The 2-Buck-Chuck Test

“The 2-Buck-Chuck Test” title comes from the remarkable wine product offered by vintner Charles Shaw, who, several years ago, began competing with the significantly higher-priced wines in the national market place by, for example, selling a bottle of quality cabernet for two dollars. The move was revolutionary because not only did Shaw sell a remarkable quantity of spirits, but the competition was forced to respond (and produce more value), and the consumer was treated to a stunningly valuable offering (which the consumer loves, I can assure you from talking with my friends in the wine industry). All three parts of this consuming cycle benefited, and the economic model called basic capitalism did best what it does best: It competed head-to-head and things improved.

About a century ago, a gentleman named Rockefeller became so strong a force in the development of the U.S. petroleum industry that he and his company, Standard Oil, gained the ability to take over and control more and more competitors’ products and services. It became so bad that many believed the “free” marketplace was no longer operating properly, normal price controls suffered, and antitrust laws were enacted to ensure that competition - and not monopoly - was the oil that drove the U.S. economic engine.

With the lessons of our forefathers and John D. Rockefeller in mind, one can’t help but compare the lessons of oil and wine, to those of today’s satellite radio merger.

Satellite radio is really just a varietal among many other choices. And the problem there is that if you allow the XM-Sirius merger, it is the equivalent of allowing Gallo to purchase the sole remaining competitive cabernet sauvignon producer, leaving just one single maker of cabernet sauvignon. I drink what Gallo gives me (and only that).

I can still go out and purchase merlot, or a zinfandel, or really a lot of other red wines. But what if I just want to purchase cabernet sauvignon - or, in our example, satellite radio - and the merger means there is now only one maker and one choice of cabernet sauvignon … or satellite radio? Is that the best way to run an economy? You pick a business and simply eliminate competition by permitting mergers and telling consumers that other, different types of products or services are adequate substitutes (even if they are not)?

And what if the cost of getting into the cabernet sauvignon - or satellite radio - business is so great that it means, de facto, that no one else will enter and no other competitor for cabernet sauvignon or satellite radio will ever compete? Do you solve my problem by just telling me, well, go drink another type of red wine? Or do you solve my problem of no intra-industry satellite radio competition by telling me my only answer is to go through the hassle, the huge learning curve, and time and cost of downloading scores or hundreds of songs, and buying an expensive device that I don’t want? Or do you solve my problem by telling me to simply listen instead to ad-filled AM-FM broadcast radio?

Moreover, with just one satellite radio competitor in the satellite radio market, don’t ever expect the radio equivalent of 2-Buck-Chuck to ever come from that new monopoly satellite radio behemoth. Why would the merged XM-Sirius organization ever think of bringing out its own 2-Buck-Chuck when it no longer has to?

I don’t own an iPod, internet radio, HD radio, nor do I get music on my cell phone. I cherish ad-free satellite radio, created by DJ’s who I gladly pay to do the work for me, and I absolutely love the idea that Mel Karmazin stays up a bit later at night trying to figure out how to find better content for me and beat his rival to the south, XM’s Gary Parsons.

I simply like drinking cabernet sauvignon more than merlot or zinfandel. (And I don’t see either as a substitute for cabernet, even if Mel or Gary, or their shareholders, want to force me into thinking - or drinking - otherwise).
Ultimately, part of what makes the U.S. such a great country is my (and your) pure choice to continue drinking 2-Buck-Chuck, and more than just one maker’s version of cabernet sauvignon.*

*Note that my dear wife tells me 2-Buck-Chuck now costs 3, yet my point remains the same.

Jimmy Schaeffler is Chairman and Chief Service Officer for The Carmel Group
The Carmel Group