The instant order follows in the wake of the Department of Justice (the “DOJ”) Antitrust Division’s questionable decision to close its investigation of the merger without requiring any conditions. The DOJ explained that it could not find that such a merger would substantially lessen competition, in part, because of a lack of competition between the parties even without the merger. Thus, the DOJ concluded that the merger would not make matters much worse — hardly consolation for consumers.
Ostensibly, the DOJ relied on two key premises in reaching its decision: long-term sole source contracts with automobile manufacturers and the lack of an interoperable radio. Even though the DOJ acknowledged that the Applicants competed on the terms of automotive contracts, including the amount of equipment subsidization, it readily dispensed with this consumer benefit, because many of the sole-source contracts were locked up for extended periods. Further lack of competition between the Applicants was explained by their decision not to bring an interoperable radio to market despite a Commission requirement to do so. It is ironic that the DOJ relied on the Applicants’ failure to comply with the interoperability mandate as a justification for the merger. The DOJ also gave the Applicants a pass on the financial interests and corporate directorships held by major automotive manufacturers in the Applicants’ businesses and the merged entity’s future business. While more analysis is needed, this relationship presents a potential for discrimination against the installation of competitive technologies in the automotive sector going forward.
3. Interoperable Radio Receivers
113. Section 25.144 of the Commission’s rules sets forth the licensing provisions for SDARS systems. As part of these provisions, each applicant for an SDARS license must certify that its system “includes a receiver that will permit end users to access all licensed satellite DARS systems that are operational or under construction.” As the Commission stated when it adopted this rule, such receiver interoperability would “at the very least” permit consumers “to access the services from all licensed satellite DARS systems.” The Commission stated that a receiver interoperability requirement was an alternative to mandating a specific receiver standard, concluding that a more flexible certification approach would promote innovative system design. In October 1997, the International Bureau granted each Applicant’s application to provide SDARS, “subject to certification … that its final user receiver design is interoperable with respect to [the other SDARS provider’s] system final design.”
114. Since authorization in 1997, Applicants have twice filed letters with the Commission regarding their compliance with the Commission’s receiver interoperability rule. By letter dated October 6, 2000, Applicants stated their “continued compliance” with the receiver interoperability rule and described their efforts towards making available interoperable receivers to the public. Applicants noted that they “do not control the actual manufacture, distribution and sale of receivers,” but instead license their receiver technology to radio manufacturers. As a result, they stated that they rely on such manufactures to produce SDARS receivers, as well as on automakers to install receivers and on retailers to market receivers for installation in existing vehicles.
115. By letter dated March 14, 2005, Applicants reiterated that they had complied with the Commission’s interoperability rule “by including interoperable radios in their respective system designs.” They claimed that they had designed and licensed receiver systems with common components capable of receiving Sirius or XM programming, although not both simultaneously, and that they had invested nearly $5,000,000 in a joint venture aimed at “combining XM’s and Sirius’s proprietary chipsets into a compact and efficient device capable of receiving both services.” They emphasized, however, that “the availability of interoperable radios … will depend in large part on factors outside of the control of either XM or Sirius, including consumer demand for interoperability and the willingness of manufacturers to manufacture, distribute, market and sell interoperable radios after carefully weighing the integration, qualification, costs and efficiency considerations.”
116. We note that each of Applicants subsidizes the manufacture and sale of receivers in various ways. Applicants state, however, that there is little incentive for each to subsidize the cost of interoperable receivers – as is done with single-system receivers – because of uncertainty whether the subsidy would be recouped since the purchaser might not subscribe to that particular Applicant’s service. Applicants state that the absence of subsidization has limited the interest of manufacturers in producing and distributing such interoperable receivers. As a result, no interoperable radio is currently on the market.
117. Commenters in this proceeding disagree whether Applicants’ efforts to date comply with the Commission’s provisions regarding radio receiver interoperability. Applicants argue that the interoperability requirement mandates that an interoperable receiver be designed, but does not require the production, distribution, marketing, or sale of such a receiver, which Applicants claim is outside of their control. Relying on their October 6, 2000 and March 14, 2005 letters, Applicants maintain that they have complied with the receiver interoperability requirement by designing an interoperable receiver. Other commenters contend that Applicants have not satisfied the receiver interoperability requirement contained in the Commission’s rules. For example, NAB asserts that the receiver interoperability provision requires both the development and the public availability of an interoperable receiver and that, in any event, the design process for an interoperable receiver is not complete. Another commenter claims that existing receivers made available to the public are already capable of interoperability, despite claims by Applicants to the contrary.
118. In addition, C3SR filed a letter on May 27, 2008, alleging that Applicants have not been truthful or candid in their representations regarding compliance with the Commission’s receiver interoperability requirement. C3SR states that documents submitted by Applicants demonstrate that instead of complying with the interoperability requirement, Applicants [REDACTED]. In particular, C3SR claims that the documents show that Applicants concealed the [REDACTED]. C3SR states that the documents also demonstrate [REDACTED]. C3SR urges the Commission to designate the merger applications for hearing and to commence an investigation into whether Applicants lacked candor in their representations to the Commission in the Merger Applications and whether the merger is contrary to the public interest because it furthers a conspiracy to restrain trade. In the alternative, if the Commission does not designate the applications for hearing or investigate further, C3SR requests that the Commission impose certain remedies in response to the alleged misconduct, including disgorging profits resulting from the alleged FCC rule violations, restitution to the public, an order requiring the adoption of a corporate compliance plan, and divestiture of one of the existing satellite systems.
119. Applicants respond that they have fully complied with the Commission’s interoperability requirement and that the documents cited by C3SR simply reflect the substantial efforts that Applicants have taken in developing an interoperable receiver. They acknowledge building and developing a prototype of an interoperable receiver through a Joint Development Agreement, but have not taken the ultimate step of bringing such an interoperable radio to market. Applicants deny that interoperable receivers designed under the Joint Development Agreement could be sold at [REDACTED] since the cost cited in the documents cited by C3SR included [REDACTED]. Applicants state that the cost did not include [REDACTED], and that existing receivers sold by Applicants are available at prices significantly less than [REDACTED]. Applicants also state that the documents cited by C3SR reflect only the aspirations of one person who was directed to develop interoperable technology – not to evaluate the distribution or sale of interoperable radios – and that the views did not represent the views of Applicants. Furthermore, Applicants claim that C3SR’s pleading is procedurally and substantively deficient and should be dismissed.
120. We conclude that Section 25.144(a)(3)(ii) requires Applicants to make an interoperable receiver commercially available. As stated above, the rule requires each applicant to “[c]ertify 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.” The rule’s reference to “a receiver that will permit end users to access all licensed satellite DARS systems” also indicates that consumer availability is required, as end users cannot use a receiver that is not commercially available. The Bureau’s references in 1997 to Sirius’s expressed “commitment to work with all interested parties to insure that the SDARS receivers will permit customers to access both systems,” and in 2005 to the need for Sirius and XM to identify “a clear timeframe for making such an interoperable receiver available to the public,” also support this interpretation. The 1997 condition that “final user receiver design” be interoperable merely reflects the recognition that Sirius and XM still were designing receivers at the time: the Bureau did not intend (nor did it have authority) to modify the rule to require only the design of an interoperable receiver.
121. Notwithstanding the rule’s express language requiring that end users have access to receivers that can access all licensed satellite DARS systems, we do not believe that Applicants’ interpretation of the receiver interoperability mandate as a design requirement was unreasonable, under the circumstances. As indicated above, Applicants do not manufacture or distribute SDARS receivers, and the 1997 condition requires that “final user receiver design” be interoperable. Further, the Commission did not explicitly require them to assure consumer availability of an interoperable receiver or require that all SDARS receivers sold in interstate commerce be interoperable. Moreover, the Commission never specified a deadline for compliance.
122. Based on our examination of the record, we are also not persuaded that C3SR’s filing raises a substantial and material question of fact that requires a hearing before the Commission can make the required public interest determination in this proceeding. First, neither the references to [REDACTED] nor the information that the documents reveal as to the joint venture company’s activities reflect a lack of candor. Contrary to C3SR’s argument, the requirement that Applicants make an interoperable receiver commercially available was not “unambiguous,” as the above analysis indicates, and the general language of the joint venture agreement does not cast significant doubt on Applicants’ contention as to how they interpreted that requirement. In addition, we perceive no discrepancy between the representations in Applicants’ March 14, 2005 letter to the Commission concerning the status of their joint venture activities and later documents cited by C3SR, a presentation to the joint venture board and several “white papers” discussing potential means of distributing interoperable receivers. As C3SR acknowledges, there is a time lag between the documents, and in any event we are not persuaded that Applicants had a duty under Section 1.65 of the Commission’s rules to disclose an internal presentation or “white papers” prepared by the joint venture that did not reflect the companies’ actual business plans or conclusions.
123. C3SR urges the Commission to bring the documents in question to the attention the Department of Justice, the antitrust enforcement authority, arguing that they warrant antitrust investigation under Section 1 of the Sherman Act. [REDACTED] Further, we are not persuaded that the documents cited by C3SR otherwise provide sufficient support for their allegations. The documents reflect [REDACTED]. These estimates do not reflect that Applicants could have made an interoperable receiver available to the mass market, without any subsidy, at a cost comparable to that of commercially available Sirius and XM receivers. As Applicants point out, [REDACTED]. C3SR also maintains that the documents reflect [REDACTED] does not contradict Applicants’ representations that the mass market availability of interoperable radios depends in large part on factors outside of their control. Finally, although C3SR characterizes Applicants’ decisions not to make an interoperable receiver commercially available in 2006 and 2007 as improper, the documents are consistent with Applicants’ rationale in the Merger Application that making an interoperable receiver commercially available would not make economic sense for them. [REDACTED]; there is no evidence that
Applicants ever had a business plan for mass market deployment. [REDACTED] Under the circumstances, there is not a substantial question of fact as to whether the companies’ decisions not to go forward, in order to avoid creating the perception of such a change, were improper.124. Applicants have voluntarily committed that the combined entity will offer for sale an interoperable receiver in the retail aftermarket within nine months of the consummation of the merger. As a result, subscribers who already have purchased non-interoperable receivers will be able to transition to a receiver that has the ability to receive either of the complete programming offerings that the merged entity will offer without having to purchase two separate receivers. In light of this voluntary commitment, we dismiss a complaint filed by Michael Hartleib that seeks enforcement of the interoperability mandate. We conclude that Applicants’ voluntary commitment to establish a deadline to ensure the commercial availability of an interoperable receiver will enable and expedite realization of the full benefits of the merger, such as more efficient use of the SDARS spectrum. We also find this commitment satisfies the request of commenters that commercial deployment of interoperable receivers by the merged entity be prompt and subject to a stringent timeline. 125. We believe that the merged entity will adhere to this voluntary interoperability commitment and bring its system into compliance with the Commission’s interoperability rule, despite commenters’ views to the contrary. Applicants’ voluntary interoperability commitment is clear in its scope and deadline for implementation, which should remove any uncertainty as to what is necessary for compliance.
Kind of ironic now, thinking about it..
What would be the point of an interoperable receiver at this point? Considering the best of offerings, its sort of moot. The intent going forward will be to consolidate the 2 systems anyway.
In theory, the xm infrastructure could, in time, be used for satellite radio and the sirius system could be used for navigation, TV and other offerings...
You are right but that is down the road. It is not moot because of their being seperate brands, exclusive content and OEM contracts will require that for quite sometime. I can not wait to get my hands on all of the unredacted doc.s I smell trouble ahead?
Now we will see what happens! Many parties have been waiting for the final rule. I hope Mel has some big news tomorrow. I think he may? I still can not
believe how low the share price is!
Tyler how about that interview?
we were just discussing the share price. Most of us are of the opinion that the deal that was forced on siri to consumate the merger will be replaced on better terms, now that time allows. My guess would be before the first interest payment is due. That would force all those borrowed shares to be covered and returned...
Even if consolidation of most of the music stations occurs there will still be content that will be on only one system. The best of service will not include all the baseball games. There are oddball stations like "The 40's", Cinemagic and a non Sinatra "Standards" station that will probably only be available on XM. I would buy a interoperable radio, if the additional XM subsciption was at the $6.95 price.
Originally Posted by crfceo
I agree that XM would be the better platform because it has a superior codec. I think they need to concentrate on long term improvements in sound quality. What they should be designing is a platform that uses uses the full spectrum. The radios could be interoperative now and then be switched over to a single band with higher quality sound at a later date when there would be minimal impact on old radios.
Interoperable Receiver. The Order characterizes the Applicants’ interpretation of the Commission’s interoperability requirement as “not unreasonable” to excuse their earlier failure to develop and market interoperable receivers. The Applicants’ noncompliance created switching costs for consumers and, thus, limited pre-merger competition between the Applicants. Adding this condition today is virtually meaningless, because the merged entity will have every incentive to offer interoperable devices anyway. The point was to enforce the requirement before, not after, the merger. Doing it now is clearly a case of closing the barn door after the cows got out. At least the Order recognizes that this claimed benefit simply cannot be deemed merger-specific.