U.S Electronics has outlined a specific open access proposal for the FCC to consider. Some sector followers believe that open access is a concession that could carry some weight with at least some of the FCC commissioners. While the U.S. Electronics proposal would take away the ability of Sirius and XM to make their own hardware, it would also make the “interoperable radio” as well as the “HD chipset inclusion” issues virtually disappear because the merged company would no longer be in the hardware business.

Open access as a concept seems like a pretty workable situation, but there are concerns that still need to be addressed. Thus far, the only distributor/manufacturer seeking an open access condition is U.S. Electronics, a company currently in litigation with Sirius over the hardware that the company made, as well as other issues. With retail sales being weak, it does not seem like manufacturers are knocking on the door in an effort to make hardware for satellite radio. The fact that the list of manufacturers seeking the condition only has one member is a bit of a concern in that unless the marketplace wants to participate, many of the theoretical benefits that open access promises would not come to fruition.

U.S. Electronics lists Sirius Buzz a a supporter of the concept of open access, which to a certain extent is accurate. I feel that the concept can be sound given the right conditions. Whether those conditions can happen is another issue altogether. Read It All After The Jump

The U.S. Electronics Proposal (My Comments In Italics):

A. Definitions
1. “Sirius” means the post merger SDARS entity.

2. “Satellite Radio Receiver” means any device that contains a SDARS chipset or is capable of receiving SDARS signals. This includes but is not limited to receivers that may be used in a home, a motor vehicle, marine applications or portable environments.

3. “Qualified Manufacturer” and “Qualified Distributor” means, respectively, a manufacturer or distributor that offers or seeks to offer satellite radio receivers to consumers that have been or will be subject to testing by an accredited independent testing facility as described in section C.1. below.

B. Restrictions
1. Sirius shall not directly or indirectly engage in the design, manufacture or distribution of satellite radio receivers.

To take the ability for Sirius to be involved in the final design of a receiver that will carry their product is taking away what in the future could be a revenue stream for the company. To take away distribution rights could also carry a negative impact on the company. Sirius better understands where more radios are needed, and until the company is making money, they need to have the ability to be efficient with the products that carry their service. Additionally, the manufacturers are getting a direct benefit from Sirius marketing. When Sirius advertises their service, people look for receivers. Will their be a requirement for qualified manufacturers or distributors to market their hardware?

2. Sirius shall not enter into any exclusive agreements with any manufacturer, distributor, retailer, partner or auto manufacturer that limits the availability of hardware capable of receiving SDARS signal by consumers.

This issue again gets to the heart of taking away certain efficiencies that enable SDARS to expand at a rate that the company can handle and anticipate. This is particularly the case when the company is still subsidizing the chipsets. The company needs to control growth, and ensure that most of the chipsets they make turn into subscriptions. By example, if 85% of retail radios sold translate into subscriptions, then the company can plan their growth, cash flow, and expenses. If an open access manufacturer makes a poor product that people do not want, then the subsidized chipset sits on the store shelves with little chance of becoming a subscription. The company has now paid money into a radio that simply collects dust. Satellite radio sales do not work in certain retail environments. Sirius should have some say to ensure that the local supermarket, for example, has 30,000 units in a warehouse, and only moves one per week. In the OEM channel, half of the radios translate into a self paying subscriber. The company is aware of this, and structures their deals accordingly.

3. Sirius shall not participate in setting, influence or seek to influence, directly or indirectly, the retail price paid by consumers to acquire any satellite radio receiver or ancialliary hardware used to support the operation of a satellite radio receiver except through mechanisms allowed pursuant to D.2. below.

Again, this issue comes down to the fact that there are hardware subsidies paid by these companies on chipsets. This is Sirius investing money into a chipset that the company want to recover in the fastest way possible. In the past, these companies have virtually given away receivers in hopes of getting a good subscription. In particular, XM did this in the fourth quarter of 2006. The result was higher subscriber acquisition costs, and a miss in subscribers relative to guidance. The company stated at that time that there were enough radios out there to hit the guidance, but that many simply were not activated.

C. Publication of Technical Requirements

1. Sirius shall publish and make available all technical requirements and specifications for its chipset technology and for any hardware that is compatible with the SDARS network, including advance notice of any new, changed, modified or improved requirements or specifications to all interested and qualified hardware providers in an equitable manner that favors no partner or other entity or entities. This information shall be made available at least 6 months prior to their implementation and on a reasonable non-discriminatory basis.

This time lag could place Sirius in a situation where they miss certain key retail or OEM staging cycles. This would not be fair to the company.

2. Sirius shall ensure that all specifications comply with any federal, state, or local laws and regulations and that all such regulations are strictly adhered to.

I can understand that the specifications need to comply with the laws, but why should Sirius be in charge of supervising the open device manufacturers. Are they (the manufacturers) not taking on the responsibility of making the devices to the specifications?

3. Compliance with all requirements, specifications or regulations will be verified by accredited independent testing facilities prior to a device being offered to consumers and approval will be the responsibility of the manufacturer or distributor that develops the SDARS compatible receiver. Testing fees shall be the responsibility of the manufacturer or distributor seeking approval of a device to be offered to consumers.

Sirius should have audit rights of any accredited testing facility.

D. Voluntary, Non-Discriminatory Provision Of Subsidies

1. Chipset subsidies

a. Chipset subsidies, if provided by Sirius, shall be provided on a non-discriminatory basis, that is fixed and equal for all manufacturers and distributors and paid in an identical manner.

The heart of the issue. What if manufacturer “A” is far more successful at converting sales into subscriptions? Shouldn’t Sirius have the right to let company “A” make more radios? Particularly if Sirius is subsidizing the chipset. This issue is also missing the chasm that exists between the retail channel and the OEM channel. There is a lot more that goes into getting a SDARS receiver into a car. Typically, the subsidies are larger, and often there is even a subsidy for the installation into the car as well as the chipset.

b. Sirius shall not participate in setting, nor influence or seek to influence, the pricing to or from a manufacturer, wholesaler or retailer other than the subsidy, if any, referred to in paragraph “a” above, nor shall it accept or seek, directly or indirectly, from a manufacturer, wholesaler, or retailer any consideration intended to influence the distribution of chipsets.

Shouldn’t one of the criteria for distributing chipsets be based on the success of a manufacturer or distributor? If an open access company does an outstanding job at getting units sold that actually convert to new subscribers, they should get more business, and the opportunity to produce more radios. If an open access company can “deliver” where it counts, they should get additional consideration. In particular if a subsidy is involved. Additionally, Sirius need to know that when they deliver 300,000 chipsets to an open access company that those chipsets will be installed into radios and delivered into the channel in an appropriate timeframe. Chipsets delivered in Q2 and Q3 need to be on store shelves in Q4. Sirius can not afford an inventory hic-up because an open access company fails to manufacture in a timely manner.

c. Changes in subsidy amount, if any, shall be applied non-discriminatory, that is, applied to all recipients equally and at the same time and in the same amount for all partners and with reasonable and equal notice.

This method seems to take away from the very innovation that open access is supposed to deliver. There is also no protection here for Sirius. Perhaps a workable solution is that subsidies be paid upon activation of a manufactured device. This compels the open access companies to strive to develop good hardware, partner with good retailers, and move units.

d. Sirius shall have no financial interest in any manufacturer or distributor of satellite radio receivers.

e. Sirius shall make its chipsets available to qualified manufacturers and distributors on a reasonable non-discriminatory basis.

In my opinion, quality open access manufactures and distributors that deliver success should be able to build on that by getting access to more chipsets. Again, this is the competitive landscape. If a company develops something that people want, they should be able to make more, and Sirius should not be hindered because they are limited in the number of chipsets they deliver to any particular company. let the market and the statistics of sales have meaning.

2. Sales and Marketing Support: Marketing support, rebates, hardware discounts, or any promotional payments or incentives on hardware must be made available non-discriminatory to all qualified manufacturers, distributors, retailers or devices, as the case may be.

What if Best Buy were the biggest seller of satellite radio’s? Who is renting the shelf space? Sirius, or the open access manufacturer? Who is paying to put ads in the flyers? Sirius or the open access manufacturer? What if an open access manufacturer decides to sell their radios at a super market chain? Does Sirius have to spend as much money showing a radio in the supermarket flyer as they do in Best Buy? Sirius needs to be able to market themselves, and hardware is a part of that picture. Perhaps a scale based on sales statistics and success is a workable solution. Once again, the competitive situation that open access promises can not be compromised by everyone getting the same thing regardless of performance.

E. Monitoring and Enforcement of Condition

1. An independent monitor will be appointed by the FCC for the purpose of receiving complaints from manufacturers and distributors of satellite radio receivers concerning any violations of this condition, and to assist the commission in enforcement of the condition.

Who pays the monitor? I am not comfortable putting any more responsibility in the government.

2. The independent monitor will recommend to the commission proposed resolution of any alleged violation of the condition.

That is the U.S. Electronics filing as well as my comments on what was filed. Now, I would like to address something that in my opinion is missing…..Protection for the consumer.

1. Any open device manufacturer or distributor must have dedicated customer service via a toll free number so that consumers who have issue with a product can get resolution. This customer service must be accountable to an independent monitor paid for by the open access contractor but hired by Sirius. Detailed descriptions of issues must be maintained, and resolutions described in detail.

2. Any condition that limits innovation must be looked at with a careful eye. The key benefit, in theory, of open access is that various companies will innovate and develop. A good open access company should be able to reap the rewards of their work, and garner more business because of it, not be limited to a specified number of chipsets because that is the same number that the weakest link gets. Open access should reward the performance, and not be a regulation that requires Sirius as well as the consumer to carry dead weight.

3. Documentation that accompanies any open access device shall state clearly who this device is manufactured by and the contact information for customer service. This information shall be the only information on the page, and should be bold so that the consumer is not confused as to what to do if there is a problem.

In a perfect world, open access would provide a benefit to Sirius, the manufacturers and distributors, as well as the consumer. Any open access condition in my opinion MUST give all three entities equal weight and footing. Anything shy of this will be a condition for failure of open access.

Position – Long Sirius, Long XM