Do Not Pass Go, Do not Collect $200

Standing the test of time is no easy feat – preferences change, trends shift, and businesses rise just as quickly as they fall. We were recently reminded of this when ExxonMobil was removed from the Dow Jones Industrial Average index where it had been a member since 1928. Then it was still known as the Standard Oil Company of New Jersey.

For so long the world’s most valuable businesses were mostly associated with tangible commodity-oriented goods and services such as oil production. Today, the markets are telling us something vastly different – gold is no longer black*, it is digital (or at the very least technology oriented). The pandemic has effectively accelerated trends that would have eventually displaced old ways of doing things, but at a much faster rate. As a result, the technology companies that had already held a prominent position in the S&P 500, and our everyday lives, have since grown disproportionately in size and power.

*Black gold is an informal term for oil or petroleum

With growing anti-trust concerns, the term monopoly has been used to describe companies such as Amazon, Apple, Microsoft, and Google. Given heightened attention from Congress, it is fair to wonder if these modern-day monopolies are at risk of being broken up. As their power grows it is not unthinkable that history could repeat itself . However, the more relevant question as investors is whether or not we should care.

THE RISE AND FALL OF THE... LANDLORD’S GAME?!

Despite the digital world that we live in, there are still remnants of what was seemingly a much simpler time. The board game Monopoly is one example. Remarkably, the core components of the game have barely changed since it was first introduced in 1936 by Parker Brothers. However, the true origins of the game date back to a woman named Lizzie Maggie who patented the original version – The Landlord’s Game - in 1903. Her objective when creating the game was to promote equality and fair business awareness by demonstrating the negative effects of monopolistic dominance. Maggie’s version of the game included two sets of rules: an anti-monopolist set in which all were rewarded when wealth was created, and a monopolist set in which the goal was to create monopolies and crush opponents.

The game Monopoly was popularized shortly following a time when real monopolies were all the rage. Companies like Standard Oil, U.S. Steel, and Northern Securities Co. led by the likes of John D. Rockefeller, Andrew Carnegie, and J.P. Morgan, absolutely dominated the industries they operated in. Rockefeller stood ahead of the pack as he holds the prominent title of the United States’ first billionaire. It has been estimated that his fortune in today’s dollars, after adjusting for inflation, would be equivalent to over $400 billion. For context, the world’s richest person in year 2020, Jeff Bezos, just surpassed $200 billion.

Not so different than today’s narrative, growing wealth inequality, consumer wellbeing, and labor protection rights were important issues that politicians were forced to address. Republican Senator John Sherman initially led the charge by rallying Congress to pass the Sherman Anti-Trust Act of 1890. This law was the first Federal law that outlawed monopolistic business practices and helped to lay the foundation for what continues to be the basis of anti-monopolistic regulations in the United States. A decade later, newly appointed President Theodore Roosevelt moved quickly to break up Rockefeller’s Standard Oil and J.P. Morgan’s railroad conglomerate, Northern Securities Company, effectively marking the end of the monopolistic era.

HOW BAD IS BAD?

The impact these businessmen had on society is still evident well over a hundred years later. For example, consider the oil industry. Many of the oil companies operating today have roots to Rockefeller’s oil juggernaut Standard Oil.  While oil is a clear example, the influence these monopolists had on society extends to railroads, steel, banks, oil, higher education,  philanthropy, and so on. The list gets even longer if you begin to consider the innovation and products that were introduced to the world by the companies associated with them. Given these positive contributions to society, why are monopolies considered to be bad?

The short answer is that without competition, companies have the power to overcharge consumers and underpay workers. Also, many economists argue that innovation is stymied over the long run because lack of competition allows companies to become complacent. Said a different way, competition makes us better. The issue that regulators and Congress have is that there is no clear definition of what qualifies as a monopoly, so the assessment is always subjective.  

In recent times, concerns from Congress about Big Tech and their so-called monopoly power has thrust the conversation about monopolies back into the limelight. The parallels to the late 1800’s is undeniable. Free market capitalism with a little help from supportive government regulations has fostered the growth, importance, and power of a few behemoth companies - except this time, it’s not steel and oil, it’s data and digital marketplaces.

MORE THAN ESSENTIAL

In July, Facebook's Mark Zuckerberg, Amazon's Jeff Bezos, Google's Sundar Pichai and Apple's Tim Cook testified to the House Judiciary Committee to make the argument that their businesses are not monopolies. Similar to previous hearings, Congress fumbled around with a plethora of questions with limited substance to back up their claims. It was evident who the smartest people in the (virtual) room were, but it didn’t matter. An interesting mention by the committee’s chairman says it all:

“Today’s anti-trust laws were written a century ago and likely need to be updated for the digital age.””

Indeed, politicians do not have as strong as an argument as one would think based on how current laws are written. If anti-trust laws were created to protect the consumer, how could one argue that any of these companies are hurting the consumer? If anything, these companies have provided products and services that have become critical to the average American’s everyday life and in some cases are completely free! Afterall, what would quarantine life be like without Amazon delivery ordered directly from your iPhone after Googling reviews?

The reality is that these companies know what the laws of the land are and employ very smart people to help them navigate their growth. Each display monopolistic behavior, sometimes even predatory, but society as a whole continues to extract more positives than negatives.

• Apple - Apple’s smartphone market share is estimated to be below 50% in the U.S. and only about 20% globally. Both Samsung and Huawei are bigger players in the global smart phone business than Apple, with several other smaller brands also taking market share. While the smartphone market itself is fragmented enough to ward off anti-trust concerns, the mobile operating systems that run on all these devices is set up as a pure duopoly. Google’s Android dominates this market with over 80% market share, but Apple makes up most of the rest. Regulators have taken aim at the dominance of the Apple App store but without much success.
• Alphabet Inc. (Google) - Their core search business accounts for over 90% of all internet searches worldwide. Their search engine is so prevalent that businesses literally need to cater their message around Google’s algorithms so they can be found online. Google subtly shapes our individual perception as they tell us what is true and what is important. In addition, think about everything that you have ever searched for online. The company likely knows more about you than you know about you; including all your deepest secrets. Of course, what would happen to modern day society without Google? Our desire to be told what we like and believe has never been higher and most importantly, we get this insight for “free”.

• Amazon.com – Pre-pandemic Amazon had just under 50% of total U.S. e-commerce market share. Walmart was the closest competitor under 9%. Post-pandemic it’s quite likely that Amazon has taken even more of the market, bolstering scrutiny from regulators. However, since e-commerce remains a much smaller portion of overall retail, Amazon’s total retail market share is only between 5%-10%. Obviously, these figures alone don’t tell the whole story. The disruptive nature of Amazon on traditional brick and mortar retail has it’s own name, “the Amazon Effect”. But perhaps most troubling is Amazon’s propensity to copy designs of products and create cheaper versions under their own brand name. Of course, we haven’t even mentioned Amazon’s web services business, which has become a dominant business in and of itself.
  
• Microsoft Corp. - In 2001, the United States vs. Microsoft Corp. case was a clear example as to how hard it is to come after a technology company under current laws. At the time there was clear evidence of the company pushing around suppliers and manufacturers in the PC market. Microsoft also made a habit out of buying any potential competitors before they became threats. This of course drew the ire of regulators but when it was all said and done, they received nothing more than a slap on the wrist. In fact, they essentially created a roadmap for all the other tech giants on how to become a monopoly, without becoming a monopoly. Their predatory business practices can be found in case studies at all the major business schools.

Without government intervention, it is very difficult to envision a scenario where these companies are no longer taking market share – particularly since the pandemic has seemingly benefitted these tech giants at the expense of much their competition. However, despite an increasingly louder drumbeat, it’s unlikely a massive shake-up comes anytime soon. These businesses have proved throughout the pandemic that not only are they important, they are essential.  

With that said, at some point the growing power these companies have will push regulators to eventually step in as they did over a century ago. As investors, the risk of a breakup is something that should be accounted for. At the same time, it may not even matter. When Standard Oil was forced to split into 34 independent companies, the Rockefellers fortune grew even more. Many of the newly formed smaller companies eventually grew to become independently successful and the equity holders benefitted greatly. If history does indeed repeat itself, buying and holding monopolies is potentially a pretty strong bet.

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