choice they now purport to offer consumers under the merger but without the necessity of a
merger. It's important to point out that in their discussion of consumer choice, the merging
parties fail to consider the loss of choice between the two providers as a meaningful one. The
two parties have not, as a matter of business practice, offered consumers the most
fundamental choice - which channels to pay for. They stuck to a high-priced, high volume
bundle, which is anti-competitive and anti-consumer.

Moreover, under the scant details released to date, it remains unclear what additional equipment costs will be imposed on consumers as a result of the merger and whether, if consumers fail to invest in additional equipment, they will enjoy benefits the parties purport to provide to their subscribers.

Because this is a unique product market, once the competition is eliminated, prices

will rise and no commitments have been made to the contrary. More importantly, the primary driver of innovation and progress in both programming and technology - competition in the market - will be eliminated. Innovation will slow to the pace preferred by the monopolist and consumers will be much worse off in the long run. This is a Faustian bargain that America rejected over a century ago when we affirmed our commitment to competition by enacting the Sherman Act. The short-term benefit of a monopolist who is subject to political oversight is simply not worth the long-term costs of abandoning the competitive engine of economic

progress.

Offers of conditions on the mergers should also be taken with a grain of salt. The recent track record of conditions has been abysmal and the satellite radio industry has already proven that it cannot be trusted to live up to conditions imposed on it. Let us be clear. The licenses were issued subject to the condition that the licensees never merge. Yet here they are

e

C

8

asking to be excused from that condition. The licensees promised to offer the public interoperable radios that would work with on both networks. Yet, ten years have passed and there is no such interoperability. We are told interoperable radios have been developed but are too costly and thus manufacturers will not install them. Yet we have no ability to verify whether the lack of commercial availability of interoperable radios is due to cost, is the result of technical barriers, or instead is a strategic decision to impose barriers to prevent consumers from switching services. The parties have violated conditions about non-interference and use of terrestrial repeaters. In short, from day one they have failed to meet the conditions of their licenses and the public has suffered as a result.

This merger has such a high threshold to pass that at this stage of the merge review, we refuse to play the merger condition game. If the antitrust and regulatory authorities are diligent in the merger review process, they will turn up a host of competitive, pricing, bundling, contractual, and equipment issues and practices that counsel denial of the merger. If, in spite of that clear message, they choose to allow the merger, there will be time to craft meaningful conditions with strong, automatic enforcement mechanisms, so that the dismal record of recent merger conditions is not allowed to repeat itself.

A satellite radio merger to monopoly is about an avalanche of mergers. There was a key moment a decade ago when the Department of Justice decided that a large monopolist is no worse then two smaller monopolists and allowed the Bell Atlantic-NYNEX merger to go forward. That decision opened the door to a wave of mergers that doomed head-to-head competition in telecommunications. The old telephone monopoly was recreated as two hugc geographically distinct monopolies that rarely if every compete.

M

A satellite radio merger to monopoly will perform a similar bellwether function. If the agencies with oversight adopt a loose definition of products and markets and allow a merger to monopoly on the basis of intermodal competition, then a tsunami of merger will ripple through the digital space at the worst possible moment. The firms that have declared their undying hostility to the open flow of products in the digital economy (broadcasters, telephone/cellular companies, cable companies), will be empowered to capture and stifle the alternatives, under the premise that every media and telecommunications product competes with all others and that new technologics and services will come along to protect the consumer in any case. That relief, however, will be slow and insufficient because the competitive core of the digital economy will have been damaged and the critical terrain of the digital economy will be controlled by entities who have the same anticompetitive anti

consumer objectives as the merging parties in this case.

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 calcula