Evaluating market power with two-sided demand and preemptive offers to dissipate monopoly rent: Lessons for high-technology industries from the antitrust division's approval of the XM-Sirius satellite radio merger

Journal of Competition Law and Economics

Volumn 4, Issue 3, 2008, Pages 697-751

  Sidak, J Gregory ^a,b   Singer, Hal J ^a  

^a Criterion Economics LLC ^*

^b International Institute for Competition Law and Economics

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[No Author keywords available]

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EID: 54149119881     PISSN: 17446414     EISSN: 17446422     Source Type: Journal    
DOI: 10.1093/joclec/nhn019     Document Type: Article

References (265)

1. Antitrust Modernization Commission, Report and Recommendation 9 (April 2007), available at http://www.amc.gov/ report_recommendation/amc_final_report.pdf.
2. See Request For Further Comment on Selected Issues Regarding the Authorization of Satellite Digital Audio Radio Service Terrestrial Repeater Networks, Public Notice, DA 01-2570, 1 (November 1, 2001), available at http://www.fcc.gov/ftp/Bureaus/International/ Public_Notices/2001/pnin1232.doc.
3. Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines, revised April 8, 1997, at §1.0 (emphasis added).
4. Id. at §1. 11 ("In considering the likely reaction of buyers to a price increase, the Agency will take into account all relevant evidence, including, but not limited to, the following: (1) evidence that buyers have shifted or have considered shifting purchases between products in response to relative changes in price or other competitive variables; (2) evidence that sellers base business decisions on the prospect of buyer substitution between products in response to relative changes in price or other competitive variables; (3) the influence of downstream competition faced by buyers in their output markets; and (4) the timing and costs of switching products.").
5. Id. at §1.0 ("Supply substitution factors - i.e., possible production responses - are considered elsewhere in the Guidelines in the identification of firms that participate in the relevant market and the analysis of entry.").
6. U.S. Department of Justice and Federal Trade Commission, Commentary on the Horizontal Merger Guidelines, Introduction (March 2006), available at http://www.usdoj.gov/atr/public/guidelines/215247.htm (emphasis added) [hereinafter Merger Guidelines Commentary].
7. Id. Statement of the Department of Justice Antitrust Division on Its Decision to Close Its Investigation of XM Satellite Radio Holdings Inc.'s Merger with Sirius Satellite Radio Inc. (Mar. 24, 2008) [hereinafter DOJ Decision to Close Investigation] (emphasis added).
8. 15 U.S.C. §18.
9. Id. Statement of the Department of Justice Antitrust Division on Its Decision to Close Its Investigation of XM Satellite Radio Holdings Inc.'s Merger with Sirius Satellite Radio Inc. (Mar. 24, 2008) [hereinafter DOJ Decision to Close Investigation] (emphasis added).
10. The Division's analysis is misguided in other important respects. The Division concluded that competition for existing customers is over because there is no evidence of switching. DOJ Decision to Close Investigation, supra note 9. Yet, a disinclination on the part of consumers to switch is true of any durable good. Moreover, evidence developed in the investigation indeed showed a propensity to switch in response to unilateral quality-adjusted price changes. Also, the two SDARS carriers compete for all types of customers through the development of new content offerings. The Division further concluded that competition for potential customers is limited in both the auto and retail channels. DOJ Decision to Close Investigation, supra note 9. The facts belie this conclusion as well. Regarding the automobile OEM channel, although carmakers have indeed entered into exclusive agreements with SDARS providers, dealers are nevertheless free to install alternative SDARS systems. Switching costs relative to the price of a new car are trivial. Survey evidence developed in the investigation also indicated that 22 percent of customers had the device professionally installed after the purchase of a vehicle. Regarding the retail channel, XM and Sirius provided no evidence to show demand-side substitution from other audio devices. Moreover, although exclusive content may cause some customers to perceive XM and Sirius as imperfect substitutes, it is impossible to identify those price-insensitive customers; it is the marginal customer who constrains prices. A merger to monopoly would eliminate that constraint.
11. Consolidated Application for Authority to Transfer Control of XM Radio Inc. and Sirius Satellite Radio Inc., In the Matter of XM Satellite Radio Holdings Inc., Transferor and Sirius Satellite Radio Inc., Transferee, MB Dkt No. 07-57, filed March 20, 2007.
12. See FRED S. MC CHESNEY, MONEY FOR NOTHING: POLITICIANS, RENT EXTRACTION, AND EXTORTION (1997); Fred S. McChesney, Rent Extraction and Rent Creation in the Economic Theory of Regulation, 16 J. LEGAL STUD. 101 (1987).
13. Merger Guidelines, supra note 3, §1.0.
14. See, e.g., Scott Woolley, Freedom Of Speech On Satellite Radio FORBES. COM, October 6, 2004, available at http://www.forbes.com/home/services/2004/10/06/cx_sw_1006stern.html.
15. For a more extensive discussion, see Farrell Malone & J. Gregory Sidak, Should Antitrust Consent Decrees Regulate Post-Merger Pricing?, 3 J. COMPETITION L. & ECON. 471 (2007).
16. 15 U.S.C. §18.
17. FTC v. Proctor & Gamble, 386 U.S. 568, 577 (1967). Horizontal Merger Guidelines, §0.2. Although the Merger Guidelines provide a persuasive framework for evaluating transactions, reviewing courts retain the freedom to tailor the analytical and evidentiary approach to suit specific case needs. Moreover, the government does not bind itself to the framework whenever it litigates to block a merger. Id. at § 0.1.
18. Id. at §0.2 (emphasis added).
19. Id. at §0.1.
20. Complaint, United States v. Oracle Corp., No. 04-0807 (N.D. Cal. San Francisco Div. Feb. 26, 2004) [hereinafter Oracle Complaint]
21. see also U.S. Department of Justice: Antitrust Division, Press Releases available at http://www.usdoj.gov/atr/public/press_releases/ 2008/index08.htm (last visited April 17, 2008).
22. Oracle Complaint, supra note 2 1, at 31.
23. Id. at 40. The complaint alleged, in paragraph 40: "(a) Competition in the development, provision, sale and support of high function HRM software and high function FMS software in the relevant product and geographic markets would be eliminated or substantially lessened; (b) actual and future competition between Oracle and PeopleSoft, and between these companies and others, in the development, provision, sale and support of high function HRM software and high function FMS software would be eliminated or substantially lessened; (c) prices for high function HRM software and high function FMS software would likely increase to levels above those that would prevail absent the merger; (d) innovation and quality of high function HRM software and high function FMS software would likely decrease to levels below those that would prevail absent the merger, and; (e) quality of support for high function HRM software and high function FMS software would likely decrease to levels below those that would prevail absent the merger." Id.
24. United States v. Oracle Corp., 331 F. Supp. 2d 1098, 1109 (N.D. Cal. 2004) (quoting United States v. Penn Olin Chem. Co., 378 U.S. 158, 171 (1964) ["a section 7 violation is established when the 'reasonable likelihood' of a substantial lessening of competition in the relevant market is shown"]).
25. Oracle, 331 F. Supp. 2d at 1110 (quoting Brown Shoe Co. v. United States, 370 U.S. 294, 323 [1962]) (emphasis added by the Brown Shoe court).
26. Id. (quoting Hospital Corp. of Am. v. FTC, 807 F.2d 1381, 1389 [7th Cir. 1986] [Posner, J.]).
27. Id. at 1158.
28. One commenter suggests that the decision in Oracle is partly attributable to a trend of increased deference to high-tech business conduct and heightened reluctance on the part of courts to interfere with technological development. See Yane Svetiev, Antitrust Governance: The New Wave of Antitrust, 38 LOY. U. CHI. L.J. 593 (2007).
29. See Department of Justice: Antitrust Division, Press Releases available at http://www.usdoj.gov/atr/public/Press_releases/2008/indexO8.htm (last visited April 17, 2008). The relevant transactions that the Antitrust Division has reviewed and declined to challenge since 2004 are: Chicago Mercantile Exchange and CBOT (2007); Smithfield and Premium Standard Farms (2007); AT&T and BellSouth (2006); MediaNews and Contra Costa and San Jose Mercury News (2006); Maytag and Whirlpool (2006); Instinct Group and NASDAQ (2005); New York Stock Exchange and Archipelago Holdings (2005); Sprint and Nextel (2005); America West and U.S. Air (2005); Arch Wireless and Metrocall (2004); United Health and Oxford Health (2004); and Anthem and Wellpoint (2004). Of course, several transactions have cleared the review process of the Antitrust Division upon agreement by the parties to divest specific holdings.
30. See, e.g., Press Release, Department of Justice: Antitrust Division, Justice Department Requires Mill Divestitures in Proposed Merger of Altivity and Graphic Packaging, available at http://www.usdoj.gov/atr/public/press_releases/2008/230790.htm (March 5, 2008).
31. Statement of the Department of Justice Antitrust Division on Its Decision to Close Its Investigation of XM Satellite Radio Holdings Inc.'s Merger with Sirius Satellite Radio Inc. (March 24, 2008) [hereinafter DOJ Decision to Close Investigation] (emphasis added).
32. The Antitrust Division's elevated standard of competitive harm cannot be bootstrapped from a principle of prosecutorial discretion to a legitimate statutory interpretation of Section 7 that is entitled to judicial deference. Under Chevron, an agency is entitled to deference on reasonable interpretations of its ambiguous statute. Chevron, Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842-845 (1984). The Clayton Act, however, is not ambiguous in this respect. There is a clear linguistic and logical distinction between "may" and "is likely to." The two formulations are not subject to confusion. Congress chose the former, more speculative standard. judicial interpretation of Section Ts incipiency standard comports with the plain language of the statute, as illustrated by judge Posner's decision in Hospital Corp. of America, 807 E2d at 1389. Consequently, the argument that a court should defer to the Division's interpretation of Section 7 would collapse on Chevron's first prong.
33. XM SATELLITE RADIO, INC., The Facts About What the NAB Is Saying (S.E.C. FORM SCHEDULE 14A), at 4, March 6, 2007.
34. See, e.g., DENNIS W. CARLTON & JEFFREY M. PERLOFF, MODERN INDUSTRIAL ORGANIZATION 612 (Addison Wesley 3rd ed. 2000).
35. Merger Guidelines, supra note 3, §1.0 ("Market definition focuses solely on demand substitution factors - i.e., possible consumer responses. Supply substitution factors - i.e., possible production responses - are considered elsewhere in the Guidelines in the identification of firms that participate in the relevant market and the analysis of entry.") (emphasis added).
36. Merger Guidelines Commentary, supra note 6, at §1 ("Product market definition depends critically upon demand-side substitution - i.e., consumers' willingness to switch from one product to another in reaction to price changes. Tle Guidelines' approach to market definition reflects the separation of demand substitutability from supply substitutability - i.e., the ability and willingness, given existing capacity, of firms to substitute from making one product to producing another in reaction to a price change. Under this approach, demand substitutability is the concern of market delineation, while supply substitutability and entry are concerned with current and future market participants.").
37. See FTC v. Arch Coal, Inc., 329 F. Supp. 2d 109, 120 (D.D.C. 2004)
38. United States v. Oracle Corp., 331 F. Supp. 2d 1098, 1108 (N.D. Cal. 2004)
39. United States v. Sungard Data Systems, Inc., 172 R Supp. 2d 172, 182 (D.D.C. 2001)
40. FTC v. Swedish Match, 131 F. Supp. 2d 151, 160 (D.D.C. 2000)
41. FTC v. Cardinal Health, Inc., 12 F. Supp. 2d. 34, 46 (D.D.C. 1998).
42. See also United States v. Microsoft Corp., 253 F.3d 34, 51 (D.C. Cit. 2001)
43. CF Indus., Inc. v. Surface Transp. Bd., 255 F.3d 816, 823 n. 13 (D.C. Cit. 2001)
44. United States v. Engelhard Corp., 126 F.3d 1302, 1304 (11th Cit. 1997)
45. United States v. VISA U.S.A., Inc., 163 F. Supp. 2d 322, 335 (S.D.N.Y 2001).
46. Merger Guidelines, supra note 3, §1. 11.
47. Id.
48. A Westlaw search produces no cases that contain the words "other competitive variables" and "Merger Guidelines." There is no specific or extensive discussion of what that phrase means in any antitrust treatise.
49. It is not relevant to the market definition exercise to ask, for example, whether a teetotaler considers whiskey to be a substitute for water.
50. See, e.g., Steven C. Salop, Steven R. Brenner, Lorenzo Coppi & Serge X. Morisi, Economic Analysis of the Competitive Effects of the Sirius-XM Merger, July 24, 2007 [hereinafter CPA Report]. It is conceivable, of course, that the conduct cited by the CRA Report had nothing to do with entry by SDARS providers. More important, there is little if anything in the CRA Report about what XM or Sirius has done in response to the supply-side activities of these other suppliers.
51. The Merger Guidelines framework does not explicitly allocate burdens of proof and production with respect to specific issues. Merger Guidelines, supra note 3, §0.1. However, a reviewing court must ultimately consider "whether the effect of the merger 'may be substantially to lessen competition' in the relevant market." See United States V. Philadelphia Nat'l Bank, 374 U.S. 321, 363-6 (1963). An initial showing of evidence that a merger "produces a firm controlling an undue percentage share of the relevant market, and results in a significant increase in the concentration" permits an inference that the effect of the merger "is so inherently likely to lessen competition substantially that it must be enjoined in the absence of evidence clearly showing that the merger is not likely to have such anticompetitive effects."
52. Id. at 363.
53. See also PHILLIP AREEDA & HERBERT HovENKAmp, ANTITRUST LAW 905'h, at 191 (Supp. 1998). This showing involves proof of market structure, market behavior, and factors such as the likelihood of entry, buyer concentration and sophistication, product durability, product differentiation, sales methods, presence or absence of vertical integration, and history of coordination. Id. The Merger Guidelines also note that merging parties must meet the burden of proof regarding any claimed efficiencies argued to arise from the merger.
54. Merger Guidelines Commentary, supra note 6, at §4 ("In litigation, the parties have the burden on any efficiencies claim (Guidelines §0.1 n.5), and it is to their advantage to present efficiency claims (including supporting documents and data) to the reviewing Agency as early as possible."). Thus, in the case of a merger to monopoly, in which the market shares and market concentration reach maximum values, proponents face an extremely high probative duty.
55. See Jonathan B. Baker, Market Definition: An Analytical Overview, 74 ANTITRUST L.J. 129, 141 (2007).
56. Id. at 133-4 (emphasis added).
57. Id. at 135.
58. Verizon Communications Inc. and MCI, Inc., Memorandum Opinion & Order, 20 EC.C.R. 18,433, 18,463-64 57-8 (2005) [hereinafter Verizon-MCI MO&O]
59. AT&T Inc. and BellSouth Corporation Application for Transfer of Control, Memorandum Opinion & Order, 22 F.C.C.R. 5662, 5711-14 90-95 (2007) [hereinafter AT&T-BellSouth MO&O]
60. Applications of AT&T Wireless Services, Inc. and Cingular Wireless Corporation, Memorandum Opinion & Order, 19 F.C.C.R. 21,522, 21,557 71 (2004) [hereinafter AT&T-Cingular MO&O]
61. SBC Communications Inc. and AT&T Corp., Memorandum Opinion & Order, 20 F.C.C.R. 18,290, 18,341-6, 18,357 90, 92, 94-6, 100, 125 (2005) [hereinafter SBC-AT&T MO&O]
62. Applications of Nextel Communications, Inc. and Sprint Corporation, Memorandum Opinion & Order, 20 F.C.C.R. 13,967, 13,984, 13,991 39, 58 (2005) [hereinafter Nextel-Sprint MO&O]
63. Applications for Consent to the Assignment and/or Transfer of Control of Licenses Adelphia Communications Corporation (and Subsidiaries, Debtors-In-Possession), Assignors, to Time Warner Cable Inc. (Subsidiaries), Assignees
64. Adelphia Communications Corporation (and Subsidiaries, Debtors-In-Possession), Assignors and Transferors, to Comcast Corporation (Subsidiaries), Assignees and Transferees
65. Comcast Corporation, Transferor, to Time Warner Inc., Transferee
66. Time Warner Inc., Transferor, to Comcast Corporation, Transferee, Memorandum Opinion & Order, 21 F.C.C.R. 8203, 8234-35 59, 62 (2006) [hereinafter Comcast-Adelphia MO&O].
67. Craig Moffett & Amelia Wong, Satellite Radio: Limitations of Digital Radio Suggest Impact on Satellite Radio Will Likely Be Small, BERNSTEIN RESEARCH CALL, December 8, 2005, at 4 (emphasis added).
68. XM Satellite Radio Raises Monthly Fee, CHI TRIB., March 1, 2005, at 10 ("XM said it would raise the price of it basic service to $12.95 per month from $9.99 beginning April 2, matching Sirius' monthly fee.").
69. XM RADIO, ANNUAL REPORT (SEC Form 10-K), at 1 (March 16, 2006) (showing 6 million subscribers)
70. XM RADIO, QUARTERLY REPORT (SEC FORM 10-Q), 18 (November 07, 2005) (showing 5 million subscribers)
71. XM RADIO, QUARTERLY REPORT (SEC 10-Q), at 19 (August 5, 2005) (showing 4.4 million).
72. This price increase is direct evidence of XM's market power, which is more reliable than inferential evidence based on market share calculations. Market shares do not make price increases; firms do.
73. Howard's way - Satellite radio, THE ECONOMIST, January 14, 2006 (citing an unnamed executive at Sirius).
74. Craig Moffett & Amelia Wong, XMSR: Few Surprises, but Strong Second Quarter Affirms Positive Long Term Trends, BERNSTEIN RESEARCH CALL, July 29, 2005 at 7.
75. Howard's way - Satellite radio, THE ECONOMIST, January 14, 2006 (quoting Mel Karmazin).
76. Heather Green & Tom Lowry, Media The New Radio Revolution; From satellite to podcasts, programming is exploding - but the fight for profits will be ferocious, BUS. WK., March 14, 2005, at 32.
77. Craig Moffett & Amelia Wong, Sirius (SIRI) and XM (XMSR): Back to First 1),inciples ... Lowering SIRI Target Price, but Reiterate Outperform, BERNSTEIN RESEARCH, February 21, 2006. Bernstein explains that the aggregate churn rate for XM is a composite of self-paid churn and the churn of subscribers coming off original equipment manufacturers' promotional periods, which is not comparable to Sirius's churn rate. Thus, customers who receive three months of free SDARS are more likely to cancel their subscription than a customer who selected the service voluntarily.
78. See, e.g., Craig Moffett & Amelia Wong, XMSR: Few Surprises, but Strong Second Quarter Affirms Positive Long Term Trends, BERNSTEIN RESEARCH CALL, July 29, 2005 at 8 ("While the low churn suggests low price elasticity, cross-elasticity (i.e. choice between brands) remains unknown. On the margin, there are almost certainly some subscribers - in the retail channel - who previously chose XM over Sirius because of the difference in subscription cost.").
79. See, e.g., Craig Moffett & Amelia Wong, XM Satellite Radio (XMSR): Lowering Target Price to Reflect Conversion Rate Concerns; Maintain Outperform, BERNSTEIN RESEARCH CALL, February 17, 2006 ("Conversion Rate is the best indicator of cross-sectional consumer demand for satellite radio.").
80. Id.
81. Id.
82. See, e.g, Dan M. Kahan, Between Economics and Sociology: The New Path of Deterrence, 95 MICH. L. REV. 2477, 2491 (1997) (arguing that the demand for pornography is inelastic because pornography is addictive).
83. Frontline: American Porn: Interview With Dennis McAlpine, http://www.pbs.org/wgbh/pages/frontline/shows/porn/interviews/ mcalpine.html (last visited February 7, 2007).
84. NATIONAL RESEARCH COUNCIL, YOUTH, PORNOGRAPHY & THE INTERNET (Dick Thornburgh & Herbert S. Lin eds, 2003).
85. Economists recognize that regulation may have the effect of segmenting a market for purposes of proper antitrust analysis. See, e.g., Niels Haldrup, Peter Møllgaard & Claus Kastberg Nielsen, Sequential Versus Simultaneous Market Delineation: The Relevant Antitrust Market for Salmon, 4 J. COMPETITION L. & ECON. (forthcoming 2008) (analyzing whether regulation causes Norwegian salmon to be in a different antitrust market from Scottish salmon).
86. U.S.C. §1464 (2000).
87. C.F.R. §73.3999 (2006).
88. In re Industry Guidance on the Commission's Case Law Interpreting 18 U.S.C. §1464 and Enforcement Policies Regarding Broadcast Indecency, Policy Statement, 16 F.C.C.R. 7999, 8002 (2001).
89. U.S.C. §503(b)(2)(C) (2006)
90. Obscenity, Indecency & Profanity, http://www.fcc.gov/eb/oip/Welcome.html (last visited March 2, 2007).
91. In re Complaints Against Various Broadcast Licensees Regarding Their Airing of the "Golden Globe Awards" Program, Memorandum Opinion and Order, 18 F.C.C.R. 19,859 (2003).
92. Id. at 19,861.
93. See Complaints Against Various Broadcast Licensees Regarding Their Airing of the "Golden Globe Awards" Program, Memorandum Opinion and Order, 19 F.C.C.R. 4975 (2004).
94. Id. at 4979.
95. Id. at 4980.
96. Id. at 4981
97. see 18 U.S.C. §1464 (2000) (prohibiting the broadcast of "obscene, indecent, or profane language") (emphasis added). The Second Circuit subsequently vacated the FCC's order in the Bono case and remanded the proceeding to the agency.
98. See Fox Television Stations, Inc. v. FCC, 489 F.3d 444 (2d Cit. 2007).
99. See Indecency Complaints and NALs: 1993-2006, http://www.fcc.gov/ eb/oip/Stats.html (last visited February 4, 2007) [hereinafter Indecency Complaints]. The only other period of sizeable annual fines was in 1993 and 1994, when the Commission assessed liability totaling approximately $1.2 million, largely due to several broadcasts by Howard Stern. FCC Indecency Fines, 1970-2004, WASH. POST, http://www.washingtonpost.com/wp-srv/business/ graphics/web-fcc970.html (last visited February 4, 2007).
100. Indecency Complaints, supra note 74.
101. Id.
102. Id.
103. Obscene, Profane & Indecent Broadcasts: Consent Decrees, http://www.fcc.gov/eb/broadcast/CD.html (last visited February 6, 2007).
104. Id.
105. FCC Indecency Fines, supra note 74. The complaints focused on a simulated group-sex scene at a high-school party.
106. Sarah McBride, Clear Channel Dumps Stern After Big Fine, WALL ST. J., April 9, 2004, at B1.
107. Opie and Anthony also broadcast a censored version of their show on CBS Radio.
108. Pub. L. No. 109-235, 120 Star. 491 (2006).
109. See Frank Ahrens, Six-Figure Fines For Four-Letter Words Worry Broadcasters, WASH. POST., July 11, 2006, at A1
110. David Hinckley, Local Radio: We're Good With FCC Rules, N.Y DAILY NEWS, July 10, 2006, at 82.
111. Id. at 45 (citing In re Applications of Harriscope of Chicago, Inc., Memorandum Opinion and Order, 3 F.C.C.R. 757, 760 n. 2 [1988]).
112. In the Matter of Satellite CD Radio, Inc., Memorandum Opinion and Order, FCC Dkt No. 01-335, 16 F.C.C.R. 21458, 21460 (2001).
113. Letter from W. Kenneth Ferree, Media Bureau Chief, FCC, to Saul Levine, President of Mt. Wilson FM Broadcasters, 19 F.C.C.R 24,069 (December 14, 2004) (citing In re Applications of Harriscope of Chicago, Inc., 3 F.C.C.R. 757, 760 n. 2 [1988]).
114. See Robert Corn-Revere, Can Broadcast Indecency Regulations Be Extended to Cable Television and Satellite Radio?, 30 S. ILL. U. L.J. 243, 271 (2006).
115. See FCC v. Pacifica Foundation, 438 U.S. 726, 748-9 (1978).
116. XM Parental Controls, http://www.xmradio.com/parentalcontrols/index.jsp (last visited February 3, 2007).
117. Sirius Satellite Radio, www.sirius.com (last visited March 3, 2007) (see link at bottom).
118. United States v. Playboy Entertainment Group, 529 U.S. 803, 813 (2000) (applying strict scrutiny to cable content-based regulation) (citing Sable Communications v. FCC, 492 U.S. 115, 126 [1989] [applying strict scrutiny in challenge to content-based regulation of landline telephone service]).
119. Stern may program several Sirius channels; two are currently on the air. See SIRIUS SATELLITE RADIO, UNSCHEDULED MATERIAL EVENTS (SEC FORM 8-K), §8.01 (October 6, 2004).
120. Paul Davidson, Indecent or Not? TV, Radio Walk Fuzzy Line, USA TODAY, June 3, 2005, at 1B.
121. Frank Ahrens, Six-Figure Fines for Four-Letter Words Worry Broadcasters, WASH. POST., July 11, 2006, at A1.
122. PBS Issues Indecency Guidelines in Response to FCC Fines, PUBLIC BROADCASTING REP., June 23, 2006.
123. Michael Heaton, Indecency the Old-Fashioned Way, CLEVELAND PLAIN DEALER, February 17, 2006, at 60.
124. Dan Caterinicchia, Elliot Wakes to Subpoena, WASH. TIMES, June 28, 2006, at C8
125. see also Sarah McBride & Julia Angwin, Tough House: Broadcast Lags Satellite in Radio Race for Laughs, WALL ST. J., September 24, 2005, at 13.
126. Playboy Clicks With On-Demand Fare, VARIETY, July 10, 2006, at 16.
127. See, e.g., Cesca Antonelli, Sirius Radio Passes 3 Million Subscribers, CHI. TRIB., December 28, 2005, at 3 (citing Citigroup analyst Ellen Furukawa).
128. Editorial, Stern Action, CLEVELAND PLAIN DEALER, January 6, 1993, at 4B ("When FCC Chairman Al Sikes was diagnosed with prostate cancer, Stern replied with characteristic dignity: 'I pray for his death."').
129. See, e.g., Antonelli, supra note 99.
130. Jacques Steinberg, Stern Likes His New Censor: Himself, N.Y. TIMES, January 9, 2007, at E1.
131. Alana Semuels, Sirius Gives Stern, Agent $83 Million Stock Bonus, L.A. TIMES, January 10, 2007, at 1.
132. Id.
133. Gene G. Marcial, Stern Is the Draw At Sirius Satellite Radio, BUS. WK., April 10, 2006, at 104.
134. Stern's $82M Anniversary, NEWSDAY, January 10, 2007, at A10.
135. Press Release, Sirius Satellite Radio, Howard Stern Marks First Year of the Radio Revolution on Sirius Satellite Radio (January 9, 2007).
136. XM RADIO, ANNUAL REPORT (SEC FORM 1O-K), at 23 (March 3, 2006).
137. See id. at 1
138. SIRIUS SATELLITE RADIO, ANNUAL REPORT (SEC FORM 10-K), at 3 (March 16, 2005).
139. In the Matter of Subscription Video, 2 F.C.C.R. 1001, 1003, 20 (1987).
140. Id. at 1005.
141. Id.
142. Id. at 1006.
143. See Request For Further Comment on Selected Issues Regarding the Authorization of Satellite Digital Audio Radio Service Terrestrial Repeater Networks, Public Notice, DA 01-2570, 1 (November 1, 2001), available at http://www.fcc.gov/ftp/Bureaus/International/ Public_Notices/2001/pnin1232.doc.
144. Id.
145. United States v. Clear Channel Communications, Inc., No. 1:00CV02063, 2001 WL 34038532 (D.D.C. Feb. 27, 2001). Competitive Impact Statement 2 (Nov. 15, 2000), concerning United States v. Clear Channel Communications, Inc., 2001 WL 34038532 (D.D.C. 2001).
146. Id.
147. See, e.g., Adam Thierer, XNT+ Sirius=Good Deal (for the Companies and Consumers), The Progress & Freedom Foundation Progress Snapshot, Release 3.4, February 2007 ("At a minimum, the 'relevant market' in this merger review should include all the potential sources of audible information/entertainment that are competing for our cars, including: Free, over-the-air terrestrial radio broadcast stations; compact discs (or other stored media); iPods and MP3 players; digital music stores; podcasts; online file sharing; Internet radio stations and other services (such as Pandora); the 'Music Choice' cable radio service; and other portable media entertainment/communications devices and services.").
148. Sirius News Release, January 8, 2003 (available at http://investor.sirius.com/ReleaseDetail.cfm?ReleaseID=154702&cat= &newsroom).
149. XM Corporate Information (available at http://www.xmradio.com/about/ corporate-information.xmc) ("XM's 2007 lineup includes more than 170 digital channels of choice from coast to coast: The most music in satellite radio, including 69 commercial-free music channels and exclusive live concerts and original programming, plus premier sports, talk, comedy, children's and entertainment programming; and 21 channels of the most advanced traffic and weather information.").
150. Tom Lowry, Antenna Adjustment; Clear Channel is pulling apart its empire as it scrambles to compete in a changed media world, BUS. WK., June 20, 2005, at 64.
151. Why radio is worth watching, THE ECONNOMIST, June 11, 2005, at 15 (citing analyst Ted Schadler).
152. XM SATELLITE RADIO, INC., ANNUAL REPORT (S.E.C. FORM 10-K), at 1, March 15, 2001 (citing American Radio, Spring 2000 Ratings Report, Duncan's American Radio, 2000).
153. Craig Moffet & Amelia Wong, Satellite Radio: Limitations of Digital Radio Suggest Impact on Satellite Radio will Likely Be Small, BERNSTEIN RESEARCH CALL, December 8, 2005, at 1.
154. XM SATELLITE RADIO, INC., ANNUAL REPORT (SEC FORM 10-K), at 2, March 15, 2001.
155. Id. (citing census data and The Arbitron Company Fall 1999 Market Rankings).
156. Id. (citing The Satellite Report 1999, C. E. Unterberg, Towbin).
157. Interstate Connections, About Us, available at http://www.icrocks.com/ic/ about.asp?id=57 (citing trucker statistics from Randall Publishing surveys and Truckers News and Overdrive Magazine).
158. XM SATELLITE RADIO, INC., ANNUAL REPORT (SEC FORM 10-K), at 4, March 15, 2001.
159. Press Release, Wilson Research Strategies, Survey of Satellite Radio Subscribers (July 8, 2007), available at http://www.w-r-s.com/press/ WPS_NABSatRadioSurvey_PressRelease_070710.pdf.
160. Id.
161. Id.
162. Id.
163. See What is HD Radio, iBiquity Digital Corporation Website (last visited March 9, 2007), at http://www.ibiquity.com/hd_radio
164. Heather Green & Tom Lowry, Media the New Radio Revolution; From satellite to podcasts, programming is exploding - but the fight for profits will be ferocious, BUS. WK., March 14, 2005, at 32.
165. For example, according to Robert Unmacht of the media consultancy IM3 Partners, Clear Channel's digital offerings are not comparable to SDARS offerings: "The programming is not compelling enough yet to get somebody to buy [an HD] receiver." Tom Lowry, From Vanilla To Full Metal Racket; Clear Channel is racing into the Digital Age with an array of high-def niche channels, BUS. WK., May 1, 2006, at 42.
166. Heather Green & Tom Lowry, Media The New Radio Revolution; From satellite to podcasts, programming is exploding - but the fight for profits will be ferocious, BUS. WK., March 14, 2005, at 32.
167. Craig Moffett & Amelia Wong, Satellite Radio: Limitations of Digital Radio Suggest Impact on Satellite Radio Will Likely Be Small, BERNSTEIN RESEARCH CALL, December 8, 2005, at 1-2 (emphasis added).
168. Id.
169. Id.
170. Id.
171. Id.
172. See Podcasting and ITunes: Frequently Asked Questions, Apple iTunes Website (last visited March 9, 2007), at http://www.apple.com/ itunes/store/podcastsfaq.html.
173. Craig Moffett, Amelia Wong & Judah Rifkin, Satellite Radio 1Q Preview: All Eyes Are on Conversion Rates, SAC, and iPods, BERNSTEIN RESEARCH, April 25, 2006.
174. Sirius and XM: Can Two Archrivals Sing the Same Tune?, KNOWLEDGE@WHARTON, February 21, 2007, available at http://knowledge.wharton.upenn.edu/createpdf.cfm?articleid= 1667&CFID=3861947&CFTOKEN=62968861 (quoting Dr Gerald Faulhaber, Wharton Business and Public Policy Professor).
175. Id.
176. See, e.g., Cingular Wireless Coverage Viewer, available at http://www.cingular.com/coverageviewer/.
177. Sarmad Ali, Technology - The 10 Biggest Problems With Wireless & How to Fix Them - Missing Calls, Dead Zones, Surprise Charges; What Are Cellphone Companies Doing About Them., WALL ST. J., October 21, 2006, at R1.
178. Thomas Eisenmann & Alastair Brown, Satellite Radio, HARVARD BUSINESS SCHOOL CASE STUDY, November 20, 2003, at 7. The case study does not attempt to quantify the difference in quality.
179. Bill Machrone, Internet Radio: Failed Promise?, PC MAGAZINE, September 9, 2003, at http://www.pcmag.com/article2/ 0,4149,1268106,00.asp ("RealAudio's lower bit rates often sound as if they were recorded in a huge steel drum, with a hollow, boomy quality. Windows Media is bass-heavy, which is ideal if you like a funky groove. MP3 sounds the most neutral to me, but each player has a unique sound, too. A given MP3 sample will sound somewhat different when played on MusicMatch, RealOne, Windows Media Player, or Winamp. The differences are subtle but noticeable.").
180. Craig Moffett & Amelia Wong, Satellite Radio II: The Competition Between XM and Sirius; Like Coke and Pepsi, Expect Market Shares to Converge, BERNSTEIN RESEARCH CALL, June 29, 2005, at 20 ("In the end, both services have very high consumer satisfaction scores (XM at around 90%, Sirius 95%) and very low churn rates, so consumers appear to be quite satisfied with the quality of the listening experience at both services, despite the difference in network architecture.").
181. Eisenmann & Brown, supra note 154, at 7
182. (citing John L. Stone, Sirius Upside Potential, LADENBURG THALMANN & CO. INC., August 15, 2001, at 16).
183. See Cingular Data Connect Plans, available at http://www.cingular.com/cell-phone-service//cell-phone-plans/ data-connect-plans.jsp. (We use the cost of an unlimited data package to approximate the amount of bandwidth needed to approximate normal radio usage.)
184. See, Heather Green, et al., The New Radio Revolution; From Satellite to Podcasts, Programming Is Exploding - but the fight for profits will be ferocious, BUS. WK., March 14, 2005.
185. See, e.g., Verizon Terms of Service (available at http://www.verizonwireless.com/b2c/store/ controller?item=planFirst&action=viewPlanDetail&catId=409)
186. AT&T Terms of Service (available at: http://onlinestorez.AT&Tcom/ cell-phone-service/wirelessphone-plans/cell-phone-plans.jsp?WT.svl= 2206800007&qtˇid=2206800007).
187. Nick Wingfield, RealNetworks, Sprint Will Offer Radio Via Phones, WALL ST. J., September 19, 2006.
188. CRA Report, supra note 41, at 21-25.
189. Id. at 22 n. 61.
190. Id. at 24 n. 74.
191. Id. at 22.
192. CRA Report, supra note 41, at 10.
193. Verizon-MCI MO&O, supra note 46, at 18,449, 18,465-6, 18,494
194. AT&T-BellSouth MO&O, supra note 46, at 5678, 5700, 5729-31
195. AT&T-Cingular MO&O, supra note 46, at 21,558, 21,561
196. SBC-AT&T MO&O, supra note 46, at 18,307, 18,322, 18,324, 18,352-3
197. Nextel-Sprint MO&O, supra note 46, at 13,989-90
198. Comcast-Adelphia MO&O, supra note 46, at 8269 (2006).
199. There is no mention of the phrase "dynamic demand" in the Federal Trade Commission's and Department of justice's Commentary on the Merger Guidelines, released in May 2006. No witness (including Professor Salop) relied on the phrase "dynamic demand" in his or her testimony before the Antitrust Modernization Committee. Moreover, the AMC did not mention the phrase, let alone endorse the concept of altering the SSNIP test when evaluating mergers in dynamic industries.
200. CPA Report, supra note 41, at 62. In addition to efficiency defenses relating to product quality, XM and Sirius offered efficiency arguments relating to (1) reduced content acquisition costs (Part IV.F.), (2) reduced automobile OEM distribution costs (Part IV.G.), and (3) reduced retail distribution costs (Part IV.H.). Setting aside the issue of deadweight welfare loss from monopsony power, all of these claimed efficiencies represent at best a transfer of surplus from equipment and content suppliers to XM and Sirius. Thus, they would not even increase the inappropriate total welfare standard. Moreover, because they would not reduce the merged firm's marginal costs, none of these claimed efficiencies would redound to the benefit of consumers in the form of lower SDARS prices or expanded output. In fact, one would expect that these so-called "savings" would result in the combined XM-Sirius becoming less aggressive in signing up incremental subscribers, because these savings would allow the combined firm to maintain its profitability with fewer subscriptions. In other words, the combined company will likely sell fewer subscriptions than XM and Sirius would sell absent the merger. For this reason, none of the claimed efficiencies can be counted on to offset a reduction in consumer welfare caused by an increase in SDARS prices or more commercials or both.
201. Id. at 61-62.
202. Further Economics Analysis of the Sirius-XM Merger, November 9, 2007, Appendix A, at 38-59 [hereinafter CPA Further Analysis].
203. Id. at 39 n. 136
204. (citing EVERETT M. ROGERS, DIFFUSION OF INNOVATIONS [1983]
205. Frank M. Bass, A New Product Growth Model for Consumer Durables, 15 MGMT. SCI. 1825 [1967]
206. JEAN TIROLE, THE THEORY OF INDUSTRIAL ORGANIZATION 71 [MIT Press 1990]).
207. Id.
208. See, e.g., Antitrust Modernization Committee, Report and Recommendations (April 2007), available at http://www.amc.gov/ report-recommendation/toc.htm (last visited November 5, 2007) at 32 ("Antitrust analysis, as refined to incorporate new economic learning, is sufficiently flexible to provide a sound competitive assessment in such industries.").
209. Id.
210. Merger Guidelines, supra note 3, §0.2.
211. CRA Further Analysis, supra note 171, at 40. ("This understanding of the implications of dynamic demand on pricing and investment is central to analyzing the competitive effects of the merger. It is also central to constructing a hypothetical monopolist test for market definition that fits the facts and circumstances of this merger and therefore will define the relevant market a way that informs rather than obscures an understanding of the competitive effects of the merger.") (emphasis added) [hereinafter CPA Supplemental Report].
212. See, e.g., Timothy F. Bresnahan, Empirical Methods for Industries with Market Power, in 2 HANDBOOK OF INDUSTRIAL ORGANIZATION (Richard Schmalensee & Robert Willig eds, North Holland 1989)
213. PAUL W. MACAVOY, THE FAILURE OF ANTITRUST AND REGULATION TO ESTABLISH COMPETITION IN LONG-DISTANCE TELEPHONE SERVICE 102 (MIT Press 1996).
214. For an application of this method in the airline industry, see J.A. Brander & A. Zhang, Market Conduct in the Airline Industry: An Empirical Investigation, 21 RAND J. ECON. 569 (1990).
215. Craig Moffett & Judah Rifkin, XM Satellite Radio (XMSR): Clearer Skies Ahead, BERNSTEIN RESEARCH, July 5, 2006 (showing nationwide market shares as of the end of the third quarter 2006 of 42 percent and 58 percent for Sirius and XM, respectively).
216. Merger Guidelines, supra note 3, §3.0.
217. Charles Babington & Thomas Heath, Satellite Radio Firms Plan To Merge; XM, Sirius Face Antitrust Hurdles, WASH. POST, February 20, 2007, at A01.
218. Conference call to discuss the merger of Sirius Satellite Radio and XM Satellite Radio, February 20, 2007, available at http://online.wsj.com/ documents/transcript-xmsr-20070220.pdf.
219. Id.
220. See, e.g., PATRICK S. MC CARTHY, TRANSPORTATION ECONOMICS, THEORY & PRACTICES: A CASE STUDY APPROACH 121 (Blackwell 2001) (showing the value-of-time estimates by income by transportation mode).
221. Louis Hau, Sirius CEO Discusses The Biz, FORBES.COM, September 17, 2007, available at http://www.forbes.com/business/2007/09/ 17/sirius-xmradio-advertising-biz-media-cx_lh_0917karmazin.html.
222. Id.
223. See, e.g., Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., Inc., 127 S. Ct. 1069, 1075 (2007) ("The reduction in input prices will lead to 'a significant cost saving that more than offsets the profit [s] that would have been earned on the output.' If all goes as planned, the predatory bidder will reap monopsonistic profits that will offset any losses suffered in bidding up input prices."); DENNIS CARLTON & JEFFREY PERLOFF, MODERN INDUSTRIAL ORGANIZATION 107 (Addison Wesley 3d ed. 2000).
224. Hospital Corp. of Am. v. FTC, 807 F.2d at 1391-92. ("Hospital Corporation's most telling point is that the impetus for the Commission's complaint came from a competitor.... The hospital that complained to the Commission must have thought that the acquisition would lead to lower rather than higher prices - which would benefit consumers, and hence, under contemporary principles of antitrust law, would support the view that the acquisitions were lawful.").
225. Consolidated Application for Authority to Transfer Control of XM Radio Inc. and Sirius Satellite Radio Inc., In the Matter of XM Satellite Radio Holdings Inc., Transferor and Sirius Satellite Radio Inc., Transferee, MB Dkt. No. 07-57, filed March 20, 2007, at 38 (citing Press Release, National Association of Broadcasters, NAB Statement in Response to Proposed Sirius/XM Merger, February 19, 2007) [hereinafter Merger Application.
226. See The XM-Sirius Merger: Monopoly or Competition from New Technologies: Hearing Before the S. Committee on the Judiciary, Subcommittee on Antitrust, Competition Policy and Consumer Rights, 110th Cong. 8 (March 20, 2007) (statement of Gigi Sohn, President of Public Knowledge) (noting NAB's opposition to the merger).
227. See Holman W. Jenkins, Jr., Beyond Parity, WALL ST. J. at A14, April 25, 2007 ("Naturally, leading the opposition is the National Association of Broadcasters. That competitors would lobby against a merger as 'anticompetitive' is now accepted without a guffaw.") [hereinafter Beyond Parity].
228. For explanations of the relevance of two-sided markets to antitrust analysis, see J. Gregory Sidak, A Consumer Welfare Approach to Network Neutrality Regulation of the Internet, 2 J. COMPETITION L. & ECON. 349 (2006)
229. David S. Evans, The Antitrust Economics of Multi-Sided Platform Markets, 20 YALE J. ON REG. 325 (2003)
230. Jean-Charles Rochet & Jean Tirole, Platform Competition in Two-Sided Markets, 4 J. EUR. ECON. ASS'N 990 (2003). The seminal article on two-sided markets is William F. Baxter, Bank Interchange of Transactional Paper: Legal and Economic Perspectives, 26 J.L. & ECON. 541 (1983).
231. Antitrust Division Policy Guide to Merger Remedies, Oct. 2004, available at http://www.usdoj.gov/atr/public/guidelines/205108.pdf.
232. Id. at 7.
233. Id. at 8.
234. Id. at 8-9.
235. Id. at 18.
236. Id.
237. Id. at 22.
238. Id. at 20.
239. Id.
240. For an explanation of why the FCC was willing to play this role, see J. Gregory Sidak & Hal J. Singer, Foxes in the Henhouse: FCC Regulations through Merger Review, 10 MILKEN INSTITUTE REVIEW (2008).
241. Merger Application, supra note 189, at i-ii ("The efficiencies resulting from the merger will allow the combined company to provide consumers programming choices on a more á-la-carte basis at lower prices.").
242. Id. at ii ("Consumers will also be able to block adult-themed channels and receive a price credit for those channels.").
243. Id. at 14 ("This additional capacity also will allow the combined company to provide additional programming related to public safety and homeland security.").
244. Id. at 13 ("[Offering] expanded non-English language programming ... and additional programming aimed at minority and other underserved populations.").
245. Antitrust Task Force Subcommittee, House Committee on the Judiciary, Competition and the Future of Digital Music, February 28, 2007, at 13-14 (2007) (statement of Mr Mel Karmazin, CEO of Sirius Satellite Radio) (transcribed by CQ Transcription) [hereinafter Antitrust Task Force Hearings].
246. XM SATELLITE RADIO, INC., The Facts About What the NAB Is Saying (S.E.C. FORM SCHEDULE 14A), at 6, March 6, 2007 (emphasis added).
247. Antitrust Task Force Hearings, supra note 207, at 6-7 (Rep. Sensenbrenner added: "And I don't think that's the kind of model that we policy makers want to sign off on because we've already rejected that in other areas where regulated utilities have been.").
248. R. Hewitt Pate, Assistant Att'y Gen'l, Antitrust Division, U.S. Dept of Justice, Senate Committee on the Judiciary Antitrust Enforcement in the Agricultural Marketplace October 30 (2003), available at http://www.usdoj.gov/atr/public/testimony/201430.htm
249. see also Pamela Jones Harbour, A Check-Up of Selected Health Care Activity at the Federal Trade Commission, ABA Antitrust Section Spring Meeting (March 30, 2005) (noting the DOJ does not accept price regulation as a means of solving competitive concerns in antitrust review of mergers).
250. Reply Brief for Plaintiff Appellant FTC at 5, FTC v. Butterworth Health Corp., No. 96-2440, 1997 App. LEXIS 17422 (July 8, 1997)
251. see also Mary Lou Steptoe & David Balto, Finding the Right Pescription: The FTC's Use of Innovative Merger Remedies, 10 ANTITRUST 16 (Fall 1995) ("The FTC has consistently rejected these proposals on the grounds that it is not a price-regulatory agency, compliance is difficult to monitor, and competition is the proper driving force for pricing decisions.").
252. Butterworth Health Corp. v. FTC, 946 F. Supp. 1285 (W.D. Mich. 1996).
253. The denial of preliminary injunction turned, in a large part, on the court's observation that "nonprofit hospitals may be treated differently under the antitrust laws." Id. at 1298.
254. See id.
255. Id.
256. FTC v. Cardinal Health, Inc., 12 F. Supp. 2d 34, 67 (D.D.C. 1998).
257. Id.
258. See, e.g., Richard G. Parker, Senior Deputy Director, Bureau of Competition, FTC, Trends in Merger Enforcement and Litigation, Annual Briefing for Corporate Counsel (September 16, 1998), at http://www.ftc.gov/speeches/other/parker.htm (noting a previous merger attempt by parties in the Cardinal Health case was blocked and prices fell in the years following the injunction).
259. See Stephen Calkins, In Praise ofAntitrust Litigation, 72 ST. JOHN's L. REV. 1, 9 (1998) ("If any lesson has been well-learned by economists and even politicians, it is that regulation is a poor substitute for competition.").
260. See, e.g., Farrell Malone & J. Gregory Sidak, Should Antitrust Consent Decrees Regulate Post-Merger Pricing?, 3 J. COMPETITION L. & ECON. 471 (2007).
261. ICC v. Cincinnati, New Orleans & Tex. Pac. Ry., 167 U.S. 479, 505 (1897).
262. Nor has Congress given legislative delegation to the FCC with respect to price regulation for satellite video services. Indeed, Chairman Martin has publicly noted that the FCC is not a rate regulator in this kind of situation. In discussing the proposed Echostar-DirectTV merger, he stated that a "detail we would need to iron out is how this policy [of uniform national pricing] would be enforced - I, for one, am generally hesitant to enter the rate regulation business." Kevin Martin, Commissioner, Federal Communications Commission, Remarks at The Carmel Group's Satellite Entertainment 2002: TV and Radio From Space (April 25, 2002) http://www.fcc.gov/Speeches/Martin/2002/spkjm2O5.txt.
263. Id. at 11 ("The proposed merger will generate significant synergies that will allow the combined company to offer consumers programming choices on a more à-la-carte basis at lower prices. Customers may, if they elect, continue to enjoy programming substantially similar to that which they currently receive after the merger at the existing monthly price of $12.95; the combined company will also offer consumers the options of receiving either fewer channels at a lower price or more channels, including the 'best of both' networks, at a modest premium to the existing $12.95 per month price.").
264. Merger Application, supra note 189, at 11.
265. Id. at 12 n. 26.