So XM and Sirius satellite radio have announced that they are finally going to merge. We called that one years ago! What the two have been doing is engaging in a competitive war of attrition that is guaranteed to end with one killing the other off, or in a desperate bid to avoid the ultimate game of competitive chicken, a merger such as the one proposed.
What is fascinating is how companies get themselves into these situations over and over again. Almost the exact same scenario played out years ago with British Satellite Broadcasting and Rupert Murdoch’s Sky TV satellite network. The two went head-to-head with incompatible systems, losing millions of pounds each month, until a merger deal was finally forged, combining the two into B Sky B.Or what about the 3G debacle in the telecommunications markets? Same idea.
The assumptions underlying such ‘war of attrition’ situations are similar. One party believes that if they can just outlast the other, they will have a monopoly hold on a major market, which will make it all worthwhile in the end. Or, conversely, they believe that eventually their superior product, business model, customer service, whatever, will swing enough customers their way that they will prevail. Not usually true.
In class, we play a game in which we auction off a dollar – the winner gets the dollar, while the loser has to pay the winner. With competitive pressure behind them, I’ve been able to sell that dollar off for $2, $3 or even more. Savvy managers, though, stop before they get sucked into that situation.