Open Access has been a proposal that was originally brought to the forefront by Gigi Sohn of Public Knowledge. The concept is simple. Open up the SDARS platform to allow manufacturers to create satellite radios. The subscription would still be through Sirius and XM, but the hardware may be developed by anyone.
Open Access sounds great in theory. U.S. electronics, Directed Electronics, Delphi, Audiovox, and many others all competing to bring a compelling product to market that consumers will vie for. What could possibly go wrong?
With SDARS, the issue is a bit complex. The chipsets for SDARS have been subsidized by Sirius and XM over the years. Is it fair to force the companies to dole out chips to any manufacturer out there that wants to hop into the radio manufacture business? Not really.
So how does open access happen in a fair and equitable way? A way that works well for consumers, while at the same time not placing undue expenses on the merged companies.
I had the opportunity to speak with Cameron McAlpine and Kathy Wallman who have recently been working with U.S. Electronics on their discussions with the FCC regarding open access as a merger condition.
To be frank, I have been highly critical of U.S. Electronics in the past. I felt strongly that their filings early on in the process were an effort to bring about open access, but were just as much aimed at Sirius because of ongoing arbitration/litigation between Sirius and U.S. Electronics.
More recently, U.S. Electronics has toned down what I call the arbitration rhetoric, and concentrated on a real issue relating to the merger. I commend the company for taking that step, and commend U.S. Electronics for reaching out to me to discuss the Open Access issue.
In my conversations with Cameron and Kathy, I outlined what I felt were the compelling issues with regard to the subject. I explained that I felt that the street and sector watchers were battle fatigued after over a year of channeled trading, and what seems to be request after request with regard to the merger. I told them that in my opinion, a proposal needs to have some “meat and potatoes” for it to gain acceptance by the street. It is only through putting cards on the table that people can wrap their head around all of the various proposals and situations on that exist in the poker game of a merger.
Miss Wallman expressed that what is being sought is a level playing field for manufacturers to participate in the satellite radio market. If subsidies are an issue that the various companies be treated in an equal manner. This is a proposal that seems fair. It is inclusive rather than restrictive, and it allows for the engineers of potentially several companies to innovate the products that are capable of receiving satellite radio.
Miss Wallman, Mr. McAlpine and I discussed in depth the issue of consumer comprehension and quality control. It is reasonable that certain measures need to be taken to ensure that products not only meet the quality controls of Sirius and XM, but also meet the needs of consumers. U.S. Electronics fully grasps this situation, and proposes some guidelines to ensure quality control. The crux of their proposal with regard to quality control is that an independent organization be brought on to ensure that certain standards are maintained in a fair, balanced and appropriate manner.
From a logistics standpoint, Sirius and XM also need certain guarantees with regard to how many units are produced, and in what time frame. In particular this is essential if Sirius and XM are still subsidizing the chipsets. Cash flow is important to companies, and a demand cycle exists that require a ramp up of devices at certain points during the year of SDARS devices It would be unfair and unrealistic to expect Sirius and XM to deliver and subsidize 1,000,000 chips to a certain company only to have that company sit on those chipsets for months without any production, or wind up with delays not in the control of Sirius or XM. U.S. electronics points out that the decision of giving a subsidy is a decision made by the SDARS company. In theory, this is correct. The companies needed to subsidize chipsets in order to launch the service. If there was enough interest in creating devices on an open platform, perhaps the subsidy can disappear. However, getting to that point of reality carries a lot of speculation.
As an example, consider HD radio. Ibiquity is having a challenge getting acceptance by consumers because their product is not readily available. Until it becomes readily available, it will not be popular. It is a classic chicken and egg situation. A subsidy is paid in order to gain market acceptance. The sensitivity in this issue surrounds the subsidy. Will it or will it not exist?
U.S. Electronics feels that a merger would create a SDARS monopoly. In a narrowly defined marketplace this could indeed be the definition. However, the Department of Justice has outlined a broad marketplace. Consumers will have and already do have wide variety in the audio entertainment landscape. Open access has the potential to bring about great innovation in SDARS, but it needs to be planned correctly.
The concept of open access can work it is fair to all parties involved. Any proposal short of the following standards (as well as other aspects not listed) should be something that the FCC as well as the street is very aware of should this platform be considered. While the FCC, Sirius, XM, and U.S. Electronics may not agree with each of these points, I think that they can all see the reasoning behind them:
1. Open access should encourage competition and development by independent manufactures so as to deliver quality products to consumers from companies that will stand behind their products.
2. Open access should be fair to manufacturers in that they have an equal opportunity to participate without the fear of being undercut. Only through this fairness can true open access work.
3. Companies that develop products have rights to patent and protect their work, but must also be willing to open their platform so that others can also deliver these products to consumers. Open access for the purpose of simply developing ideas to patent and sell to the highest bidder defeats the purpose of the concept.
4. Sirius and XM need the ability to dictate certain standards of production, approval, and quality. These quality standards can be monitored by an independent party.
5. Companies that participate need to have accessible customer service agents who consumers can contact. Customer service of these companies needs to maintain certain business practices that include live support and a published consumer comment section that is reported to not only the respective manufacturers, but to Sirius and XM as well. Companies that fail to properly support their product, or generate large numbers of complaints should be removed from the open access platform.
6. Open access manufactures should agree to maintain parts for a minimum of three years to service the devices they build. Parts should be readily available for order at reasonable prices from that manufacturer’s website.
7. Non-disclosure of information that Sirius and XM want protected needs to be agreed upon and strict controls in place to ensure this need to be implemented.
The goal in developing an open access platform is that it is fair to Sirius and XM, the manufacturers who wish to participate, and the consumers who will be buying the product. If Open access can accomplish this, there is very little that any party can complain about.
U.S. Electronics has taken strides in bringing the issue of open access to a point where it is beginning to take the shape of something that can satisfy all three parties involved (manufacturer, the merged company, and the consumer). Getting to this step is commendable. There is still work to be done, and still more light that can be shed on the issue. Whether this can happen in a timely enough fashion is yet to be determined, but as a consumer as well as an investor, I can appreciate the efforts that have started. I can only say that I wish these steps had been taken earlier.
Sirius Buzz would like to thank Miss Wallman and Mr. McAlpine for reaching out to us.
Position – Long Sirius, Long XM