The FTC recently sent a letter to Whole Foods Market, Inc. vigorously opposing its proposed acquisition of Wild Oats Markets, Inc. and seeking a temporary restraining order in U.S. District Court (see article for background). The FTC sees this deal as anticompetitive, one that would allow Wild Oats to dominate the market for natural and organic foods. I am not sure I necessarily agree with that assessment, or the FTC’s decision to oppose the deal. Certainly a thorough analysis of the implications of the deal for competitiveness is required. However, what struck me was the possible implications that such a maneuver by the FTC holds for the Sirius Satellite and XM deal.

I discussed the Sirius-XM deal at length in a previous post (see post). What jumped out to me about the whole situation is that Sirius seems to be making similar arguments in its justification for the XM deal that Whole Foods is making in its bid to acquire Wild Oats. Specifically, Whole Foods suggested that they were being squeezed by competition from traditional supermarkets like Safeway, and from supercenters like WalMart and Costco. They maintain that both sets of stores have been increasing their natural and organic offerings – at once creating separate store-within-a-store formats that carry natural/organic foods, and at the same time integrating natural/organic product offerings on shelves among more traditional product offerings. Likewise, Sirius’ position was that they face substantial competition in the form of HD radio, traditional radio, iPod connectivity, and internet
streaming. Both Sirius and Whole Foods therefore believe competition from substitutes will put a ceiling on their
ex post pricing power.

In the case of Whole Foods, testing for anticompetitive effects should be relatively easy and straightforward. It’s not that hard to identify geographic markets in which Whole Foods and Wild Oats do not overlap to see if there is any difference in Whole Foods’ pricing behavior across markets. For Sirius and XM, it’s much more difficult to conduct such an analysis. As digital businesses rather than physical businesses, competition is not as subject to local market forces. The market is anytime, anywhere, and everywhere. I’m not even sure that there are any geographic markets in the US in which XM and Sirius do not overlap. And even if such markets exist, it would be difficult to justify price differences as a satellite radio provider across markets because such practices would almost immediately be viewed as price discrimination. At least in the supermarket space, some variance in prices across retail markets can be expected – justified by differences in local labor market conditions, local rents, and transportation costs.

That analysis aside, Sirius could stand to learn a few things from the government’s initial reaction to the Whole Foods deal, whose case rests on similar justifications. If we can infer anything from the Whole Foods case, it is probably high time for Sirius to give up its pursuit of XM. Given Sirius’ stock price performance since Karmazin’s appearance before the House Judiciary Committee Antitrust Task Force on February 28 (from nearly $3.75 to $2.75), it seems the market already has.

This entry was posted on Monday, June 18th, 2007 at 6:48 pm and is filed under Corporate Strategy. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.