The standard Guidelines analysis would suggest a rebuttal presumption that the relevant antitrust market is satellite radio. However, new products seeking a larger

market presence often must compete with a more established technology, even if there is just one producer of the new product. This argument loses its force the longer the “new” product has been on the market, especially where there the new product is sold be two firms competing head-to-head. Thus, a key factual question posed by this merger will be whether satellite radio has come to the point where the gains from consolidating the subscriber bases of the two providers are more significant than the need to keep prices low in order to continue adding new subscribers.

In addition to the market definition and competitive effects analysis, the Antitrust Division and the FCC will consider the efficiencies that may be generated by the merger. To be cognizable under the Guidelines, any efficiencies must be merger specific (i.e., not attainable without the merger or through less anticompetitive means) and verifiable. In addition, efficiencies that would tend to reduce price (i.e., efficiencies that generate lower variable costs) are more apt to be recognized. Fixed cost savings, which typically do not lead to lower prices in the short term, or only credited in limited circumstances. Further, efficiencies almost never justify a 3-to-2 or 2-to-1 merger. Mergers make economic sense to for two basic reasons; the merged firm can expect increased profits either from higher prices or lower costs. The existence of efficiencies at least provides a procompetitive reason for parties to merge (although a merger can both lower costs and lead to higher prices).

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 market

place. There appear to be plausible efficiencies that will be generated by the merger (e.g., elimination of duplicative programming, better spectrum and satellite utilization and savings in subscriber acquisition and other overhead). However, the parties' efficiencies story – even if it can be substantiated – may not be enough to justify the merger if the Antitrust Division and the FCC believe the relevant market is limited to satellite radio.

Finally, the ease with which new firms could enter the market will also be evaluated. In this case, there is a regulatory barrier to entry – an FCC license. However, even if additional licenses were available from the FCC, it appears unlikely that a new firm could enter the market and become a meaningful competitor within the two year period envisioned by the Guidelines; as the existing satellite companies have demonstrated, it is expensive and time-consuming to attract the content and customers necessary to develop a viable business in this industry.

Conclusion

A merger between XM and Sirius poses obvious competitive issues. On the one hand, the merger quite plausibly is a merger to monopoly in a satellite radio market. On the other hand, XM and Sirius will advance market definition arguments that, if supported by the evidence, provide sufficient legal basis to permit the merger to proceed. The best answer to the market definition question will be found in evaluating the real world factors that go into a marginal consumer's calculation of what he or she will pay for satellite radio. The evidence relevant to this evaluation will come from a variety of sources, including the parties' documents, past pricing behavior and an understanding of how and why consumers choose to spend their money on satellite radio.

Mr. CONYERS. Thank you so much.

Mr. Karmazin, it is all yours now. You are the final witness, and you have been referred to more than once here.

TESTIMONY OF MEL KARMAZIN, CEO,

SIRIUS SATELLITE RADIO

Mr. KARMAZIN. Well, thank you very much. And good afternoon. Thank you very much, Chairman Conyers, Congressman Smith, Congressman Chabot and the Members of the Antitrust Task Force, for this invitation to talk to you about the pending merger between XM and Sirius satellite radio.

I am speaking today on behalf of both companies. With me here today is Gary Parsons, chairman of XM.

With your permission, I think what I would like to do, because I think it would be more meaningful, is to abandon my opening comments, which I will be happy to make them available to you, and spend a little bit of time talking about this merger and what we think it means for consumers and the public.

So far, I agree with everything that was said. I think it is the very early stages of this merger. I can tell you that we look forward to working with Congress, working with the regulators, and convincing everybody that this merger is in the best interest of the public.

I think that our obligation is going to be twofold. We will have an obligation to demonstrate that this merger is not anticompetitive. I hear that we will probably be working with the DOJ and I am convinced that we will give them enough information and they will get their own information to make that determination.

I can tell you for sure that satellite radio competes with the 10,000 terrestrial radio stations. We compete with over the 1,000 HD radio stations on the air today. We compete with the Internet for Internet radio. We compete with all kinds of services that, interestingly enough, weren't available at the time when our licenses were given.

So, you know, the idea of comparing where we are from a technology point of view today and comparing it to where it was 10 or 12 years ago, when statements were made, we think is sort of not very consumer-friendly because the world has changed.

So number one, we know that both with the Justice Department and with the FCC, we are going to have to convince them that this is not anticompetitive. I think even more important, if there is something more important than that, is that I believe in order to convince Congress and the regulators that this deal should be approved, is that we are going to have to demonstrate that this is in the consumers' best interest, because if we cannot convince everybody that this is in the consumers' best interest, then this merger will not be approved. And I am confident that the members of the FCC, if they didn't believe it, would not vote for it and we wouldn't get antitrust approval.

We are absolutely convinced that this merger is in the consumers' best interest. This merger will give people more choice than they have before and lower prices and, very importantly, less confusion. So if you think about the way it is today without the merger, there are two different radios that a consumer needs to

buy. It would be like buying one for AM radio and one for FM radio. But it was obviously determined that a receiver that would get both services would be in the consumer's best interest.

There is a great deal of confusion in the marketplace because they are interested, when they buy a car and they go and buy a General Motors car and that comes with an XM radio and that XM radio doesn't enable the consumer to pick up the NFL, that is not very consumer-friendly. And we believe that this merger will absolutely give the consumer more benefits.

So number one, one of the benefits will be is that no radio will be obsolete. I heard that mentioned earlier and there was a concern that the people who have bought an XM radio or they bought a Sirius Satellite Radio, those radios would be obsolete. And we can guarantee that is not the case.

We also have said that there would be more choice for consumers and we believe that by consolidating these companies, we are going to be able to offer the consumer who wants to be able to have the NFL and wants to be able to have Major League Baseball, instead of them buying two radios and paying $25.90 a month, that they will be able to do it at a cheaper price.

So what we believe will serve the consumer's best interest would be to give them more choice. We are committed to giving the consumer more choice. Count on it. Okay?

And if you want to count on it in some other ways other than us saying it, I am sure that the FCC and the Justice Department could absolutely keep our feet to the fire on that kind of commit

ment.

And, number two, what we are committed to doing is offering lower prices. We are saying we are not going to raise our price and we are going to offer the consumer something that they have not had before.

So, Sirius has never, ever raised its price. We started our service, the first subscriber paid $12.95. They are currently paying $12.95. Our vision would be that, because we are competing with free radio, because $12.95 has only enabled us to get 10 million subscribers nationally, we are competing with the 200 million cars that have AM and FM radio, we are competing with 109 million homes that have four radios in it. So the idea of raising a price to compete with free is bizarre and doesn't seem to work.

But you know what? Maybe you are concerned that you don't want to deal with the economics. I am telling you today that we are committed, we are committed to not raising prices and committed to in fact lowering the price. So if the consumer is going to be able to have more choice, guaranteed no price increase and be able to have an option-more flexibility for a lower price we think that we would meet the standard of absolutely saying that this merger is in the public interest.

So I look forward to working with the regulators. I look forward to working with this Committee and I look forward to working with consumers in making sure that that they see this advantage as well.

Thank you.

[The prepared statement of Mr. Karmazin follows:]

E

Mr. Chairman,

PREPARED STATEMENT OF MEL KARMAZIN

Good afternoon. Thank you, Chairman Conyers, Ranking Member Smith, and members of the Anti-Trust Task Force for the invitation to talk with you about our merger with XM Satellite Radio.

I'm Mel Karmazin, the CEO of Sirius Satellite Radio. Before I came to Sirius in 2004, I was president of Viacom, and before that, president of CBS. I've spent just about my entire working life in the broadcast industry.

I am speaking today on behalf of both companies. With me here today is Gary Parsons, the chairman of XM. Gary is a veteran of the communications business, a real leader in the world of satellite radio. Gary and I are both looking forward to working together to create an exciting new company.

Gary's leadership and talent are crucial to this merger. He built XM into the success it is today. I should point out that XM has the largest digital radio facility of its kind in the country, and is headquartered right here in Washington.

We firmly believe that this transaction is essential to preserving and enhancing choice for consumers. A combined company will be able to compete more effectively in the highly competitive and rapidly evolving audio entertainment marketplace. Our new enterprise will enhance the audio industry's future.

I appreciate this opportunity to explain why we believe so strongly that this merger will benefit American consumers.

This afternoon I would like to focus on the two most important aspects of this merger:

1. How this merger will lead to increased consumer choice and lower prices; and

2. How this merger enhances competition in an already highly competitive market.

CONSUMER CHOICE AND LOWER PRICES

Since the creation of satellite radio in 1997, the consumer has been at the center of our business plan. Consumer wants and needs have brought the technology and the industry to where it is today and the consumer continues to be our number one priority. That simple but important fact will not change post-merger. The long-term success of satellite radio rests on growing our subscriber base. As a single company, we expect to provide current and future subscribers the best and most diverse audio content available.

A merged company will also give subscribers additional programming options and pave the way for even more programming. We expect that consumers will no longer have to subscribe to both services in order to receive the most popular programming. We want subscribers on both systems to be able to listen to both the NFL and Major League Baseball. Both the PGA and NCAA basketball. Both Oprah Winfrey and Martha Stewart.

Moreover, in the long-term the significantly expanded channel capacity of our merged company will give consumers access to a greater range of programming. XM and SIRIUS already broadcast a wide range of commercial-free music channels, exclusive and non-exclusive sports coverage, news, talk, and entertainment programming. In the long-term, our combined company expects to be able to expand diverse programs for underserved interests. For example, we hope to expand foreign language and religious programming.

The merger will also result in a combined focus on designing the best products and innovative services for our subscribers. By combining our research and development, we will be able to design and introduce radios and transmission infrastructure that will give satellite radio subscribers the best experience in audio entertainment. We will be able to speed the introduction of radios offering content from both of our services today-something that has been challenging as separate companies. We anticipate that together, our radios will be smaller, lighter, simpler, and more technologically-advanced than what each company has on the market today. Over time, we will look to combine our satellite and terrestrial transmission infrastructure to deliver the broadest range of content and the highest level of service quality. Finally, we'll use our combined resources to improve upon our nascent non-audio services, like Backseat Video, real-time traffic and weather, and other infotainmentstyle data services. At the same time, we will accelerate the delivery of innovative services and products.

It is important to realize, however, that our individual radios will not become obsolete as a result of this combination. Any radios or other equipment that subscribers currently use will be fully supported by SIRIUS and XM. When more tech