NFL, that is not very consumer-friendly. And we believe that
this merger will absolutely give the consumer more benefits.
So number one, one of the benefits will be is that no radio
will be obsolete. I heard that mentioned earlier and there was
a concern that the people who have bought an XM radio or they
bought a Sirius Satellite Radio, those radios would be
obsolete. And we can guarantee that is not the case.
We also have said that there would be more choice for
consumers and we believe that by consolidating these companies,
we are going to be able to offer the consumer who wants to be
able to have the NFL and wants to be able to have Major League
Baseball, instead of them buying two radios and paying $25.90 a
month, that they will be able to do it at a cheaper price.
So what we believe will serve the consumer's best interest
would be to give them more choice. We are committed to giving
the consumer more choice. Count on it. Okay?
And if you want to count on it in some other ways other
than us saying it, I am sure that the FCC and the Justice
Department could absolutely keep our feet to the fire on that
kind of commitment.
And, number two, what we are committed to doing is offering
lower prices. We are saying we are not going to raise our price
and we are going to offer the consumer something that they have
not had before.
So, Sirius has never, ever raised its price. We started our
service, the first subscriber paid $12.95. They are currently
paying $12.95. Our vision would be that, because we are
competing with free radio, because $12.95 has only enabled us
to get 10 million subscribers nationally, we are competing with
the 200 million cars that have AM and FM radio, we are
competing with 109 million homes that have four radios in it.
So the idea of raising a price to compete with free is bizarre
and doesn't seem to work.
But you know what? Maybe you are concerned that you don't
want to deal with the economics. I am telling you today that we
are committed, we are committed to not raising prices and
committed to in fact lowering the price. So if the consumer is
going to be able to have more choice, guaranteed no price
increase and be able to have an option--more flexibility for a
lower price--we think that we would meet the standard of
absolutely saying that this merger is in the public interest.
So I look forward to working with the regulators. I look
forward to working with this Committee and I look forward to
working with consumers in making sure that that they see this
advantage as well.
Thank you.
[The prepared statement of Mr. Karmazin follows:]
Prepared Statement of Mel Karmazin
Mr. Chairman,
Good afternoon. Thank you, Chairman Conyers, Ranking Member Smith,
and members of the Anti-Trust Task Force for the invitation to talk
with you about our merger with XM Satellite Radio.
I'm Mel Karmazin, the CEO of Sirius Satellite Radio. Before I came
to Sirius in 2004, I was president of Viacom, and before that,
president of CBS. I've spent just about my entire working life in the
broadcast industry.
I am speaking today on behalf of both companies. With me here today
is Gary Parsons, the chairman of XM. Gary is a veteran of the
communications business, a real leader in the world of satellite radio.
Gary and I are both looking forward to working together to create an
exciting new company.
Gary's leadership and talent are crucial to this merger. He built
XM into the success it is today. I should point out that XM has the
largest digital radio facility of its kind in the country, and is
headquartered right here in Washington.
We firmly believe that this transaction is essential to preserving
and enhancing choice for consumers. A combined company will be able to
compete more effectively in the highly competitive and rapidly evolving
audio entertainment marketplace. Our new enterprise will enhance the
audio industry's future.
I appreciate this opportunity to explain why we believe so strongly
that this merger will benefit American consumers.
This afternoon I would like to focus on the two most important
aspects of this merger:
1. How this merger will lead to increased consumer choice and
lower prices; and
2. How this merger enhances competition in an already highly
competitive market.
CONSUMER CHOICE AND LOWER PRICES
Since the creation of satellite radio in 1997, the consumer has
been at the center of our business plan. Consumer wants and needs have
brought the technology and the industry to where it is today and the
consumer continues to be our number one priority. That simple but
important fact will not change post-merger. The long-term success of
satellite radio rests on growing our subscriber base. As a single
company, we expect to provide current and future subscribers the best
and most diverse audio content available.
A merged company will also give subscribers additional programming
options and pave the way for even more programming. We expect that
consumers will no longer have to subscribe to both services in order to
receive the most popular programming. We want subscribers on both
systems to be able to listen to both the NFL and Major League Baseball.
Both the PGA and NCAA basketball. Both Oprah Winfrey and Martha
Stewart.
Moreover, in the long-term the significantly expanded channel
capacity of our merged company will give consumers access to a greater
range of programming. XM and SIRIUS already broadcast a wide range of
commercial-free music channels, exclusive and non-exclusive sports
coverage, news, talk, and entertainment programming. In the long-term,
our combined company expects to be able to expand diverse programs for
underserved interests. For example, we hope to expand foreign language
and religious programming.
The merger will also result in a combined focus on designing the
best products and innovative services for our subscribers. By combining
our research and development, we will be able to design and introduce
radios and transmission infrastructure that will give satellite radio
subscribers the best experience in audio entertainment. We will be able
to speed the introduction of radios offering content from both of our
services today--something that has been challenging as separate
companies.
We anticipate that together, our radios will be smaller, lighter,
simpler, and more technologically-advanced than what each company has
on the market today. Over time, we will look to combine our satellite
and terrestrial transmission infrastructure to deliver the broadest
range of content and the highest level of service quality. Finally,
we'll use our combined resources to improve upon our nascent non-audio
services, like Backseat Video, real-time traffic and weather, and other
infotainment-style data services. At the same time, we will accelerate
the delivery of innovative services and products.
It is important to realize, however, that our individual radios
will not become obsolete as a result of this combination. Any radios or
other equipment that subscribers currently use will be fully supported
by SIRIUS and XM. When more technologically advanced devices are ready,
subscribers will make the decision to adopt them at a timing of their
choice.
In summary, a merged Sirius and XM will be a boon to consumers.
They will receive additional programming opportunities and choice at
more competitive prices. They will have access to advanced equipment
and services, but they will have the flexibility to adopt technology
when they wish, secure in the knowledge that their current radio will
continue to operate. And satellite audio will continue to be a viable
consumer option in the modern audio entertainment marketplace--a
marketplace that has undergone incredible growth and upheaval since the
birth of satellite radio.
ENHANCED COMPETITION IN THE AUDIO ENTERTAINMENT INDUSTRY
We operate in an intensely competitive environment and that
competition will continue to intensify post-merger--and continue to
provide an inherent check on programming as well as on pricing. Our
long-term success rests on growing our subscriber base, and we simply
will not attract new subscribers if we are not meeting consumer
expectations on price and programming.
The dynamic growth in audio technology has given consumers an
impressive array of choice--a significantly broader range of audio
entertainment options from which to choose than was the case when we
were first granted our licenses a decade ago in 1997. Back in 1997, an
eon ago in the world of technology, audio entertainment was dominated
by analog AM and FM radio. Digital broadcast radio did not yet exist.
The Internet was still in its infancy; with multi-channel digital
broadcast radio and broadband streaming Internet audio and radio still
on the horizon.
Today's options paint a stark contrast to those in 1997. Of course,
satellite radio still competes vigorously with free over-the-air AM-FM
radio--a service that exists in virtually every home and car in the
country. That competition is becoming fiercer, as radio moves to
digital broadcasts in response to satellite's appeal. But we also face
growing competition for our audience from emerging audio sources,
including multi-channel digital broadcast radio, wireless broadband and
mobile phone streaming.
But that's just the beginning; an even wider range of new services
are becoming mainstream. Wireless carriers are exploring new data and
voice services as they deploy 3G and 4G networks. Multi-channel HD
radio is spurring renewed growth in the terrestrial radio marketplace,
with additional free programming choice. Services such as WiMAX and
Media Flow are emerging as high-bandwidth, long-range content, and data
transmission technologies.
It has only been 10 years since satellite radio was licensed. Could
we have predicted 10 years ago that the audio entertainment marketplace
would look the way it does now? One reason for all the new
technological advancements is that competition in the audio
entertainment market is robust. We are seeing new entrants on a regular
basis as the market continues to meet the needs of the consumer. The
reality is that consumers can choose from a wide range of different
services and technologies that offer audio entertainment.
XM and Sirius are relatively small players in that highly
competitive and rapidly evolving audio entertainment marketplace.
Welterweights in an arena of heavyweights. There are 237 million
vehicles in the United States, each of which offers a built-in AM and
FM radio. There are another 230 million PCs in use that can access
programming online, and there are 223 million weekly AM and FM radio
listeners in the United States, and millions of cell phones for music
listening, to programmed entertainment, music news, talk and
information. Contrast that to Sirius and XM. The companies currently
have about 14 million subscribers. Satellite radio is a David operating
in a land of Goliaths and is hardly a threat to controlling the audio
entertainment market.
But competition is healthy, and it benefits the consumer. Today
when we think to ourselves, ``I want to hear some of the jazz greats
like Louis Armstrong, John Coltrane or Miles Davis,'' we have a
multitude of options at our fingertips. We can turn on our AM/FM radio
and tune in to a jazz station; we can log on to the Internet and find
the music online; or we can turn on our SIRIUS satellite radio and tune
into Planet Jazz, Jazz Cafe or Spa 73.
Given the expansive market--within which satellite radio is only
one of many alternatives--we are certain that an accelerating level of
competition will exist post-merger. There is little doubt that
satellite radio faces stiff competition from many of the technologies
and entertainment platforms that I have already described. In fact, I
would like to note for the committee that in the SEC filings of
traditional radio companies, they readily acknowledge that they compete
with satellite radio in a larger market for audio entertainment:
-- From Clear Channel Communications 2005 Form 10-K; page 24:
``Our broadcasting businesses face increasing competition from
new broadcast technologies, such as broadband wireless and
satellite television and radio, and new consumer products, such
as portable digital audio players and personal digital video
recorders.''
-- From COX Broadcasting / COX RADIO 2005 Form 10-K; page 8-9:
``In addition, the radio broadcasting industry is subject to
competition from new technologies and services that are being
developed or introduced, such as the delivery of audio
programming by cable television systems, by satellite digital
audio radio service and by digital audio broadcasting. Digital
audio broadcasting and satellite digital audio radio service
provide for the delivery by terrestrial or satellite means of
multiple new audio programming formats with compact disc
quality sound to local and national audiences.''
The fact is that we are in the middle of a rapid evolution of the
audio entertainment industry. Together, SIRIUS and XM can compete more
effectively. We will have the capacity to expand our market by offering
more compelling and more diverse content to a greater proportion of the
population. Our goal is to have as many people in this country look to
us as a source of content relevant to them. By combining our companies,
we are absolutely convinced that we are creating a company with
tremendous potential. We are confident that together we will be able to
quickly and successfully integrate the two companies to deliver the
greatest programming choices to our existing and new subscribers.
Our merger has resulted in one unexpected harmony. There are few--
if any--issues where you'll find the LOS ANGELES TIMES, the WALL STREET
JOURNAL, USA TODAY, and the CHICAGO TRIBUNE in agreement. All four
newspapers found that our merger is meritorious. The LA TIMES concluded
that the audio entertainment market ``is very competitive, particularly
among the national players.'' Mr. Chairman, Ranking Member Smith, and
members of the Committee, thank you for this invitation to speak with
you today about the very significant consumer benefits that this merger
will produce. Sirius and XM together see great opportunities, and we
believe that our growth will be faster and our service offerings will
be more competitive on a combined basis.
This transaction is about choice. We look forward to the day this
merger is approved and we can begin to provide consumers with best-of-
breed programming as well as the acceleration of innovative services
and products that they desire.
I look forward to answering any questions the Committee might have.
Mr. Conyers. Thank you very much, all of the witnesses.
This has been, I think, an extraordinarily useful way to begin
an examination of this proposed merger. I compliment all of you
on the details that have gone into your statement and the
concern.
I commend you, Mel Karmazin, for the defense that you have
raised in view of their earlier discussion.
One of the considerations is, how do we enforce promises in
the circumstances in which we find ourselves? This Committee
won't be a party to the negotiations with the Department of
Justice or the FCC, and so we are concerned about how that can
happen.
The two companies compete through pricing structures.
Sirius currently offers a $500 lifetime subscription fee. How
do we know that structure will remain in place in the future?
We have, unfortunately, a not-too-good-record of
performance of satellite radio keeping promises. That is part
of the record that I think both companies have to overcome.
There is no public interoperable radio that would work on both
networks. And that was promised. You violated conditions about
noninterference and use of terrestrial repeaters.
How do we draw--I mean, trusting you isn't going to work
here, in this--not just today, but in this longer-term of
examinations that you will be go going through. You have high
hurdles to overcome, don't you think?
Mr. Karmazin. Mr. Chairman, thank you for that.
I am not asking you just to--first of all, you can trust
me. But, more importantly, you need something more than that,
and I am prepared to work with this Committee, work with
Congress, work with the regulators, to do what you need to do
to have something beyond ``trust me.''
A couple of the facts are wrong and I just don't want to
get hung up on facts, but when we committed, we said that we
would design and we would create the ability to have an
interoperable radio. We have such a radio. It is in my office.
And it is there.
The problem with it is that there is no receiver
manufacturer that wants to pay to supply it, and we currently
are subsidizing our radios and we are subsidizing our radios
today because we get a subscription from it.
The idea of us subsidizing a radio when we may not get a
subscription doesn't make any sense for us. So we did not in
any way, shape or form break that promise. We have developed,
as our requirement was, a radio. We have offered intellectual
property to receiver manufacturers, so if any receiver
manufacturer wants to make an interoperable radio, they can
make it.
The problem is, it would sell somewhere around $700 without
a subsidy, and that is why the merger could make it possible,
because we can get a subscription.
Regarding the interference on the terrestrial repeaters, I
could tell you that our company, when we found out that we had
11 repeaters that were not operating in accordance with our
rules--okay, they were minor issues--we shut them off as soon
as we found about it. These repeaters were not causing any
interference. They weren't causing any harm to consumers. They
were operating at a different standard.
So we take exception to the idea of us not following the
rules. It would be like saying that a broadcaster who violated
the political advertising rule, who is not giving the lowest
rate was fined, they don't deserve to be a licensee. Or
recently one company, a terrestrial broadcaster, paying a $24
million----
Mr. Conyers. Let me interrupt you here, because I wanted to
find out what your opposition was to Ms. Sohn's testimony that
the FCC should permit satellite radio broadcasters to do more
local programming.
And then I might ask Mr. Cooper to use up a half minute if
we have got that kind of--oh, we don't have that kind of time.
Sorry, Mr. Cooper.
Mr. Karmazin. Okay. So, I will tell you that providing
local content is not our business model. You know, I mean,
unless you sit there and say that we are broadcasting the
Washington Redskins and that is a local content, our belief is
that every place you have a satellite radio--this is not
television and this is not DirecTV-Echostar.
Every place you have a satellite radio, you have an AM and
an FM radio. So for us to duplicate what they do very well is
not part of our plan. But if in fact--we want to get this deal
done. There are so many synergies that are there. We have
committed to taking a chunk of the synergies, a good chunk of
the synergies, and passing it along to the consumer as a
financial benefit. So, we want to get the deal done.
If, in order to get the deal done, we need to make
concessions, we are prepared to make concessions and we will
work with the FCC on doing it. Putting in more local
programming, we think, would not be in the consumer's best
interest, because they have free over-the-air radio in their
market where they are doing it.
We don't sell local adverting. We are not in that business.
We don't plan to be in it, we don't want to be in it, but if
that was a condition, you know, we would certainly consider
anything that the Government would ask us to do.
Mr. Conyers. Thank you so much.
Steve Chabot, our Ranking Member, has the best excuse for
being late that I have heard lately, because he was before the
House Administration Committee getting his budget administered
for the 110th Congress.
I am glad that you are here now. And I am sorry that they
kept you so long. I wish you good luck before that Committee.
Mr. Chabot. Thank you very much, Mr. Chairman. As you know,
duty calls and you have to answer, and I did in that case.
I want to take this opportunity to apologize for being
late, first of all, but also to thank the distinguished
gentleman from Michigan, Mr. Conyers, and the distinguished
gentleman from Texas, Mr. Smith, for their leadership on this
issue.
And the topic that we are examining this afternoon
demonstrates the Task Force's continued commitment to carrying
out its responsibilities and the critical role it will play in
assessing the viability of our antitrust laws, especially as
they relate to competition in the 21st century.
The promoted XM-Sirius merger highlights just one of the
complex issues that the Task Force will face: examining current
business conditions in an age of constant change and advancing
technology and the impact that these conditions have on
consumers.
I will begin my questioning, and I will have to make it
relatively brief as well, because we are all restricted by the
5-minute rule.
I will begin with you, Mr. Karmazin, as the Chairman did.
Could you explain again why it is necessary for, you believe,
the two companies to merge, and what benefits the consumers
arguably would receive that they don't already have in the
current market and what inefficiencies are the two companies
experiencing that makes merging necessary? In about 2 minutes,
if you can do that.
Mr. Karmazin. I will talk real fast, unlike my normal
style.
First of all, it is not necessarily. We are not making a
failing company argument and we are not saying that if in fact
our merger were not approved at the end of the day we would not
continue to go along and do business.
Why we think it should be approved is the fact that the
consumer will get more choice, lower prices and the ability to
have less confusion and more content. So we believe it should
be approved because it is very pro-consumer.
It doesn't have to be approved. We can go back to sitting
there having our existing businesses. But the idea is, if there
is an interest in giving the consumer more choice and better
pricing, it happens with the merger, not without the merger.
Mr. Chabot. Okay. Thank you very much.
Mr. Rehr, if I could turn to you next, and I know that you
have, in your written statement, adamantly opposed the merger
of XM and Sirius because it creates a monopoly, arguably.
Would you elaborate a bit on your opposition to the merger
and why you believe it would not be good for consumers?
Mr. Rehr. Yes. Thank you, Congressman.
Let me make three quick points.
Number one, and I am not a lawyer, I am an economist by
training. Monopolies in and of themselves are bad. And one of
the points that I made in my oral testimony is that we are
currently in a duopoly, a two-market--or a two-company market
in, mobile national audio multi-channel satellite radio.
So when you go from two companies to one company, I think
you have to say what is the overwhelming reason why we should
create a monopoly? Because when monopolies are created, they
have a tendency to do bad things--raise prices, restrict
supply, engage in dictating terms of contracts--that wouldn't
exist in a duopoly, two-company model let alone in a multi-
company model. So we have real concerns about creating a
monopoly.
Number two, with a monopoly, comes monopoly power and
monopoly profits, profits that wouldn't be able to be grabbed
by the companies if they were in a competitive market. And we
believe those will be used for exclusivity, constraints put
upon programmers, as well as cross-subsidization to compete
against local radio stations.
Mr. Chabot. Thank you very much.
Mr. Biggio, if I could turn to you next. Would you describe
the antitrust scrutiny that the proposed merger would undergo?
Mr. Biggio. Yes. The merger is subject to Hart Scott
Rodino, which means it has to be notified to both the FTC and
the DOJ. The DOJ would review it, given its past history in
this market.
The merger also is going to be reviewed by the Federal
Communications Commission and during that process, the parties
will have an opportunity to provide a very considerable amount
of information, both pursuant to a subpoena from the Government
as well as voluntarily, to explain what the consequences of the
merger will be.
Both the FCC and the DOJ will do a thorough investigation
not on the only of the parties but also of other affected
firms, customers, competitors, content providers, automobile
OEMs, I am sure, the electronic retailers and so forth, to
figure out what choices the consumer actually has and at what
price point would a consumer who is interested in satellite
radio after the merger switch to some other product in order to
avoid a higher price. That is the basic question.
Mr. Chabot. Let me cut you off there, if I can, because I
have less than a minute and I want to get to Mr. Cooper.
I apologize, Ms. Sohn, for not getting to you.
Mr. Cooper, one of your complaints about satellite radio as
it currently exists is that the companies force consumers to
purchase bundles of channels. If the combined company chose to
offer tiered service or was forced to do so by the FCC, would
that do anything to ameliorate your concerns? Could you comment
on that issue?
Mr. Cooper. Each of the conditions that we have heard about
ameliorates some concern.
Mr. Karmazin has proposed the regulatory regime that, if I
came up here and offered it, members would fall back over in
their chairs. I mean, he is talking about price, quantity
regulation, public interest obligations, all kinds of
regulatory oversight. He says don't trust me. Tell the
regulators to impose it on me. So those take away the harms.
But in the long run--I have been testifying up here for 30
years. And the essential message that I have learned, and I
believe it, is that competition is the consumer's best friend.
So, Mr. Karmazin has said, look, impose these regulations
on me--and in the antitrust case they won't be permanent, so we
will worry about what happens when they go away--and I will be
good for a period of time. But consumers are, in fact, better
serviced by competition.
And let me make a point. He has talked about--he sells the
consumer short. He says consumers are confused by our two
products. Consumers see hundreds and thousands of products in
the market every day. They are differentiated but similar. They
can handle that difference. If there is confusion, it has been
created by their failure to deliver--notice the way he parsed
these words. ``We developed an interoperable radio, but we just
can't deliver it.''
Imagine the regulator now having to deal with that kind of
double talk.
So from our point of view, you can name these conditions,
but in the end it will be a wrestling match with that kind of
parsing of words. It will be time limited and it will take away
the consumer's best friend, which is competition.
Mr. Chabot. Thank you, Mr. Chairman.
Mr. Conyers. Mr. Howard Berman?
Mr. Berman. Thank you, Mr. Chairman.
As I listened to Mr. Rehr's testimony, my mind wandered for
a second, and when he was talking about merged entities that
would control many radio channels and many local markets, I
thought for a second he was talking about Clear Channel.
But, Mr. Karmazin, in announcing the merger, you talked
about the field of competition, and in the course of it, you
mentioned over-the-air AM-FM radio, and you also mentioned
iPods, which is really more of a distribution mechanism than a
performance mechanism.
And I was wondering, if--I had introduced last year the
Perform Act, having reintroduced it this year, because of my
concern that with new portable devices that turn performances
into distributions, there was an issue here of whether or not
the creators of the music are the essence of all of the
business models being talked about here, whether they were
getting fairly compensated.
And I do note that under your leadership, Sirius reached a
marketplace deal through negotiations to compensate the artists
and their record labels. XM took a different approach and
preliminary litigation--actually, it was a judicial decision
which talked about what they were doing and raising the
question of whether that was really a performance and the
meaning of that term under the copyright law.
Will your new company plan to adhere to the perspective
that you adopted for Sirius of ensuring adequate compensation
to copyright owners?
Mr. Karmazin. We believe that we made a business decision
in paying a royalty. We thought it was the right thing for our
company to do. XM had a different viewpoint and they took
advantage of the courts, and I think that is an option.
And I think that either XM will win or lose in court, and
that will find its way, or they will reach an agreement. I
think that----
Mr. Berman. Well, at some point there will be a merger, if
you have your way, and it is not then you and XM anymore.
Mr. Karmazin. And at this point, I have no idea if this
litigation issue will be settled or resolved beforehand. I tend
to like not to use the courts. I tend to also like to use the
marketplace, so my point in response to the Chairman's question
on how do I know about pricing and other issues. The
marketplace--there is no monopoly or duopoly. That is the most
bizarre thing I have ever heard. I can't wait----
Mr. Berman. I didn't use those terms.
Mr. Karmazin. I can't wait to get the market definition.
So I think that there is a sense that there are all of
these products out there. Ninety-five percent of the products
out there compete with iPod, not because we have a record
function in it; just because if you are driving in your car and
you put your iPod in a jack, you are listening to content. We
have very few products out there with the record function in it
so that the competition has nothing to do, when I mention it,
with the Perform Act issue. It has to do with the fact that
people are listening to their music on iPod or listening to
their music on satellite radio.
Mr. Berman. Well, since I raised it, I guess I am not the
person to make this point, but it is not a hearing on that, the
device's ability to record hours of music, ability to give a
play list and have people select and maintain copies is an
issue.
But let me move on to another issue, just for the
recognition that, since you have this marketplace view, you
made this deal and you will be the CEO of the new company, you
are raising the expectations of how that issue will finally get
resolved.
Mr. Rehr, your testimony talks about wanting the level
playing field. But the over-the-air radio station--and Ms. Sohn
made this point, but it is worth repeating because it was so
good. You operate a profitable business built on music, but you
don't pay artists and record companies, whether it is in the
analog or in the digital format.
So when every station in America at a certain time of the
year is playing ``White Christmas,'' you don't pay Bing Crosby
or his heirs, you don't pay the people who own that song. When
Frank Sinatra is singing ``New York, New York,'' you are not
paying his heirs or the people who own that song.
The competition that you talk about, that you are concerned
about, has to pay the performance right to the recording artist
for the labels for that music. Why is this present situation a
level playing field? Why shouldn't we rectify something that
was done originally in a different time in a very different
situation?
Mr. Rehr. I think that is a great question, Mr. Berman. I
would respond to it in three ways.
Number one, radio broadcasters and artists have a long
symbiotic relationship that benefits artists. We build demand
for them in the market. I think a lot of artists recognize
that.
Number two----
Mr. Berman. Well, then, why are--and, so, what? These poor
guys are suckers because----
Mr. Rehr. No, no, no. I mean, I think--hopefully you, I
believe, as the Subcommittee Chairman will be having hearings
on the Performance Act and we would be more than anxious to
testify on our viewpoint, because it is a very complicated
issue.
But in a nutshell, I don't think it is so much of the
artists. I think they are looking at their revenue--I think the
recording labels have seen their fundamental business model
changed and are looking for ways to not only compensate the
artists, but to frankly compensate themselves.
And the three things that I can say about broadcasters are,
number one----
Mr. Berman. I don't think that is an issue much in dispute.
Mr. Rehr. Right. We build demand for the artist----
Mr. Berman. And you are looking to avoid compensating both.
Mr. Rehr. No, I don't think so, because I think we
compensate them----
Mr. Berman. Wait. But you are sitting here--Webcasters are
paying it.
Mr. Rehr. Right.
Mr. Berman. Satellite radio guys are paying it. Apple is
paying it. All kinds of new services that perform and deliver
music are paying it. Over-the-air radio isn't paying the
performance right.
Mr. Conyers. The gentleman's time has expired, regretfully.
The gentleman from Florida, Mr. Keller.
Mr. Keller. Well, thank you, Mr. Chairman.
The issue before us is controversial and simple. By
allowing this merger, is the Federal Government encouraging
competition, choices and low prices or are we creating a
monopoly and bailing out two struggling competitors who may
have overspent on high-priced talent.
I remain completely open-minded on this issue, and I am
trying to look at this issue through the eyes of a typical
consumer. So I want to ask some pointed questions.
I am going to ask the first to you, Mr. Karmazin, and to be
fair about it, just realize I am going to ask Mr. Rehr some
equally tough questions.
But as I look at this through the eyes of a consumer, and I
am one--you will be pleased to know I am a Sirius subscriber,
and my favorite preset, for example, is a stand-up comedy
channel.
Now, if you decided to jack up your rates today, I would
have the option of going to XM. Now, after the merger, I have
got no place to go. If you decided to increase the price from
12.95 to $14 as part of Sirius-XM, would I pay for it?
Probably, yes. I think it is probably worth it and I have got
nowhere else to go. There is no competitor with the traditional
AM-FM because the material on that particular channel is a
little too edgy and adult-oriented.
On the other hand, it is better to have one choice than no
choice if you both go under. So I am sensitive to that, too.
So let me ask you, am I correct from your testimony today
that as a condition to securing approval from the Federal
Government for this merger that you would agree to pricing
restrictions for a period of time?
Mr. Karmazin. Yes.
Mr. Keller. And how long a period of time?
Mr. Karmazin. We are willing to talk to people about it.
But I will tell you, the main reason, Congressman----
Mr. Keller. Four years?
Mr. Karmazin. Congressman, the main reason about the
pricing is not the regulated issue. It is we compete with free.
And I can give you alternatives----
Mr. Keller. I understand that and I am going to follow up
on that.
Mr. Karmazin [continuing]. And that is the pricing point.
Mr. Keller. But when you say you are agreeing for a period
of time, it is an impressive statement. I think you will make
news with it. But if you are agreeing to pricing restrictions
for 2 weeks, it is not impressive. For 4 years, it is
impressive.
Mr. Karmazin. Okay. So why don't we now understand in your
judgment what that window is and let us see if we can come to
an agreement somewhere in that window between 2 weeks and 4
years?
Mr. Keller. But you don't have any--when you told us, and
you testified that you were going to agree to it for a period
of time, you had no idea in your mind whether it was 2 weeks or
4 years?
Mr. Karmazin. Congressman, the reason that we believe that
is because we believe that we need to show you and others that
this is in the public interest. And we know that price is
important. So we know we want to get there. We want to get
there in whatever the regulators and we feel is the appropriate
time frame.
Mr. Keller. Okay. And did I hear you correctly when I said
you would agree, if necessary, to formally enter into an
agreement with the Federal Government that you would not be
competing with the local broadcasters with respect to local
news, traffic and weather, if that was necessary to get the
approval?
Mr. Karmazin. Well, I think we would be open--I think we
would be open to lots of things. I think that we are trying to
make this agreement, this merger, happen for the benefit of the
consumer.
The idea of the Government saying it is not in the
consumer's best interest to give them more choices sounds anti-
consumer. But if the idea of the merger is conditioned on
certain restrictions, we would be open to those restrictions.
Mr. Keller. Okay. Now, as a Sirius subscriber, am I correct
from your testimony that I am not going to have to junk my old
radio as part of this new XM-Sirius merger and get a new radio?
Mr. Karmazin. Guaranteed.
Mr. Keller. Okay.
Mr. Rehr, let me turn to you. Must be pretty good news for
you, hearing, at least, that Mr. Karmazin says he has no
intention in their business model to engage in competition with
the AM-FM radio stations with respect to local news, traffic
and weather. Why aren't you smiling on hearing that?
Mr. Rehr. People who want to attain a Government-sanctioned
monopoly, with all due respect, will about say and do anything
to grab it.
Mr. Keller. And I promised him I would give you some hard
questions, too. So let me just ask you what Ms. Sohn said and I
will give you a chance to respond.
Mr. Rehr. Let me----
Mr. Keller. You are going to have as much time as you want
to respond, but I have got to get my question out or I get
zapped here.
Ms. Sohn said it is pretty hypocritical of you to come up
here and talk about the beauty of competition when you all
vehemently oppose having the satellite radio folks compete with
the traditional AM and FM with respect to local news, weather
and traffic.
What say you to that argument?
Mr. Rehr. Let me first respond to the previous question,
and then get to the latter question.
Mr. Keller. You bet.
Mr. Rehr. The previous question is, how can you tell if
someone who is attempting to go from a duopoly to a monopoly
will keep their commitments into the future. The only way I can
judge that is based upon their past performance. It is
questionable at best, at best.
It would be one thing if the companies came before you and
said, we fully complied with the FCC regulations to the letter,
and we will do that into the future. It is another thing to
recognize, in fact, that at least in three areas they have
flaunted the rules, ignored them, and in fact, to Mr.
Karmazin's point, one of the repeaters that he talked about,
where he said, you know what, it was in the wrong place, it was
67 miles away from the place they reported it to be. And it
does cause interference problems. It caused interference
problems with the wireless people. I would suggest that you
bring them in as well to find out about what this monopoly will
do to their business.
To the point about competition and local advertising in
local markets, you know, we need to go back to 1997 when the
FCC made the determination of dividing the spectrum into the 25
megahertz that were awarded to national multi-channel audio
companies. And I think the determination was made that it
wanted to be sure that it could promote technology, but it
would not undermine localism and local radio, which has been
the backbone of this country since Marconi invented the
devices.
Mr. Keller. The Chairman has said I can give Ms. Sohn a
chance to reply to that.
Ms. Sohn. I think part of the problem I am having with this
whole discussion is sort of the silo approach. Okay. We are
only talking about satellite radio. Why are we not talking
about all radio?
And that is my problem with Mr. Rehr, is that, you know, 50
years ago--excuse me, 75 years ago, you know, Congress said
that broadcasters should have a monopoly on local programming,
and therefore in 2007 we should keep it that way.
It seems to me to be ridiculous. In this day and age, radio
is radio. Music is music. I understand that Mr. Karmazin will
say just about anything to get his merger, but I am surprised
that he doesn't want to do local radio. Why not?
And, I mean, you talk about level playing field, the
Government bailout. You guys are asking for a Government-
sanctioned monopoly on local programming and local news. And
that just, in this day and age, makes absolutely no sense at
all.
Mr. Conyers. Thank you.
I am sorry, Mr. Cooper, but I will recognize Mr. Rick
Boucher.
Mr. Boucher. Mr. Chairman, thank you very much. Let me
commend you at the outset for forming this Antitrust Task
Force. I think that is a very useful step for this Committee to
take.
And I also want to commend you for making the Sirius-XM
proposed merger the first subject to which you have drawn this
Task Force's attention.
Mr. Karmazin, it seems to me that much of the decision
regarding this merger will really revolve around how the
relevant market is drawn. And so let us take just a few minutes
to talk about what that relevant market actually is.
It seems to me that a very powerful argument has been made.
You have made it here today. I think perhaps Mr. Rehr's very
presence here helps to confirm this argument, that the relevant
market really is all of radio.
You are offering satellite radio, but you have terrestrial
radio, Internet-based radio. Then you have the whole IP-enabled
set of applications, including music downloads and streaming,
streaming and downloads to portable devices like iPods.
And as Ms. Sohn just said, music is music and it really
doesn't matter that much, the source of it. All of the music
sources are, in fact, in competition, one with the other.
There is a very interesting survey that Arbitron released
this week and I would like to get your reaction to this. It
shows that the satellite radio listening is only about 3.4
percent of all radio listening. So if you measure all radio and
look at that entire audience, satellite radio is actually a
fairly small player in that.
It also makes the point that satellite radio listeners are
avid listeners to terrestrial radio. They actually spend more
time listening to terrestrial radio than they spend listening
to satellite radio. Fourteen hours weekly for terrestrial, 10
hours 45 minutes weekly for satellite. And then they also
listen to Internet radio. That is an average of 8 hours 15
minutes weekly.
So when you add Internet-delivered radio together with
terrestrial radio, the radio listener, the typical one who also
subscribes either to XM or Sirius, is listening to terrestrial
and Internet radio more than twice as much time as he is
listening to XM and Sirius.
I think these are very interesting statistics. I think they
clearly show that this is a unified market for music delivery.
I would like to get any comment you want to make on that.
But before I turn that over to you, let me just ask one other
question, and then you can have the balance of the time to
respond.
Ms. Sohn has made some proposals for conditions. And I am
confident that you noted those. If not, I am sure she would be
happy to repeat them. And I wonder what your reaction is to the
proposal that she has made for conditions. They appear to me to
be reasonable. And I would think that if those conditions are
accepted, and if you come to an appropriate promise with regard
to freezing your prices, that this merger is very much in the
public interest and in my view it should be approved.
So if you would like to comment.
Mr. Karmazin. Thank you.
So, firstly, how do I feel about the fact that we only have
3.4 percent of the radio listening? I feel quite bad about
that. I would like it to be higher. So I am not happy about
that. But it does clearly reflect that anybody who believes
that a market definition of audio entertainment is a market
that is called something that was talked about before that I
can't even remember, but that was just saying that there is a
duopoly. I don't believe there is a duopoly.
So if I don't believe there is a duopoly, I certainly don't
agree there is going to be a monopoly. We compete with all of
these services. Again, regarding--I was prepared for this by
telling--you know, my people told me not to go across tables,
not to get angry, you know, keep my hands folded and be nice.
But I certainly don't like this idea of the premise behind
saying anything to get a merger approved, because you know
what? At the end of the day the regulators are going to either
approve it or not approve it and we are going to go on, okay.
We are not making a failed argument. We are not saying we
overpaid for content. As a matter of fact, we don't believe we
overpaid. We paid for it at the market rate and we will
continue to pay for it at the market rate.
So would we consider certain conditions? The answer is yes.
We currently are providing public service programming. We
currently are providing noncommercial. We provide NPR, two
channels of NPR. So the idea of pricing--and just so you
understand, and I will be quick on this--the reason we are not
going to raise prices is because terrestrial radio and all
these other choices have hundreds of millions of people. We
have a total of 10.
The way you get more isn't by saying, I am not going to
subscribe because it is 12.95, but I am going to subscribe
because it is 14.95. The hope would be, based on the efficiency
of this merger, we can lower the price, have a cheaper
offering, and therefore get more subscribers and therefore get
more than 3.4 percent of the audience.
Mr. Boucher. Thank you, Mr. Karmazin.
Thank you, Mr. Chairman.
Mr. Conyers. Thank you very much.
We turn now to Lamar Smith of Texas.
Mr. Smith. Thank you, Mr. Chairman.
Mr. Karmazin, yesterday I checked Sirius's Web site. And it
seemed to me that much of the comparison shopping, in fact all
the comparisons, were with brand ``X,'' which I assume is XM.
Is that right?
Mr. Karmazin. I can't speak for exactly what the Web site
is, but sounds like it would be, sir.
Mr. Smith. Given the comparisons, I think all the
comparisons were with the equivalent brand ``X,'' was the
equivalent of XM. The appearance, therefore, is that you are
not worried about other competition other than XM. And let me
give you an example of why I think that may be the case.
If I am driving to work in Washington, D.C., and I want to
listen to listen to Sixties hits--and by the way, there is no
more oldies station in D.C., much to my regret. But if I wanted
to listen to Sixties hits and to BBC News and to an NBA game,
where else do I go besides satellite radio for that? In other
words, where is the competition?
Mr. Karmazin. So, I think that clearly the fact that
satellite radio is serving the consumer in Washington because
there is no radio station that is playing Sixties hits is sort
of another reason that we are competing with them, because you
are, I guess, saying that maybe if in fact there was a free
station that played Sixties hits, that you might not be going
to satellite radio.
There is no new music that is being made by the Sixties
artists. These are artists that have made that music. There are
plenty of devices that enable you to get that music there.
There is tremendous competition. We want you, that if you are
going to go buy satellite radio, we are going to want you to
buy Sirius, and Gary Parsons at XM is going to want you to buy
XM.
So there are a bunch of things that we do to talk to the
consumer who is going to buy one.
Mr. Smith. I understand. I am not sure I entirely
understand the fact that I can't get the Sixties or the oldies
music means there is more competition. But I appreciate your
answer and I thank you for that.
Mr. Biggio, let me go to you. You are an antitrust expert
and, hopefully, you are a little unbiased here.
Let me make a presumption. Suppose that emerging
technologies are not yet right. Suppose emerging technologies
do not yet provide a significant amount of competition with
satellite radio. But suppose that sometime in the future and in
some coming year there will be significant competition from the
emerging technologies. What is allowed under antitrust law to
anticipate in that kind of situation?
Mr. Biggio. Well, let me answer that question from both
sides.
I think part of the argument Mr. Karmazin is making is that
satellite radio is in fact an emerging technology and right now
it doesn't have sufficient penetration to maximize and optimize
its profitability. And so it makes no sense for the companies
to raise price after this merger if it means they are going to
maintain their current subscription levels.
To the extent they can keep their prices low and expand
their output that way, and that is an argument why the merger,
in fact, is not anti-competitive.
The same argument applies to the products you are talking
about. If iPods and other products are coming on the market
today but have not yet reached a sufficient market presence to
actually be a competitive threat, then they should not be
included in the market until such time as they do have a
competitive constraint on the market.
And that is really a question of time development and
usually under the merger guidelines, we are talking about a 2-
year period of concern that these other potential entrants
aren't sufficient constraints within 2 years, then they are
typically discounted.
Mr. Smith. Okay, good, thank you.
Mr. Rehr, a final question for you. In your testimony, you
distinguish between local markets in which there is arguably
more competition and national markets in which there might not
be as much competition. Why is that significant?
Mr. Rehr. I think it is significant because when the FCC
created the duopoly in 1997, they saw a nationwide multi-
channel audio content service. The same channel that you get in
Bangor, Maine, you get in San Antonio, Texas, you get in San
Francisco, California.
Nationwide services like Sirius and XM compete with every
local broadcaster in this country. But does a small station in
San Antonio, Texas----
Mr. Smith. Any reason you are picking San Antonio?
Mr. Rehr. It is a coincidence. A small station in San
Antonio, Texas, or Milwaukee or in Orlando, doesn't compete on
a national level with those nationwide audio multi-channel
programs.
Mr. Smith. Thank you, Mr. Rehr.
And thank you, Mr. Chairman. I will yield back.
Mr. Conyers. Thank you very much.
The gentlelady from California, Ms. Zoe Lofgren.
Ms. Lofgren. Thank you, Mr. Chairman.
And congratulations to you and the Ranking Member for
establishing this Task Force. I think it is going to prove to
be very useful to the Committee and to the country to have this
renewed--not just today on this particular issue, but on the
whole issue of competitiveness and antitrust overall. And I
really feel that in the last several years we have not had
sufficient attention paid to this very important subject. And I
just think this is a first step that is just really very good.
And I appreciate your leadership in doing this.
Mr. Boucher asked most of the questions I was going to ask,
but I do have, for Ms. Sohn, you made some recommendations. I
was at the House Administration Committee, actually, suggesting
that the Ranking Member get more money for his Subcommittee.
But I did have a chance to read your testimony.
I am wondering how the conditions that you have recommended
for this merger compare to the obligations that currently exist
in the broadcast arena.
Ms. Sohn. Well, they are different. I mean, if I am going
to be completely cynical, I am not sure that the broadcasters
have any obligations any more except maybe to make time
available for Federal candidates.
So these are actually more akin to what DBS--well, some are
anyway. I mean, the first is that the company should provide
choice in pricing, so a la carte and tier pricing.
Ms. Lofgren. Obviously that is not applicable.
Ms. Sohn. Right. But DBS has an obligation to make between
4 and 7 percent of its capacity available for a noncommercial
educational-informational programming. And this is programming
over which they have no editorial control. I didn't mention
that in my oral testimony but I think that is really, really
important.
Ms. Lofgren. It is in your written report.
Ms. Sohn. Yes. That the satellite provider should not--
number one, it should not be able to say, well, we already have
NPR on two channels. First of all, it has got to be new
programmers. I would think this would be a great place for some
of the low-power FM stations that got shut out by the
broadcasters several years ago.
So they would have no editorial control. Also, you couldn't
have more than one channel taken up by any particular
programmer.
So it is more akin to DBS than it is to over-the-air
broadcasters.
Ms. Lofgren. Now, your comment about--and I saw people
grimacing when you said that there weren't any obligations on
broadcast.
But to the extent that things are not as tight perhaps as
they once were in the broadcast area, do you think if there
were a condition on the merger relative to noncommercial
educational-informational programming without control of
editorial content on the satellite side, that that ought to be
reinvigorated on the broadcast side?
Ms. Sohn. Well, boy, I have so many scars from this. Yes.
If we are talking about level playing field, probably yes.
Ms. Lofgren. In furtherance of that, the testimony has been
that there are so many providers of audio experiences, all the
way from iPods to--are we thinking that we should impose
conditions like this, for example, on Internet radio?
Ms. Sohn. Absolutely not. I mean, they are not asking to
merge. That is abundant.
Ms. Lofgren. So it is just because there is enough
competition and a low barrier to entry that we wouldn't want to
provide that kind of----
Ms. Sohn. Yes. I mean, I don't want to give the impression
that I foursquare think that this is going to pass antitrust
muster. I was very relieved to see Mr. Biggio also hedging his
bets, because he is an antitrust expert and I am not.
So, you know, I think the key is whether these other
technologies that I mention in my testimony are substitutable
and whether they would constrain prices. I don't know the
answer to that. Mr. Biggio doesn't know the answer to that.
That is obviously the case----
Ms. Lofgren. I am sure nobody on the Committee knows the
answer to that.
Ms. Sohn. That is the case that Mr. Karmazin and Mr.
Parsons are going to have to make to the antitrust authorities.
Ms. Lofgren. I will yield back, Mr. Chairman, the time.
Again, I appreciate your leadership in establishing this new
Task Force and I appreciate being a Member.
Mr. Conyers. I thank the gentlelady.
We now turn to the distinguished former Chairman of this
Committee for so many years, Mr. James Sensenbrenner.
Mr. Sensenbrenner. Thank you very much, Mr. Chairman.
Let me start out my questions with two premises. First, in
1997 when the FCC licensed spectrum for satellite radio, they
placed a condition on their license that there had to be more
than one provider or more than one licensee. So at that time my
belief is that the FCC made a policy decision that other
mediums of transmission were not necessarily the exclusive
competition, but that there had to be competition between more
than one licensee for satellite radio.
Then 4 years later, the two largest satellite TV
broadcasters, EchoStar and DirecTV, proposed a merger. We had a
hearing in this Committee where the CEOs of both of those firms
came to testify. There was concern that was expressed at that
point in the Committee that this was monopolistic in nature.
And that merger was rejected.
Now, given the fact the FCC stated the ground rules that
you need to have two or more satellite radio providers and that
they rejected a merger of the two biggest satellite TV
providers into one, what is different here?
Mr. Karmazin?
Mr. Karmazin. A whole lot.
So, first of all, we obviously are going to need to make
the argument to the FCC that what was talked about 12 years
ago, which found its way into a statement 10 years ago, is just
not relevant today in the competitive marketplace. So we have
to make that argument and we will see if we prevail.
Mr. Sensenbrenner. But there was competition then, too, at
least with terrestrial radio, and the FCC didn't look at that.
They said you had to have two satellite broadcasters.
Mr. Karmazin. And, sir, that was because there was no
Internet radio then. There was no HD radio then. There was no
iPod then. There were so many more things that came along in
addition to terrestrial radio----
Mr. Sensenbrenner. My wife, she subscribed to XM. That
apparatus is in her car, so she listens to XM in her car. Now,
I would be pretty worried if she was playing on the Internet or
playing on her iPod while trying to access this type of
entertainment in the car. Real worried about that.
Mr. Karmazin. But let me tell you, there are receivers that
are--and we saw them at the Consumer Electronics Show and they
exist today, not hypothetical--that are radios that enable you
to get the Internet just like you have a satellite radio that
enables you to get the satellite.
But, again, I understand your point. It is there. We
understand that it is an issue that we need to deal with the
FCC.
But let me talk about the Echostar-Direct one, because that
one is just totally on the opposite side.
If you take your consumers in your area, I would say close
to 100 percent of those people get their television from either
a cable or satellite provider. They are not getting it with
rabbit ears and they are not getting it over the air. So the
idea of what the market looked like in the EchoStar--and I am
not an antitrust lawyer. But in the idea of EchoStar and
DirecTV was you had a cable company you paid for. You had
EchoStar you paid for. And you had DirecTV you paid for. So it
was three people going down.
In this case, the vast majority--the vast majority--over 90
percent of the people flip the other way. They get it from free
over the air radio, in every single home, in every single car.
So you have free over-the-air radio there. So this one is not
like cable or satellite.
Mr. Sensenbrenner. I have only got a minute left, so
reclaiming my time, utilities have been regulated monopolies.
There have been State utility regulations commissions in all 50
States. And that model ended up being determined not to be good
public policy in practically every State in the union where
there was utility deregulation. Some have had disastrous
consequences, like California, and in other States it has
worked out fairly well.
What you appear to be advocating is to make your merged
company somewhat akin to an old regulated gas company, and I
don't see where the consumer ends up benefiting in that because
the regulated utilities of old ended up being guaranteed a rate
of return on their investment. And I don't think that is the
kind of model that we policy makers want to sign off on because
we have already rejected that in other areas where regulated
utilities have been.
Mr. Karmazin. And what you said we are looking at is so far
from the truth at all. We are not saying we are going to be a
monopoly. We are not saying we are a monopoly.
Mr. Sensenbrenner. But you are a monopoly.
Mr. Karmazin. We are absolutely----
Mr. Sensenbrenner. You are going to be a monopoly.
Mr. Karmazin. We are absolutely not a monopoly. I mean, the
idea is, if you are saying you believe that the radio is----
Mr. Sensenbrenner. Just one provider of the service is a
monopoly.
Mr. Conyers. The gentleman's time has expired.
Let me turn now to the gentlelady from Texas, Ms. Sheila
Jackson Lee.
Ms. Jackson Lee. Mr. Chairman, let me thank you very much
for what I think is an enormously wise decision to really shine
the light on a series of mergers.
And in order to be fair to Mr. Karmazin, to not call it
monopoly, but I might just say that the word has been used. And
I think we have to be frank with each other.
It seems unique, but I would be part of the political
constituency or elected officials that really wants more
opportunities in the media for people to have sources of
information. I frankly think merged newspapers, single-town,
single-newspaper cities--certainly we know that newspapers are
competing against Web sites and otherwise. But still, I think
we lose. I think the first amendment loses.
So I raise that concern, and I thank the Chairman for his
enlightenment on allowing us to have this opportunity for
transparency.
Might I also indicate very quickly that I think the
Chairman has asked a very vital question: What is a critical
market? And I raise these points because as I ask questions,
one of the witnesses, I think, made the point that this seems
to be too soon after the initial licensing that has occurred.
And therefore it doesn't give time for there to seem to be some
settling.
The Texas broadcasters are walking around, and Mr. Rehr may
have created that presence. I saw one walking in the hallway.
They were political enough and astute enough to just give me a
warm greeting.
So I want to know that XM and Sirius are not biased. They
didn't bother to try to create a bias in my mind.
But let me try to pose these questions, particularly to
you, Mr. Karmazin, and I have given you the backdrop of my
concern.
To Mr. Biggio, I think you sound like the baseball player
in Houston, so maybe you are related to him. But I frankly
don't think I want to leave the professionals only to this
task, the FCC lawyers and Department of Justice lawyers. I have
disagreed with them before. And their regulatory framework may
not be what I think gives good overview of what may possibly
happen.
And my bottom line is that you extinguish, you eliminate,
you cease and desist for the wide vastness of information. I
think that is key.
I am going to give you an opportunity to respond to that
and the transparency question, meaning that we should have as
much airing and hearings on this as possible. Then I am going
to get to the meat of my concerns, and that is that all of
these mergers, and in fact, all of these existing media
entities--and if we were to go into the NFL, baseball and
others, if we were to go into as my good friend from Wisconsin
talked about, utility companies, et cetera, it is a closing
down of opportunity. And one of the contingent groups that you
close down the opportunity to--and I don't think Sirius and XM
have been any shining star--it is diversity.
You are not diverse, I believe, as you exist today. And the
question is what opportunities would be available once your
merger occurred for a minority ownership. My view is that the
participation would be reduced because you become a single
entity. And together, now, you have shown no interest in that.
I have a little station that is FM low-power that is
struggling in the community. The question would be whether
there would be some vehicle to allow those stations to have
content, to sell content, you sell it back and whether it would
be, if you will, economical, or at least reasonable, that the
little base of listeners that they have could even pay.
So let me yield to you and have you pointedly tell me about
how what you are planning on doing doesn't dumb down diversity.
African-Americans, Hispanics, Asians, women and others, as
opposed to up lift. And what is your record today, which I
don't perceive that you have a record that is strong enough to
convince me.
Mr. Karmazin. Well, Congresswoman, firstly, I understand
that there is a general tone that no mergers are good mergers.
There is no such thing as a good merger. And probably
consolidation in the media world has been so poor to date that
no merger is good.
So if, in fact, the regulators and Congress does not allow
our deal to go through, that is the choice. So the consumer
will then go from not having any price competition that we are
offering, not having any price advantage and also not having
the choice, and not being able to get baseball and the other
service. So that is a possibility----
Ms. Jackson Lee. Did you hear me on the minority question?
Mr. Karmazin. I did. But you also mentioned at the
beginning the idea of the merger and the idea.
On the idea of the minority, I think my track record is
extraordinary on diversity in my whole career, and I think that
I can--if you are interested----
Ms. Jackson Lee. I am.
Mr. Karmazin. I can provide you with a whole lot of
information, including being the person who started when
Chairman Kennard was at the FCC, this whole minority
investment, and I was personally a large contributor and also
my companies have been large contributors.
Ms. Jackson Lee. But you be inclined to do more?
Mr. Karmazin. I believe there is always room for more. I
believe that our service is not doing as good a job as we
could. But I can't tell you who is doing as good a job as we
could.
I can tell you that we have a number of channels that are,
you know, catering to the Hispanic market, to the gay lifestyle
market, to the African-American market. I think that if in fact
we didn't have to keep duplicating each other's services for
competition reasons, that we can have more choice available for
more niche programming and more opportunities.
So I don't want to make any promise because I will only be
called ``you will do anything to get the deal approved.'' So
you are damned if you do, damned if you don't. If I say I want
to do things, it is because of the merge. If I don't say I am
going to do it, it is because I am not cooperating.
Ms. Jackson Lee. But you are in the light of day. So you
are saying it publicly, so that is good.
Mr. Conyers. The gentlelady's time is expired.
Ms. Jackson Lee. Thank you, Mr. Chairman.
Mr. Conyers. And we turn now to the distinguished gentleman
from Virginia, Mr. Goodlatte.
Mr. Goodlatte. Mr. Chairman, thank you very much.
I would like to ask all of you to start out, tell me, is it
a coincidence that XM and Sirius charge the same rate for their
services now?
Mr. Karmazin?
Mr. Karmazin. Well, we started our service 5 years ago and
the price was $12.95 then and we have not raised our price.
XM started its service at $9.95 and chose to raise the
price because of the cost of content. I could tell you that the
reason that they are both at $12.95 and not at $14.95 or $15.95
or $16.95 is that we are competing with free.
It is hard to get subscribers when you are charging $12.95.
It is harder to get subscribers when you are charging $14.95.
So the idea of having higher prices the way it is now doesn't
work because what we are competing with is not each other. If
we had every one of their subscribers, okay--again, not
poverty, just facts. We have lost $3.8 billion so far. Okay. So
far. That is our business plan. That is the way it works.
The idea of us raising prices without any cost--the cost
savings is going to limit our ability to get subscribers. I
mean, it is just real math.
Why would people not be subscribing in enough numbers at
$12.95, but they would at $14.95?
So there are synergies in this deal. There are 300 million
or so that analysts have said that you could save each year.
What we are saying is if there are synergies in the deal, we
can take a chunk of the synergies and provide it to the
consumer if the merger is approved. If it is not, the companies
will continue to be able to price--there is no discussion on
our parts. I mean, they don't call me, we are not allowed to
talk to each other. All right.
So the fact is that the prices could go up after the
merger, it may not go up after the merger. I could tell you if
the merger is approved, they won't go up.
Mr. Goodlatte. Mr. Rehr?
Mr. Rehr. I think that, first off, it is coincidental that
it is the same price and whether it is price mechanisms in the
market determining that price or not, I don't know.
But I think there needs to be a distinction between this
argument being made that we are competing against free and
therefore we can't raise prices. If in fact it is a duopoly
that has a distinct market of people who are willing to spend
money to buy a nationwide multi-channel audio programming, it
is the price elasticity that those people will face that will
determine whether that price goes up or down.
Am I willing to pay 50 cents more when there is a monopoly?
Perhaps. Maybe a dollar? I mean, you can't raise the price to
$100 a month and get people to sign up.
Mr. Goodlatte. But presumably both of these companies would
be charging more right now if they could get more.
Mr. Rehr. Well, I think that is also a value proposition,
quite frankly. I think that they would----
Mr. Goodlatte. Mr. Cooper?
Mr. Cooper. Well, you know, the interesting thing is we
have sat here for 2 hours and no one has suggested these
companies might have lowered their prices to increase
subscriber ship.
He has talked about, well, it is $12.95. We could go to
$15. Why not $6.95 and quadruple your subscriber ship? If you
do the math, he would have a lot bigger cash flow.
These are companies that pick very high prices and very big
bundles and said we are going to do the cable model, thank you,
and that is the way we are going to make our money.
In the Internet space, it is called promotion pricing.
People price low to get subscribership and spread those costs.
This is a management decision. In competitive markets, prices
tend to be uniform. In duopoly or monopoly markets they tend to
be uniformly high.
And now we said after 10 years, well, if you let us merge
to a monopoly, now we will lower our prices. They have never
competed on price. They have never seen the benefit of cutting
their price in half to quadruple their subscribership.
Mr. Goodlatte. Well, maybe they have or maybe they haven't
competed on price----
Mr. Cooper. Well, they haven't shown it in the marketplace.
Mr. Goodlatte. Well, I am not sure I disagree with you, Mr.
Cooper, but let me ask Mr. Karmazin.
You have described all these other things that you compete
with. But quite frankly, in that respect, you compete with
almost anything. The only entity that you compete with right
now on the wide array of radio services that you offer is XM
Satellite Radio. I am an XM subscriber. I am sorry to say I
like baseball better than football or maybe I like Oprah better
than Howard Stern. I don't know.
But in any event, I have had those choices and I have made
that choice. And it is a great service. I also listen to my
local radio stations. I also listen to my iPod. I would bet
that the overwhelming majority of your subscribers are
listening in their cars. So that limits the universe of what
you can actually listen to.
But nobody else other than your two satellite companies
offer the wide array of things like those that were describe by
Mr. Keller and by others here, that you just cannot find on
iPod or on your local broadcast radio station.
So why, when we eliminate one of the two competitors here,
aren't we going to see a spike up? Yes, there is a limit to how
much you can raise your prices, but I believe prices are going
up if you are the only one in town.
Mr. Karmazin. Well, I have assured you and we have
discussed that before, that we are prepared to commit that they
won't.
So, I mean, you can sit there and say they are, and we are
saying that they are not. And we are willing to commit to it.
But let me tell you, there is nothing that we are doing,
you know, insofar as music choices. There is Major League
Baseball that is available on your over-the-air radio station.
Mr. Goodlatte. Not the Boston Red Sox where I live.
Mr. Karmazin. So, therefore, the idea that you could pick
up the Boston Red Sox and the New England Patriots on the same
radio has to be something if you were to say no to this deal
that you are hurting the consumer.
And right now if you want to get the New England Patriots
and you want to get the Boston Red Sox, you pay $25.90. Okay?
And that may be the way you want it to be.
Mr. Conyers. The gentleman's time has expired.
I am pleased now to recognize the gentlelady from
California, Maxine Waters.
Ms. Waters. Thank you very much, Mr. Chairman.
I would also like to thank our witnesses who are here
today.
I come to this hearing not necessarily opposed to your
merger, but wondering what does it really mean in terms of
participation in ownership by minorities.
First, let me understand, who owns, for example, Sirius
Satellite Radio.
Mr. Karmazin. Both Sirius and XM----
Ms. Waters. Sirius, I am sorry.
Mr. Karmazin. No problem.
Sirius and XM are publicly owned companies. None of them
have a controlling shareholder. Both companies are listed on
NASDAQ. And in the case of Sirius, we have, you know, a
billion, 700 million shares outstanding. In the case of XM,
they have 330 million shares. A lot of the institutions, the
traditional owners of stocks, own the companies.
Ms. Waters. Well, as you know, African-Americans and people
of color have an awful difficult time accessing the media. You
don't see us on the Sunday talk shows, on corporate television,
and we depend a lot on radio. And we particularly depend on
African-American-owned radio. Whether it is Ms. Hughes's
station, Radio One, or Stevie Wonder out in California, we know
that they have the kind of programming that we can get on, we
can talk to our constituents, and we depend so much on it.
My only interest is whether or not we are advantaged or
disadvantaged by this merger.
Mr. Karmazin. I agree with you. I think that the
broadcasters that you mentioned, particularly Radio One, has
done an extraordinary job and I have been in the radio business
an awful long time. And they have consistently--Cathy Hughes
has consistently done a terrific job.
The thing that I can say to you is that we currently--and
don't get me--if I get the number exactly wrong--I think each
of our services have five or six channels that are specifically
devoted to the African-American market.
And by the way, those services are available in every
market in the United States, rural markets, urban markets.
So the benefit of satellite radio and having a healthier
satellite radio, in my opinion, is that there is a platform
that gets you not just into the markets where there is a large
African-American population and somebody could have a station
there, but it gets you into markets where you couldn't support
an African-American radio station and there is none now.
So the fact that we are providing that, I think, is a
service to the community.
Ms. Waters. Could you describe that kind of programming so
that I could try and identify with it now and know what exists
now?
Mr. Karmazin. I am not the expert on programming. We can
offline get you information. But we have talk and public
affairs programming dealing with it as well as entertainment.
We just--and again, I know I am going to get into trouble
by saying this, but we had a conversation with Jamie Foxx about
doing a channel for us, which he is going to do, called The
Foxx Hole. And the purpose of that channel was to provide urban
comedy, you know, on a national basis. And he has agreed to do
it and we will start that channel in April.
So there is a spectrum ranging from music, ranging from
talk, ranging from other types of content. But we can get you
the specifics if you would like to.
Ms. Waters. You have talk radio and you have news also that
is targeted to these communities?
Mr. Karmazin. I can't say that we have news, because what
we do is we pick up the traditional services. So the news that
we currently have, you know, are the Fox News and CNN News and
Headline News and MSNBC is on there. So there is no
relationship.
XM has had a relationship with BET. XM has a relationship
with Radio One today, that Radio One, Alfred Liggins that Cathy
Hughes are programming a number of channels that exist on that
service.
There are some things that we have had conversations with
them about, not related, you know, to this conversation, but
about doing more programming along those lines.
Ms. Waters. Okay. Thank you very much.
Mr. Chairman, I will yield back the balance of my time.
Oh, just one moment, if I have some more time. I just got
some information.
Now, as I understand it, Mr. Karmazin, you were the CEO of
Viacom. You purchased BET. Is that right?
Mr. Karmazin. Mr. Johnson will tell you that I felt that
the name of the team should be the ``Mel Cat,'' not the
Bobcats, with the money that he got from the merger.
So yes, I did buy----
Ms. Waters. But I guess the question is this. This is
serious stuff. That after you purchased it, the first thing
that you did was to eliminate the news and public affairs
programming on BET.
Mr. Karmazin. That is blatantly not true, and Bob Johnson
and Deborah Lee will tell you that Mel Karmazin nor Sumner
Redstone, who is at Viacom, had anything to do with it.
As a matter of fact, we encouraged them to expand, and you
can find out that we absolutely did--they made a programming
decision on a personality that got a lot of attention. But Bob
Johnson would never, ever have us interfere.
One of the conditions of our buying BET was that he stay in
Washington, D.C., because he was committed to the district,
that the operation not be merged into Viacom, that he be the
CEO reporting into directly to me so there was nothing else.
Now Deborah Lee has that same position in the company.
So no, I have not eliminated news. As a matter of fact, my
history has been that I have expanded news.
Ms. Waters. But you know that there are----
Mr. Conyers. You are finished, Ms. Waters.
Ms. Waters. Thank you. Thank you.
Mr. Conyers. Thank you so much.
Mr. Cannon from Utah?
Mr. Cannon. I thank you gentleman.
We had the biggest copper mine in North America, the CEO
was in the other room and I had to meet with him for a minute.
And copper is good these days, I might point out.
Let me ask Ms. Sohn one question, just following up on your
testimony.
Can you give a little more detailed about what you would
like to do with the a la carte option? You know, you have just
under 300 channels. At $15, we are talking, like, 5 cents a
channel if you did it that way.
In your testimony you talked about categories of channels.
How would we ever create the guidelines or conditions that
would work on that?
And then, Mr. Karmazin, if you would follow up, is it
possible with your current equipment or your perspective
equipment to have an a la carte technology that would work?
Let us start with Ms. Sohn first and then come to you.
Ms. Sohn. I will have to admit I don't have a very detailed
analysis. I would be more than happy to provide it to the Task
Force.
I will give you an example. I am an XM subscriber and I
don't listen to the talk. Occasionally I take in a Met game. I
am a huge Mets fan. But I would rather just pay for the music.
That is what I listen to.
At a bare minimum, I know there are issues around providing
individual channels. That, obviously, is a consumer advocate's
dream, that you could basically pick and choose. And I would
like to hear Mr. Karmazin's response as well.
But at a bare minimum, you should be able to pick tiers.
You know, if I just want music, I should be able to pay for
that and pay less.
Mr. Cannon. I really love the idea of a la cart. I know the
cable companies are not going to like that.
Ms. Sohn. So do I
Mr. Cannon. But at some point I would love to see that
happen and with----
Ms. Sohn. It should happen in cable as well.
Mr. Cannon. Mr. Karmazin, could you talk about what the
technological limits are on what you have. Would it be possible
to go to a per channel a la cart?
Mr. Karmazin. I do not believe so, for lots of technical
reasons. I don't want to use up all your time, but I am not
trying to duck the question. I will be happy to spend time with
it.
You know, there is no set-top box in your vehicle that has
a radio in it. So the idea of being able to have a back channel
to be able to tell that radio exactly which channels are there
becomes problematic.
Mr. Cannon. So currently you probably can't do it. Could
you do it with some tiers?
Mr. Karmazin. I think we can accomplish what I am hearing,
which is today if you want to get a portion of our service,
because you really like baseball or because you like the music,
and I have heard both viewpoints, you have to buy $12.95.
So what we have said is that we think that one of the
benefits of this merger, because it does provide synergy--it
will lose revenue. I mean, if we say that at the most for a
Sirius subscriber, the most we will get is $12.95, no scenario
where we are raising that price, now what we are also saying is
that we will provide the consumer with a choice to be able to
get satellite radio for less than----
Mr. Cannon. But do you have the technology to do that? In
other words, when the person buys the radio, would you limit
the channels that it could receive at the time of sale? How
would you do it?
Mr. Karmazin. We have the ability to do a--I am using what
the witness talked about, call it tiers. We call it choices or
bundles or something. We have the ability of offering a number
of bundles.
But, remember, 43 cents a day, 130 channels, less than 10
cents a channel. Nobody has written a letter to their Congress
person--and we have asked--we know that you have heard from
your constituents on the high cost of their TV bills, their
cable TV bill or their satellite bill. We haven't found one
person who is saying that the $12.95, or 43 cents a day, is too
high in price.
What we are saying is, you know what, we will make it
lower.
Mr. Cannon. I have a couple of other questions, one for Mr.
Rehr.
This has been an awfully personal attack kind of hearing. I
have been a little surprised. A little earlier you were accused
of parsing your words and you seemed anxious to respond to
that.
Do you recall? Mr. Cooper was talking about how you parsed
your words? You can respond or not if you wish.
Mr. Karmazin. I mean, I do feel that way. Because, as I
said, all we are asking for is to go through the regulatory
process, right? I mean, we are not asking for anything. We are
not sort of doing something wrong. We are American citizens, we
are business people.
All we are asking for is if there is a Hart Scott Rodino
filing that is due, we are going to make it. If there is an
application to the FCC, we are going to do it, and we are going
to vent this thing and people will have a choice.
But, you know, to sit there and tell me what my motives
are, I mean, I just don't like hearing it. But I am a grownup,
I can handle it.
Mr. Cannon. Mr. Rehr, let me just ask this. Mr. Boucher
made the point that your being here, your presence is evidence
that the satellite companies compete with broadcasters.
Is that a fair point that he made? He didn't ask for a
response on that, but I would like one. Is that a fair point?
And if you are here because it is competition, shouldn't that
be taken into account as we look at what constitutes the
market?
Mr. Rehr. Yes. I think it is fair that we compete with a
nationwide multi-channel audio programming company. I think in
Salt Lake City, the Bonneville stations compete against
satellite radio companies Sirius and XM.
However, as I talked about a little earlier when you were
out of the room, Bonneville companies do not compete on a
nationwide basis. So it is a little complicated, but it is
really one directional competition as opposed to a market where
you are constantly competing against each other on every
aspect.
I hope that makes sense.
Mr. Cannon. I understand it.
Thank you, Mr. Chairman. I recognize my time is expired,
and so I yield back what time I don't have.
Mr. Conyers. Thank you so much.
We now turn to the gentleman from Tennessee, Mr. Cohen.
Mr. Cohen. Thank you, Mr. Chairman.
I am at a little bit of a loss. I am pleased to hear all my
senior Members get a chance to listen to all this radio.
Because I am basically just on the phone talking to my
constituents.
And I am a little--did you really pay $80-million-something
to Howard Stern?
Mr. Karmazin. Absolutely.
Mr. Cohen. That is rather obscene, isn't it?
Mr. Karmazin. Let me tell you, it is an awful lot of money.
But if I were in terrestrial radio, where I spent a long time--
--
Mr. Cohen. You are in extraterrestrial radio?
Mr. Karmazin. I am in extraterrestrial radio.
Mr. Cohen. Yes. He is an extraterrestrial character, isn't
he?
Mr. Karmazin. In my opinion, I would have paid him that
same amount of money. And had their current company paid him
that same amount of money, they would have made $70 million on
top of what they would have paid him based on their financial
results since he left.
So the marketplace dictates how much money you pay the NFL
and how much money you pay Major League Baseball and how much
money you pay talent. And in the case of Howard Stern, he was
paid what the market warranted, and we were fortunate enough to
be the one that paid it to him.
Mr. Cohen. But you are basically competing with the folks
at XM to hire these Howard Sterns, or whatever, because you all
are bidding to get these big names to get people to subscribe
to you.
Mr. Karmazin. No, I think, Congressman, I just said to you
that we are competing with terrestrial radio, because who we
hired Howard Stern from was a large radio company, not XM.
We are competing--because if Howard Stern were offered more
money to go to work at Clear Channel or Infinity Broadcasting
or CBS, I am convinced that Howard would go there. So, no, I
totally disagree with you, sir.
And the idea of having--people go into their local market,
whether it is Salt Lake City or wherever, and they listen to
their radio. The idea of it is a national service, I mean,
whether or not it is Rush Limbaugh, who is on in every market,
you know, who is on 800 stations, or Sean Hannity, the idea
that we are not competing with terrestrial radio is just not
credible.
And as a matter of fact, just one point on that subject. If
in fact what they are saying is true, that they don't compete
with us, then every one of these public companies have lied to
the SEC, because in every one of their filings to the SEC,
under the regulatory portion where it says competition, it says
they compete with satellite radio. And I don't believe these
broadcasters, who are good broadcasters, would like to the SEC
when they said that they compete with satellite radio.
Mr. Cohen. Do you compete at all? I mean, Mr. Stern gave
you a headline for your station, star performer, and that maybe
got you to get some subscribers, the people that were hooked on
him, he was their jones, and you got him. And the only other
person who would have had that attempt would have been Sirius.
Don't you all compete for the NFL? I guess you don't compete
for the XFL. Nobody does. But for the NFL?
Mr. Karmazin. Well, yes, we compete with terrestrial radio
as well. So, I mean, as an example, right now, Rush Limbaugh is
on terrestrial radio. One could argue, would we. The answer is
we are not. I am not discussing it, not that it would be bad.
All I am saying is that if we chose to hire Rush Limbaugh, we
would be competing with terrestrial radio because he is on the
800 radio stations.
We are not competing with XM. The market is too small, sir.
If we got all of their subscribers, if we got them all, okay,
the market would still not be significant enough to pay for the
fixed costs of operating the business. So the only business
model that works is us to be able to get more subscribers. And
the way you get more subscribers when you are dealing--
particularly when you have the money now available through some
synergies, to be able to offer lower prices.
We are not looking to bankrupt our company and we are not
going to do something that is going to bankrupt our company. We
have too many shareholders, too many employees, and we are not
going to do something that is stupid. And the idea of just
saying, well, you have these high fixed costs, you know, you
have these high fixed costs, lower your price.
We are saying no, we are not going to do that. But if there
is a merger and there is savings created, we will give back a
percentage of that savings to the consumer.
Mr. Cohen. Well, I wish you all a lot of luck. I don't know
too much about this.
XM had a little party when they opened up on the Potomac
River. And I went over there, my friend Warren Zevon hooked me
up with some lady friend and we went over there and I bought a
little----
Mr. Cohen. And I bought a tiny amount of stock and I sold
it, too. So I am happy you all are doing well because it was my
tax loss that year.
Mr. Conyers. We now turn to the gentleman from Virginia,
Mr. Forbes.
Mr. Forbes. Thank you, Mr. Chairman.
I want to thank all of you for being here today and your
patience. I wish we had time to listen to each one of you and
ask you some questions, because you have got such good
experience and insight.
But a lot of times when we are dealing with our
constituents, we are talking to them at the McDonald's, Sunday
school class somewhere, and they just have simple questions.
And sometimes it gets frustrating.
I know I had, just trying to work through a phone
conversation with one of your two companies, I won't say which
one, I felt at the end of it like I just wanted to pick my
phone up and throw it out the door.
And the question I would have that I think some of them are
going to ask us is, if you merge these two companies, you have
certain programs, XM has certain programs. Are you going to
keep all those programs or are you going to cut some of them?
Mr. Karmazin. So, our vision of the way it would work is
that if you are an XM subscriber, you have the Major League
Baseball, you have whatever number of channels available to you
now.
What we contemplate is that we would take some other
content, and again we have to work with our content partners.
But the hope would be that we would get NASCAR to agree to be
on XM as well. We will get the NFL to agree to be on XM as
well.
We currently have a deal with NPR and XM has a deal with
somebody else that is not NPR that we would hope to offer.
So the radios are not obsolete, nothing lost. They get
everything that they are getting now. They get the same
channels that they currently are getting and we will use
additional capacity that each company currently has to be able
to share content.
And that is where we get to the more choice.
Mr. Forbes. So you wouldn't envision cutting any of the
existing programming that you have now?
Mr. Karmazin. We think that that would result in
disappointing the consumer. We are charging them $12.95. If in
fact we disappoint them, that sounds to me like we are going to
get less subscribers, not more, and that is not the purpose of
wanting to do the merger.
Mr. Forbes. Now, the vehicles that, you know, we have some
on car lots that are XM, some Sirius right now in their radios.
How would it work that they would continue to be able to use
those radios? Would they have to do anything to change that?
Would they continue to be able to use the same ones and still
have the same programming options that either one would have?
Mr. Karmazin. Yes. And that is the argument that we have
made and the conversations we have had with our OEM partners
who make these car radios and that there are all these radios
in the cars. And we certainly are not looking to disappoint the
customer.
So if you have a Ford vehicle that has Sirius Satellite
Radio in them, you will not have to do anything else, okay,
after the deal--assuming the merger were approved. That if, in
fact, the merge were approved, we would be able to provide them
with more content through some of the XM content.
Mr. Forbes. And just the last two questions. As I know you
can appreciate, if we tell our constituents they are going to
get interoperability in their radios and then we say they have
them, but they just can't afford them, they kind of scratch
their head to that and say it doesn't do them any good.
And sometimes we make promises, even with good intentions,
that we can't keep.
What is the enforcement mechanisms if we are wrong? What
happens if the prices do go up? What happens if they have less
choice? What are the enforcement teeth that stop that from
happening, because we apparently haven't had a lot in some of
these other problems.
Mr. Karmazin. And, again, what we are saying is that they
have the radio currently so that it is not obsolete. So they
get more choice coming out of that radio without having to buy
a more expensive receiver.
What the mechanism is to make sure we live up to our
promises, I will leave to the regulators. But I am willing to
say we should be held accountable for everything I have said
here and everything that I will say when we meet with
regulators and we meet with people throughout this process.
This isn't ``trust me.'' This is about we should be held
accountable. And I have got to believe that within the
infrastructure of the Government or however it is done, we
should be able to be accountable.
Mr. Forbes. Mr. Chairman, I see my time is expired. I yield
back the balance.
Mr. Conyers. I thank the gentleman, and recognize the
gentleman from New York, Mr. Anthony Weiner.
Mr. Weiner. Thank you, Mr. Chairman.
First of all, Mr. Karmazin, let me apologize on behalf of
everyone for the many pronunciations of your name you have
heard today.
But I do want to tell you on the subject of names, if you
guys name this S&M Radio, I am off the reservation. I am just
not signing up. [Laughter.]
Can I ask you just a couple of very brief foundations
foundational questions?
Mr. Rehr, do your member stations compete with Mr.
Karmazin's product?
Mr. Rehr. They do, yes.
Mr. Weiner. All right. Do your member stations play music,
have music on some of them?
Mr. Rehr. Yes, 13,000 radio stations, yes.
Mr. Weiner. Mr. Karmazin, do some of your broadcast
stations have music?
Mr. Karmazin. Yes, sir.
Mr. Weiner. Mr. Rehr, do some of your broadcasters have
talk?
Mr. Rehr. Yes.
Mr. Weiner. Mr. Karmazin, some of your stations have talk?
Mr. Karmazin. Yes, sir.
Mr. Weiner. Mr. Rehr, do some of your stations have sports?
Mr. Rehr. Yes.
Mr. Weiner. Mr. Karmazin, do some of your stations have
sports?
Mr. Karmazin. Yes.
Mr. Weiner. I would like to ask the panel to oblige me by
stop throwing around the word ``monopoly'' when just about
every explanation of competition has been stipulated to over
and over again throughout this thing.
And while it might serve to send shivers into the spine of
regulators, it doesn't have much effect if it has no foundation
in the realities in the world today. In fact, it is hard to
imagine how you can describe satellite being a monopoly when
they have no ability to exercise monopoly power in any
meaningful way.
Can they stop someone else from getting into the
marketplace? First of all, what moron would want to get into
that marketplace?
Do they have the ability to, in an unfettered way, raise
prices? Well, in fact, the competition that they have, as you
yourself said, is with your stations, who are charging zero
dollars and zero cents, very often for the same or very, very,
very similar products.
So this notion that we are having a hearing about monopoly
power is wildly exaggerated, particularly when you leave out
the one most fundamental thing. Nobody needs to have a radio.
No one needs to have this product. And, in fact, increasingly,
it is anachronistic.
You know, it was mentioned by somebody, I think Mr.
Sensenbrenner, about how he doesn't want someone tinkering with
their Internet while they are--well, frankly, he doesn't
realize that 50 percent of all cars rolling off the production
line have an mp3 jack. And 100 percent of all computers have
access--that have access to the Internet, can download content
in the form of podcasts that is just like the comedy that Mr.
Keller likes to get, just like the controversial talk that some
people like to get.
And I have to tell you, I am stunned by how many people
have satellite radio in this room. I don't understand--I mean,
God bless you, Mr. Karmazin, I hope you are successful, but I
don't understand. Increasingly, it is tougher and tougher for
any radio to compete.
Here is the things that I think we do need to learn. We
made a mistake in the Echostar-DirecTV question. Mr. Rehr used
it as an example. I think today satellite TV production and the
competition that was supposed to come by keeping them apart has
suffered.
The gentleman, Mr. Cooper, has talked about how he were
right then. You know what? Maybe if we had let those two merge
back in 2002, we would have that promised broadband access
going through the satellite that we thought we were going to
have. We don't have it.
You know, sometimes mergers serve to help an industry and
help choice move forward. And I have to tell you, if this
notion that concentration is bad--Mr. Rehr, do you believe the
concentration is inherently bad? Take a look at Clear Channel.
Take a look at the number of communities that have less choice
in terrestrial radio.
Arguably, if you want to compete with Mr. Karmazin and win,
you should be as much against concentration among your members
as you appear to be on this panel. This is a new world we are
living in. No longer is it can we be sanguine to say that,
well, we don't have anything that when people get together,
because consumers wind up doing worse.
Mr. Martin at the FCC, you know, raised a pretty high bar
in one of his several, often disjointed comments about this. He
said at one point, ``We would need to demonstrate consumers
would clearly be better off with more choice and affordable
prices.''
And some people have said that is an impossible test to
pass. Well, in fact, you are going to have more choices, I
think, because when you get into your car, you are going to
have one player that is going to have football and baseball,
where otherwise you would have to put another radio on top of
it to be able to get both of those things. And you have got to
include that in your discussion about whether prices are going
to come down, Mr. Cooper.
If you are now going to have one player that is going to be
able to play both services, consumers are paying less. And I
will go one step further. The innovation that is going to then
be promoted by people being able to make hardware, invest all
of the R&D hardware to come up with a better player, think, the
players--and again, Mr. Karmazin, I apologize, are not so
great. I think they still need a good deal.
But people have to make a choice between developing one for
XM and developing one for Sirius. Now I think the prices are
going to come down on the players because you are going to have
those things.
So we have to stop with the 1970's version of this
discussion. And if Mr. Rehr admits that this is competition,
the fact that he is fighting so hard on this means this is
going to be more competition, which means this should probably
be approved.
Does anyone want to comment on any of that?
Mr. Cooper. I would be glad to comment on that.
Mr. Conyers. The gentleman's time is expired.
Mr. Weiner. Can I at least get an answer, Mr. Chairman?
Thank you.
Mr. Cooper. I will be glad to comment, because I actually
disagree with almost everything you have said.
Because satellite radio, we have heard it in Mr. Boucher's
numbers, 32 hours a week of radio listening. The world has
changed--32 hours a week. TV is about 56 hours a week. The
world hasn't changed so much.
But Mr. Boucher and Mr. Smith give you an exact answer to
what they do that is different than what local radio does.
What Mr. Karmazin does is he aggregates small demand. Ms.
Waters's question as well. He aggregates small demand that the
local market will not support.
So the Sixties channels disappear in D.C. because there
aren't enough Sixties listeners in D.C., but Mr. Karmazin takes
the listeners in D.C. and the listeners in San Francisco,
aggregates them and can sell them.
The Boston Red Sox--I am from the Bronx so I use the Boston
Red Sox as an example. There are lots of Boston Red Sox fans
spread all over the country. But the local TV station cannot
deliver a station to those viewers or listeners because there
is not enough of them in their little market.
Nationwide there is enough of them so that Mr. Karmazin can
sell the New York Yankees in Boston and San Francisco, because
he has aggregated the market.
And oh, by the way, he also happens to sell the San
Francisco Giants to the Boston Red Sox. So Karmazin competes
with local, but local can't compete with national. That is what
Mr. Rehr has said. And that is 32 hours. So these are
compliments, not substitutes.
Mr. Weiner. But would you agree that that is not true? Your
example is not 100 percent not true as it relates to Britney
Spears, is that correct? One hundred percent not true?
Mr. Cooper. Britney Spears, people like Britney Spears. She
doesn't have a channel. Maybe she could have a channel. He will
pay for all kinds much weird stuff. We have agreed on that. And
he will pay a lot. So maybe he will give Britney Spears a
channel.
The local radio station can't do that because they don't
aggregate demand. So what Mr. Karmazin does is he meets a
specific need. He sells mobility. Whether it is people who move
more than 25 miles or content that moves more than 25 miles,
the mobility is what he has because he is able to aggregate
markets.
Mr. Conyers. Mr. Cooper, Mr. Weiner's time has expired.
Mr. Weiner. Mr. Chairman----
Mr. Conyers. We thank you so very, very much.
We now turn to Mr. Issa, the gentleman from California.
Mr. Issa. Thank you, Mr. Chairman.
The extension of remarks was most interesting, and I
appreciate hearing it.
First of all, and I don't want answers until we are at the
end and the red light is on, because that works better.
First of all, perhaps what this body should have done is
said that, Mr. Karmazin, that you could not enter, nor could
XM, have entered into any exclusives until there was a viable
combined market. Thus we wouldn't have had--you know, you
wouldn't have had the shock jock that gave you all the
business. One of you wouldn't have had one sports franchise,
the other wouldn't have had the other sports franchise, and
Gary Ackerman wouldn't have to have two radios, which is tough
because they are each in separate cars.
But we didn't do that. So one thing I want to point out,
because I am seeing some content people in the audience, but
nobody here is a content person.
Isn't it true the content community loves what has
happened? They love the bidding up, like two sports franchises,
to insane amounts, the cost of the content that you are
supplying, which is part of the reason that you are not
profitable. You guys have gotten in a bidding war, you have
created a lot of money, each of you. You know, I don't care
whether it is NF or hockey or whatever. All of these things
have cost you a lot.
And that would go away to a certain extent in a merger,
because people would have to choose whether or not to be on the
global stage or not, so your cost of content might go down in
renewals because you would have a certain greater relationship.
And you would be much more similar to the terrestrial
broadcasters who say, you know, I would really like to have
this sports franchise, but it is only worth so much to me. And
they, in fact, pay less.
That is a what-if. And, Mel, before I let anyone answer, I
want to pose one more thing because I have looked at the
technology, the bandwidth you have, the bandwidth the
satellite, the TV satellite providers have.
Why is it that we are not looking here and saying, what if
Clear Channel is able to take its national footprint of
terrestrial stations, going digital, and decide instead of to
be hi-def, to be at your resolution and in fact put 10, 12, 15,
20 channels into their existing bandwidth? What if this
Committee said that we were going to let them do that, we were
going to create that market?
Obviously Energy and Commerce, Mr. Dingell, would have a
little to say about it. But what if we did that?
What if, in fact, we allowed for the 802.11 protocol to
include a non-encrypted side so that there would be broadcast
capability coming out of all those various 802.11s that are
basically at any given time you can see hundreds of them on
your screen if you have a decent high-gain antenna.
What if we in fact took satellite radio's 802.11 and Clear
Channel and, by the way, let us not forget public broadcasting,
which has an overlapping national footprint. What if we gave
all of them the ability? Wouldn't we in fact have plenty of
competition that would be direct competition?
The last what if that I have to ask is, what if we tell you
that we reserve the right at any time to sell a whole new watt
of bandwidth in the public interest that is exactly equal to
what you and XM both have?
Mel, what about those what ifs?
Mr. Karmazin. So, I want to make sure I got them all.
Let us take the what if on the content provider. So, if you
were to talk to any of the content providers, they will tell
you that not only do they have a terrestrial radio deal, that
they also have an Internet deal. They also have a cell phone
deal. So there is no shortage of competition if there was no
satellite deal.
And I am particularly interested in your comment about
802.11 and things like that. So, virtually all of the cars that
are being made are being made with Bluetooth capability so that
if you are interested in NASCAR, that you are able to get
NASCAR from the local broadcaster who wants it. They certainly
have local radio rights. They also have a deal with cell phone
companies to where you could put that Bluetooth and get it
through your audio spear.
And again, I think the idea that there is so much
technology that is out there, that the idea is that these
content is available through all of these choices and how much
money a company is going to pay for content is whether or not
the consumer is going to want that and whether you are going to
get subscribers.
So why did we pay a lot of money for our content, is
because we believe that we could get more subscribers if we
offered the consumer more choice.
And regarding there being additional competitors, I am not
a hypocrite, okay. I am saying that there is a lot of
competitors. If the Government were to say that they wanted to
have more--and by the way, they have more because they have
authorized this HD radio. So what you are finding is that--and
I am not rapping on Clear Channel. They have done an awful lot
of good things and I have friends that are there. But where
every single channel exists, they are going to be able to have
three or four channels.
So there is going to be more choice and there are 1,100
radio stations on the air today. As a matter of fact, Clear
Channel is providing a lot of the programming for these high-
definition channels that are national channels.
So, I am sort of pretty cool to compete. I mean, I am open
for that. And if the technology is there, there should be
choices.
Mr. Issa. Mr. Chairman, the only last what if would be,
what if we allowed for further syndication of broadcasters so
as to create, if you will, overt competition, which doesn't
exist today. I mean, basically non-Clear Channel, nonpublic
broadcasting, some of these have a difficult time coming
together to form a national footprint. What if we, in fact,
made sure that was available?
Thank you.
Mr. Conyers. That would be the subject of yet another
hearing.
Mr. Issa. I yield back.
Mr. Conyers. Thank the gentleman.
Let me first of all express my real and sincere
commendations to all of the five witnesses. You have started a
discussion that I am sure is going to raise a number of
questions which will be coming to you for you to submit answers
for the record. We will give you a week for our Members to do
that. Then there will be another week to print up the record.
And I want to thank you all.
I can't help but particularly thanking Mel Karmazin for the
tremendous cooperation that he has given the Committee and the
way that he has handled himself and the comments that have
exchanged between us all.
And I would like to also thank the guests, our spectators
who came here, people who are--I see a lot of industry people
around. We had an overflow first hearing, and we are going to
be watching carefully as the Senate rolls out its discussion.
And the next year will be an exciting one as this subject
develops.
On behalf of the Committee, my great thanks of indebtedness
to you all.
And I, at this point, conclude the hearing. Thank you all
very much.
[Whereupon, at 5:21 p.m., the Task Force was adjourned.]
A P P E N D I X
----------
Material Submitted for the Hearing Record
Response to post-hearing questions submitted by the Honorable John
Conyers, Jr. to Mel Karmazin, CEO, Sirius Satellite Radio
Question:
Much of the criticism of this merger proposal has focused on its
monopoly character. However, there is also the monopsony issue--the
reduction from two to one in the number of buyers of content, including
college sports rights, for satellite radio distribution. Today college
conferences and other content providers can entertain offers from two
different satellite radio distributors. Competition for content between
these two companies has been fierce. If the proposed merger is allowed,
all of that competition will disappear and there will be only one buyer
of satellite radio content. Why should we allow that?
Answer:
It is highly inaccurate to describe this merger as creating a
monopsony on the content side. There currently exist many distributors
of content, and these distributors can reach listeners through a
variety of platforms including terrestrial radio, wireless networks,
podcasts, and the Internet. A programmer's options for content
distribution are not currently limited to satellite radio, nor will
they be so limited after the merger. Moreover, given satellite radio's
continued desire to attract subscribers from other media, its incentive
to continue to offer a broad range of content that customers desire
will remain strong, and its ability to expand that range of programming
will grow over time. In short, this merger does not harm competition at
the programming level.
The specific example of college sports demonstrates that content
providers do not rely on the two satellite operators to distribute
their service. Like professional sports programming, college sports
content is distributed successfully on a global basis via the Internet,
in addition to traditional radio and television distribution. Using the
Internet, a university, a conference, or an entire league, can
distribute its content through a variety of partners or by itself. For
example, Yahoo Sports distributes the audio broadcasts for over forty
Division I schools across all sports, including teams from every
Division I-A conference.\1\ CSTV.com offers audio and video for over
100 top schools, including UNC, Notre Dame, and UCLA across 30
sports.\2\
---------------------------------------------------------------------------
\1\ http://media.yahoo.com/ncaa/splash.html
\2\ www.cstv.com
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Universities can also offer their content through their own
websites. Many individual schools offer their audio broadcasts through
their Internet sites, so that alumni who are geographically dispersed
across the world can access content. For example, Michigan offers free
game audio through its website.\3\ Even schools with smaller sports
programs such as Cornell and Harvard offer their alumni access to game
audio across a greater variety of sports than is possible over
satellite radio.\4\ These are just a few examples and such offerings of
content on university websites is becoming the rule rather than the
exception.
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\3\ http://www.mgoblue.com/section--display.cfm?section--
id=185&top=2&level=2.
\4\ http://cornellbigred.cstv.com/ and https://
www.nmnathletics.com/SportSelect.dbml?DB--OEM--
ID=9000&KEY=&SPID=3659&SPSID=41065
---------------------------------------------------------------------------
Because satellite radio is competing against other platforms like
terrestrial radio and the Internet, it will continue to have the
incentives to gather the programming that current and potential
subscribers want, so programmers with compelling content will continue
to have access to satellite radio post-merger. Indeed, in the long-
term, by enabling the consolidation of duplicative channels and freeing
up capacity for new channels, this merger increases the ability of
programmers to reach customers via satellite radio.
If content owners have sufficient options to distribute their
content, which they do, the focus of the antitrust inquiry should be on
the impact on subscribers. For subscribers, there will be an immediate
benefit as the most popular content can be shared on both the XM and
Sirius platforms. Greater access to programming is a cognizable
antitrust benefit.