Should we invest in monopolies?
Photo: Matthew Hull. Source: Morguefile
A monopoly exists when a company is the only provider of what we need. The electric company in your area is the only way to get electricity for your home. The cable or phone company is the only way to get high-speed internet service. Companies that enjoy a huge market share have one less thing – one big thing – to worry about. They don’t have to worry about what the competition will do to them.
A monopoly enterprise can raise the price of its good or service will above its marginal cost and realize a high monopoly return. They can arise naturally, because of market superiority or scale or technological innovation, or – more typically – they have some sort of government franchise. You can’t just call up a startup cable company or gas utility and ask them to provide service to your house.
Monopolies often pit themselves against their customers. After all, when your customers don’t have anywhere else to go, why bother making them happy? Googling the phrase “Comcast complaints” yields a Facebook page, a web site entitled “Comcasemustdie,” and several links to the Federal Trade Commission complaint site. Monopolies treat their customers shabbily because they can.
One approach to monopolies – rather than complaining about them – is to invest in them. If you can’t beat them, join them. Chances are your favorite beer is related to Budweiser. Not only is one in six beers sold in America a Bud Light, the company also owns Stella, Corona, and a dozen regional craft beers. The company enjoys double-digit returns, and made money all through the Great Recession.
Photo: Alvimann. Source: Morguefile
But the iron law of finance – one that applies, without exception – is that capital seeks returns. If an industry enjoys excessive returns on equity, other competitors will look for a way to shave off a slice of that market. Google may be the only game in town, when it comes to searching for information online, but Amazon is more powerful when it comes to product searches. Amazon may enjoy a monopoly on my phone when it comes to online mobile purchases, but I still need local goods and services. And besides, life doesn’t consist in an abundance of stuff.
A diversified portfolio will have some monopoly providers and some competitive enterprises because that’s the way our economy is structured. Competitors don’t always succeed in disrupting an established business, and seemingly invincible monopolies can miss out on the latest trends. Microsoft seemed invincible in the ‘90s, until government pressure and the unexpected rise of mobile computing knocked them off their pedestal.
Owning the only game in town may seem like a simple way to make money. Until someone invents a new game.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”