Ignore the government mandate that created a duopoly. Scream MONOPOLY!

I haven’t posted on Monday’s long-anticipated decision from the Justice Department on the proposed Sirius-XM merger because I didn’t have much to add to the announcement. (It’s also not the final hurdle, so over-analysis, to say nothing of celebration, would be premature.) But Steven Pearlstein’s column is worth dissecting.

The latest example of a government bailout of a troubled industry has nothing to do with Bear Stearns. It is, instead, the Justice Department’s decision to give the green light to the merger of the satellite radio companies XM and Sirius.

It’s already clear that his position will be staked on rhetoric rather than principles. While it’s good to know that from the beginning, it’s bad economics. The goal of Pearlstein’s idea of competition is not to discover winners and losers other winners, but to pick the correct winners and losers. As he makes clear, that means consumers must win and businesses must lose.

For the past several years, these two companies have been competing so hard for talent, distribution channels and customers that neither has been able to turn a profit, and probably wouldn’t have for years. Consumers have been the big winners, with great programming at affordable prices.

Any cursory look at financial results demonstrates that consumers aren’t winning in a vacuum. At least with respect to Sirius, its cash flow is improving. This matters to a growing company more than bottom-line profitability. But why should we expect such an acknowledgment from a business columnist?

All that is about to change now that the Bush administration has concluded that we’ll all be better off if these heretofore fierce rivals are allowed to stop competing and concentrate instead on reducing costs, paring down their combined offerings and finally delivering profit to their shareholders.

This reveals the problem in Pearlstein’s analysis. In setting up the satellite auction that led to the creation of Sirius and XM, the government decided that exactly two competitors was the best approach. It depended on an assumption that two could compete effectively. It ruled out the possibility for a third (or fourth or fifth or …) to compete, possibly encouraging a different development of the market. It ignored the idea that human involvement might take it in a different direction than the ideal world envisioned by the sages at the FCC. And now that reality has messed with the centralized planning, the only response is to knew what it was doing, facts be damned. That’s not convincing.

More importantly, what new innovations in the business will arrive if the combined companies don’t need to waste resources on two ’80s channels, two popular country channels, or two channels carrying C-Span? I trust competition with other competing forms of entertainment to drive the outcome because I don’t pretend to know what is best.

Pearlstein disagrees, going so far as to analogize a combined Sirius-XM to a combined Coke-Pepsi. Yet, I don’t drink either, so I’m fairly certain humans don’t need them to live. Perhaps the availability of alternatives to non-necessities puts pressure on those evil, profit-maximizing corporations. Instead, Pearlstein deems it reasonable to argue that consumers should have ideal conditions for any and all requests. Anything that helps the corporation must, by definition, harm the consumer. It must be regulated, if not stopped.

He uses interesting logic to get there:

… You would particularly want … vigilance in the case of a government-sanctioned duopoly, which is how the Federal Communications Commission viewed XM and Sirius when it granted only two licenses for satellite radio.

This irrational faith in the wisdom of government planning is matched only by his absurdity in arguing that Sirius and XM might develop substitutes for each other if forced to compete.

It makes no allowance for the possibility that, if you force the two companies to compete, XM might come up with a morning host who is funnier and more outrageous than Howard Stern. Or Sirius, lacking a Major League Baseball offering, might take a chance on World Cup soccer or college lacrosse and tap into a whole new audience that nobody knew existed. The prospects for that kind of innovation will be greatly reduced after XM and Sirius merge and the combined company focuses on protecting its existing hit channels rather than creating new ones to displace them.

As if college lacrosse will compete with Major League Baseball. Pearlstein looks at the possibilities (allegedly) eliminated from a merger while ignoring the tangible benefits customers already receive. He also dismisses the notion that the possibility that customers will leave if the channel lineup bores them won’t be an incentive to innovate. He ignores that “free” radio is already following the exact path he fears satellite radio will take and ignores the innovations that satellite radio has given and can continue to give as a combined company. (Uncensored Howard Stern counts as an improvement, as does national access to sports broadcasts.) But why worry about details when this story can just be twisted into another screed concluding that the Bush Administration wants to screw the proletariat at every opportunity?

The FCC should immediately match the Department of Justice’s decision and let the merger proceed.

(Disclosure: I’m a Sirius shareholder and customer. I’ve been an XM shareholder and customer in the past. I also desperately want XM’s Major League Baseball with Sirius’ Howard Stern. Economics and free market competition are still the reasons I support the merger.)