CAPITAL CURRENTS: ‘Let’s Make a Deal’

Sun, 08/31/2008 - 8:05pm
Jeffrey Krauss, President of Telecommunications and Technology Policy

This is just like the bad old days of cable franchising.

It used to be that the FCC acted as a judicial body when it decided whether to allow mergers and acquisitions of telecom companies. These days, under Chairman Kevin Martin, the FCC plays, “Let’s Make a Deal.” In the long run, that behavior is NOT in the public interest, but harks back to the days of “wheeling and dealing” in cable franchising which ended up Jeffrey Kraussputting an extra financial burden on subscribers all the way around. To see evidence of this, look no further than the recent XM-Sirius merger.

Any company that holds a radio license needs FCC approval before it can merge or be acquired. In most cases, the approval is automatic. For big-ticket acquisitions, like SWB-AT&T or Verizon-MCI, the FCC issues a decision that considers antitrust implications as well as other “public interest” factors.

The final vote on XM-Sirius was 3-2, along party lines. Commissioner Adelstein voted “no” because he couldn’t get the deal he wanted. He wanted 25 percent of satellite capacity set aside for leased access (10 percent for noncommercial programmers and 15 percent for unaffiliated commercial programmers). He wanted a six-year freeze on prices. The final deal included a leased access capacity of 8 percent (said to be 24 channels) and a three-year price freeze. That’s what the companies offered in June, and they weren’t willing to sweeten the deal.

Another key feature of the deal was a la carte program offerings. A customer will be able to choose 50 channels from a list of 100 channels, from either XM or Sirius, and pay $6.99 a month. Additional channels would cost 25 cents each, although “premium” programming would cost more. An expanded a la carte service would allow customers to choose from both the XM and Sirius channels. The companies, in making this proposal, were obviously pandering to FCC Chairman Martin’s unfulfilled desire to force a la carte programming on the cable industry. In addition, the companies proposed a “family-friendly” programming tier.

But none of the existing XM or Sirius radios can handle a la carte channel selection, nor can they receive each other’s signals. XM and Sirius claimed that they could have a la carte-capable radios on the market within three months, and dual-system interoperable radios within a year. In the final decision, dual-system radios must be available within nine months. Sure.

Oh, and the XM and Sirius satellite systems are technically incompatible with one another. The FCC rules for satellite Digital Audio Radio Service (DARS) were adopted in 1997, and they have always included the following interoperability requirement: “each applicant shall certify that its satellite DARS system includes a receiver that will permit end users to access all licensed satellite DARS systems that are operational or under construction.” XM and Sirius have violated that rule from day one – they use different audio coding specifications. Dual-system interoperable radios will need wider bandwidths, two different demodulators, two different audio codecs, and will cost consumers more than the existing single-system radios.

Of course, the interoperability rule is not the only rule they’ve been violating. They are allowed to install terrestrial repeaters, to fill in signal gaps caused by tall buildings. But each one requires a license, specifying location and power. They have both been nailed for operating repeaters that were unlicensed, or at the wrong location, or using too much power.

Next comes the part of the deal that won Commissioner Tate’s vote. While Chairman Martin wanted to extract family-friendliness and a la carte pricing, and Commissioner Adelstein wanted to extract longer duration price caps and more capacity for independent programmers, Commissioner Tate’s part of the deal was a $19.5 million fine imposed on XM and Sirius for violating FCC rules.

Evidently only Commissioner Copps never tried to make a deal. He released a statement saying that this merger resulted in a monopoly, even though competition could have been sustained in the market. XM and Sirius never claimed they were in financial distress. So he dissented.

What doesn’t change? There are still two incompatible satellite systems, and there was no promise that a single technology will ever be employed. Satellites XM-1 and XM-2 were launched in 2001 and were expected to reach end of life in 2008, so in 2006 XM-3 and XM-4 were launched, with an expected life of 15 years. Meanwhile, Sirius is having FM-5 constructed for launch in late 2008, and has awarded a contract for FM-6 to be completed in 2010.

FCC Chairman Martin said the merger was in the public interest because of the “voluntary commitments” that the companies made. Voluntary? Be serious. This is just like the bad old days of cable franchising. They accepted leased access and what amounts to PEG channels. The only things missing are an institutional network and live broadcasts of the FCC meetings.


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