Monopoly – Do Not Pass Go, Do Not Collect $200
We all want to invest in industry leading, best-in-class companies. In a perfect world, these companies are exposed to minimal financial risk as a result of competitive advantages they have culled through various strategic choices such as differentiated products, proprietary capabilities, or high switching costs.
When we find such businesses, it’s easy to think that the only risk we have is through erosion of the Company’s competitive advantage. But, there just happens to be one more. Regulatory risk. More specifically, the risk of being too successful. Success in the business world is bread through the erection of defensible competitive advantages. Unfortunately, when a business becomes too successful, the defensible advantages become a wall that can prevent the business from pursuing strategies that could be in its best interest.
Our most recent example comes through the inability of Google and Yahoo to shore up an add deal which would have provided boosted revenues to both Companies. In the end, antitrust concerns killed the deal. But, why? Because Google already owns 63% of the search advertising market and an inroad into another ~20% would have breached regulations on monopolies in the United States.
The deal was creatively structured to allow competition and collaboration on search advertising. And, would have provided Yahoo a seriously needed boost in revenues which would allow it to stay in the search business. Now, we may lose the #2 player in the market and Google has been barred from regulators to jump into the fray.
In another example, we’ve seen some new businesses attempt to play the monopoly card as a means to erode a dominant player’s competitive advantage. In fact, Microsoft (the most egregious anti-competitive player out there) used this tactic to stop the Google-Yahoo tie up. And, we also recently saw Psystar attempt to break through Apple’s defenses by bringing an antitrust suit against them. Luckily for Apple shareholders, the judge in the case was reasonable enough to see that the allegations had no merit. But, if Apple truly had dominant market share amongst computer manufacturers would they still have survived these allegations unscathed?
There are legitimate cases of uncompetitive behavior which is bad for the consumer that regulators need to police. Price fixing, collusion, and other similarly aggressive actions hamper innovation and victimize customers. Too often, however, successful companies are targeted simply for doing what any well-run company should. Google has a best in class search platform that it is trying to find as many distribution points for as possible. Apple sells an entire computing experience – OS and computer – which it believes is core to its value proposition. Both companies aggressively pursue new business and aggressively defend their products’ integrity. This is not meant to bar competition, but simply by being dominant players cases can and will be brought against them. And, such is the risk of becoming too successful in a regulated free market.
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