Category: Business

Competition Over Central Planning

Over at Cafe Hayek, Russ Roberts has an excellent commentary on FCC Chairman Kevin Martin’s concerns about a Sirius-XM merger. I agree with Mr. Roberts entirely, and as a Sirius subscriber, I’ll pay more if I can get the same quality Sirius service I have now and Major League Baseball.

One bit of Mr. Roberts’ post struck an interesting thought:

Five years ago there was no satellite radio. When one company came along (I don’t know who was first, Sirius or XM), should the FCC have shut them down for daring to monopolize the market? So why is it now that there’s two going back to one we have a potential calamity that the government has to worry about?

That’s an excellent question. Sirius was formed first, but XM was the first to broadcast. For those who think the government has a legitimate function in regulating this way, the government should’ve mandated that the two companies begin broadcasting on the same day. That would’ve been the only fair way to have them compete on equal footing. It can artificially decide that two is the magic number of satellite radio providers. It should be able to dictate business conditions, too. No?

Received in the Mail Yesterday

Coinciding painfully close to Kip’s recent entries on web merchant scandals, I’ve found myself in the midst of similar stupidity on the part of a brick and mortar¹ merchant. Last August, while in Seattle, Danielle and I rented a car from Alamo. We landed close to 1:00am at SeaTac. When picking up our rental car, Alamo’s reservation system was down. As such, they couldn’t verify my credit card. The clerk wrote my credit card information on the rental agreement to charge later. All good, I thought.

Yesterday, I received a letter from Alamo that I haven’t paid my invoice. The letter said this [emphasis in original]:

Dear Sir or Madam

RA#XXXXXXXXX AMOUNT DUE $410.91

You have not been invoiced for this rental.

This is your FINAL NOTICE. If we do not receive payment immediately, your account will be placed with an outside collection agency for further action. In addition, you will not [sic] longer be eligible to rent from Alamo Rent A Car or National Car Rental. Any further attempts to rent will not be honored.

To avoid this action, send payment in full in the enclosed envelope today.

Sincerely,

Alamo attached a copy of the original rental agreement with this friendly note. I quickly figured out that the clerk at SeaTac wrote the digits from my street address in place of the last four digits of my credit card number. Fascinating, but what should be clear is that this was not my error.

I’ll probably resolve this easily enough by sending them my correct credit card number. I’ll first verify that their system didn’t charge my credit card using the correct digits I entered when renting the car, but the solution is clear. It sucks to get hit with a $410 charge now when I’d assumed I already paid it. But whatever.

In response to this letter, though, Alamo need not worry about honoring any future attempt from me to rent a car from them. None will be forthcoming. The same applies to National.

I can understand an error. But do not sit on this for more than 6 months and then, in your first communication to me on the matter, threaten me with collection action. Implying that you’ll damage my credit because you’re too stupid to write down my payment information and too stupid to send me a letter for more than 6 months brings out my inner Mr. Garrison Mr. Hat: “You go to hell! You go to hell and you die!”

¹ I know Alamo isn’t a brick and mortar company in the context of that term, although I think it qualifies. But I figure if that’s what their employees have where brains should be, the term fits well enough.

Hyperbole of the Day

From yesterday’s Congressional anti-trust hearings into the proposed Sirius-XM merger.

“A tsunami of mergers will rip through the digital media space if this merger is allowed,” says Mark Cooper, research director for the Consumer Federation of America.

For once, I can say I’m glad I did not write that line.

Only Evil Empires Choose Those Colors

This is the attitude I like to see going into the start of Spring Training games:

“I hate the Mets,” said Brett Myers, who made it clear it was more about the uniform than individual players. “I want to beat them more than anyone else. What we need to do is make sure none of their fans get in our building. We shouldn’t sell tickets to Mets fans.”

I second that notion. I have extra reasons to hate the dreadful orange and blue combination, of course. But, yeah, I hate the Mets more than anyone.

I also think it’s a splendid idea for the Phillies to not sell tickets to Mets fans. If you show up at the ballpark wearing Mets gear, no tickets for you. If you call from a New York metro area code, no tickets for you. If your credit card has a New York metro zip code, no tickets for you. Just like there are local blackout restrictions for television, teams should be able to implement targeted non-local blackout restrictions on ticket sales.

Major League Baseball would never allow it, but that doesn’t mean it isn’t a brilliant idea. Wonderful thinking, Brett.

Via Balls, Sticks, & Stuff

It’s the 48th inning. Everyone’s exhausted. Keep playing!

Steven Pearlstein offers a few reasons why the government should block the proposed merger between Sirius and XM. Mostly, it’s boilerplate fear of big business and its assumed power to dominate people’s lives. I think I yawned once or twice while reading it. He wrote the perfect summation against his argument in his conclusion. It only takes a moment of looking beyond the words.

What we have here, folks, is a case of two money-losing companies locked in what has become ruinous competition, from which they hope to escape by merging. It may be that, given the economics of the business, there is room for only one to survive and prosper. But if satellite radio is such a “natural monopoly,” consumers will be better off if the companies are forced to duke it out until one prevails and the other dies. The antitrust laws were designed to foster competition, not to foreclose it by bailing out competitors that overpaid for talent, over-invested in plant and equipment or over-promised results to their investors.

How do we know consumers will be better off if the two companies continue to bloody each other? We can assume it, but it’s just an assumption. Sort of like the assumption that the FCC made that the public interest would be best served by allowing two, and only two, competitors to purchase a satellite radio license. How do we know what will be best in the future?

The explanation generally revolves around some imagined significant harm that will result from a monopoly. Only history doesn’t always show such harm. Would we have a viable, efficient economy with the same power if regulators had stopped steel or oil consolidation? Evidence suggests that those industries continually improved their manufacturing methods, increasing efficiency and lowering prices. We should not act in response to potential harm. If the merged company actually exhibits monopoly behavior, then intervention may be warranted. Until then, it’s wise to realize that the threat of intervention acts as an incentive against monopoly behavior.

More to the case at hand, perhaps it’s better to let one of the two surrender and preserve assets for productive use than to make them fight each other until one company is toast.

“You see yourself as some sort of humanitarian, don’t you?”¹

Now that I’ve had a day or so to digest the proposed Sirius–XM merger, I have a few more coherent thoughts about it. As a Sirius investor, I think this is ultimately the right deal. I know that CEO Mel Karmazin is offering the usual talk of synergies and cost savings. This is standard fare for such transactions. I have no doubt a combined company will realize some of that, but I’m not silly enough to assume it’ll be grandiose or immediate. Any significant benefit from this is years away, at least. I’m okay with that because I’ve invested for the long term. Most of the time I only know the general Sirius share price. When my shareholder ballot arrives, I’ll check “yes” with realistic expectations.

As a customer, I’m thrilled by this deal. As I mentioned, the ability to receive Howard Stern and Major League Baseball on one subscription is irresistible. I find Sirius’ radio programming better (particularly the original MTV VJs on The Big ’80s), and I’m a devoted Howard Stern fan. Those two items are year-round. That’s why I subscribe to Sirius. But the absence of Major League Baseball broadcasts is a huge frustration. This merger would solve that, even if the combined company offers a “cafeteria-style” selection of programming, as I’ve read. I can live with that. I don’t really care to have Oprah, Bob Dylan, Opie and Anthony, Nascar, or Martha Stewart. Give me Howard Stern and the Phillies for a reasonable price, and I’ll be a subscriber. To get me, it’s that simple.

However, the information announced so far is insufficient. The FCC and Department of Justice will have questions. First, Sirius and XM must convince the government that their market is not satellite radio, but audio entertainment. (I’d cite a reference for the term audio entertainment, but I don’t remember where I read it. I’ll give credit if I stumble upon it again.)

My audio choices at work are a perfect example. During a typical day, I’ll listen to Stern in the morning through my Sirius subscription. When that’s done, I’ll move on to my iPod and whatever music appeals to me at the time. Or maybe an audiobook. Then I might switch over to an internet radio station. On my commute home, I usually listen to terrestrial radio. When I get home, I have cable television, Netflix, and Xbox 360.

Every one of these things competes for my time and money. I can afford various subscriptions for those that require one, but if the programming on any one of them becomes stale or the price exceeds what I think it’s worth, I’ll cancel it. That’s the fate that HBO faces from my household as soon as The Sopranos is done. It’s barely $10 per month, but it isn’t worth it to me. I’m capable of making the decision better than the federal government, regardless of the implied public trust built into the artificial market created by government satellite licensing.

The short-term implications of this deal are also apparent, both as an investor and a subscriber. Sirius and XM work on separate signals, so each company’s hardware is incompatible with the other. I’ve been thinking about upgrading my Sirius receiver since the unit I have is several years out-of-date. But I don’t want to spend $300+ on a new receiver with all the features I want if I’ll have to dump it in a year when (if) the merger wraps up. I’ve seen no concrete answers on this, only that the companies are working this out. That’s wonderful, but current subscribers are left out in the interim if they want to upgrade.

As for potential subscribers, what incentive will they have to sign up now? The rational decision is obviously to wait this out until the executives offer answers. That will hurt both companies financially until they decide. That makes me nervous realistic about any short-term bump in the share price from this deal. The downward pressure on revenue and subscriber growth, which is what this industry needs least right now, is evident. The only responsible choice is for customers and potential customers to get answers soon. Essentially, I want the Heroes approach to answering questions, not the Lost approach.

I understand the hurdles this merger will face. In the end I think the government should get out of the way let it proceed. It will benefit customers when viewed with the correct understanding of the combined company’s market competition. I applaud the deal with guarded enthusiasm.

Full disclosure: Several times in the past, I subscribed to XM. For a brief time, I owned XM shares. For what it’s worth.

¹ The title of this entry is a quote from Heroes. Sylar said it to Mr. Bennett. I think we might be able to ask the same thing of the federal government as it reviews this deal.

This should’ve happened six months ago.

I’ll have more to say on today’s announcement that Sirius and XM intend to merge after I hear the details from tomorrow’s webcast. For now, I want to express how thrilled I am at this possibility. As a Sirius customer, I love the idea of getting Howard Stern and Major League Baseball on the same service. As an investor, I like the possibility of reduced total expenses. But mostly, it’s about Howard Stern and the Phillies.

Yes, I know this has almost no chance of passing through the FCC. Give me one night of joyous anticipation.

Stranglehold on 20th Century Business Models

Some of the criticism directed at Steve Jobs’ call for an end to DRM is a bit strange and simple.

Mitch Bainwol, chairman and chief executive of the Recording Industry Association of America, said the move would eliminate technology hurdles that now prevent fans from playing songs bought at Apple’s iTunes Music Store on devices other than the company’s iPod.

“We have no doubt that a technology company as sophisticated and smart as Apple could work with the music community to make that happen,” Bainwol said in a prepared statement.

I have no doubt that an eight-year-old with a blank CD could break Apple’s DRM by putting that blank CD in her PC, burning her iTunes songs to the cd, and ripping the resulting disc to mp3 format. I suspect Mr. Jobs is closer to the wise solution with his third of three alternatives. Not that, as my example proves, making FairPlay more available won’t change how easy it is to bypass it. Individuals only need a willingness to invest a bit of time and effort, along with a few blank discs. DRM is already dead, no matter how long music companies attach its corpse to most legally downloaded songs.

Instead of fear, which has been the record industries modus operandi surrounding digital music since the inception of the mp3 format, it should imagine a future based in reality. People will sidestep DRM and illegally trade music. Preventing that shouldn’t punish everyone, though. Don’t treat customers like criminals waiting to undermine the business. For example:

Britain’s EMI Music is experimenting with releasing music in the DRM-free MP3 format. In the past few months, the company has released tracks by Norah Jones, Lily Allen and the band Relient K.

“The feedback from fans (has) been very enthusiastic,” EMI spokeswoman Jeanne Meyer said.

Leigh believes older music could be made available without copying restrictions.

“I think the labels will release selected back-catalog stuff, to see what happens,” he said.

Low risk, potentially high return. That’s a company that’s trying.

Now, Mr. Jobs, about those restrictions that prevent me from buying music on iTunes from other countries…

Does the classification matter?

The latest issue of Wired includes an article on the threat to soldiers wounded in Iraq from acinetobacter, “an opportunistic pathogen” they’re picking up along the evacuation chain from the battlefield. While reading the article, I stopped on an interesting question not related to the subject. First, the facts:

A homemade bomb exploded under a Humvee in Anbar province, Iraq, on August 21, 2004. The blast flipped the vehicle into the air, killing two US marines and wounding another – a soft-spoken 20-year-old named Jonathan Gadsden who was near the end of his second tour of duty. In previous wars, he would have died within hours. His skull and ribs were fractured, his neck was broken, his back was badly burned, and his stomach had been perforated by shrapnel and debris.

Unfortunately, Mr. Gadsden died from the undiagnosed infection that resulted from his wounds. It’s tragic, and the implication of uncontrollable infections is scary. The article is worth reading to get the full understanding. But this is what got me thinking:

[Gadsden’s mother Zeada] discovered that an autopsy was performed shortly after her son’s death. The coroner recorded the “manner of death” as “homicide (explosion during war operation)” but determined the actual cause of death to be a bacterial infection. The organism that killed Gadsden, called Nocardia, had clogged the blood vessels leading to his brain. But the acinetobacter had been steadily draining his vital resources when he could least afford it. For weeks, it had been flourishing in his body, undetected by the doctors at Haley, resisting a constant assault by the most potent antibiotics in the medical arsenal.

I stopped at “homicide (explosion during war operation)” because I’d never thought of how a military death would be classified. Thinking in these terms could open a can of worms that I’m not trying to open. I’m intellectually curious about this designation and uninterested in the political implications. I don’t imagine we’d find too many who would challenge “homicide (explosion during war operation” for a situation like the one that led to Mr. Gadsden’s death, but both sides think they’re the “good guys”. How would another army’s autopsy rule on the death of its soldiers? Would we question if it ruled the same manner of death, because that would imply that we’re murderers?

I don’t have any answers on what our response should be. I haven’t thought of it before, and I suspect most simply wouldn’t care. I don’t know that the distinction even matters for either side, but I found the question interesting.

A government takeover can’t be far behind.

This is only peripherally about the Major League Baseball Extra Innings package, although I will discuss that angle again. But I can’t let it pass when a politician so bravely steps in to assist in a way that highlights his previous hypocrisy. Consider:

A proposal to make Major League Baseball’s “Extra Innings” exclusive to DirecTV has drawn the ire of Sen. John Kerry.

The Massachusetts Democrat said he plans to raise the matter with the chairman of the Federal Communications Commission at a hearing Thursday.

“I am opposed to anything that deprives people of reasonable choices,” Kerry said in a statement. “In this day and age, consumers should have more choices _ not fewer. I’d like to know how this serves the public _ a deal that will force fans to subscribe to DirecTV in order to tune in to their favorite players. A Red Sox fan ought to be able to watch their team without having to switch to DirecTV.”

So many issues pop up, but it’ll probably make the most sense to first address the MLB decision in the context of Sen. Kerry’s remarks. MLB is stupid if it proceeds with this asinine marketing strategy, but it is free to hurt its business if it so chooses. It is not obligated to “serve the public” any more than Whole Foods is obligated to cater to vegans. That, of course, brings up the notion that consumers should have more choices. I view keeping cable as an Extra Innings choice as desirable because it specifically impacts me. But MLB should have the same range of choice to run its business in whatever way it believes will maximize its profits and its brand, even if that means running both into the ground. Sen. Kerry’s rhetoric will serve well the economic populism that pervades our public discussion, but it’s misguided.

With his statements, Sen. Kerry also managed to make a mockery of his stances on most economic issues and many personal choice issues. If Senator Kerry is in favor of people having reasonable choices, why isn’t he promoting Social Security reform, for example? I contribute, even though I’d prefer to put my money in personal investments controlled by me and backed up by actual assets. But I don’t have that choice. How does that serve the public? I’m sure I could walk through a point-by-point list of Sen. Kerry’s campaign issues and find many more examples where he’s been less than a champion for allowing people to have choices. (I have little doubt I can find multiple examples where Sen. Kerry believes that businesses should be limited, so I won’t challenge him there.)

Greater than all of this, though, is the simple fact that Chairman Kevin Martin and the FCC have no regulatory control over cable that would enable it to take action against Major League Baseball. Sen. Kerry should know this. I assume he does, but that doesn’t sell because then the government¹ isn’t there to come to the rescue.

¹ Major League Baseball should not have anti-trust exemption. There shouldn’t be anti-trust prosecution against MLB if it didn’t have the exemption, but that’s getting further into that issue than I’m interested. Since these are the rules we’re operating under, and MLB is happy to benefit from them, I won’t feel bad if/when Congress goes after the owners for this exclusive deal with DirecTV. Feed the snake enough and you will get bitten.