I wrote last week about the impact of the government’s COVID response on the future of the federal budget (and our expectations of those who govern us).
In short, the government is going to get bigger, both because we have a mammoth debt to service and because we, as a nation, expect our governments to provide increasing levels and breadth of service. And that’s not to mention the growing burden of the aged pension and health budget as our population continues to age!
But there’s something else that’s been getting big for a while now.
Companies.
Australia has long been the land of the duopoly (two dominant players) and oligopoly (a handful of dominant players).
Actually, when I say it has ‘long been the land of the duopoly’, it’s probably more accurate to say ‘has steadily become the land of the duopoly’.
When I was a kid there were many, many competitors in most industries. Now? There are lucky to be more than three serious national players in any of them. To wit:
We have two national airlines.
Two major supermarket chains.
A small handful of service station brands.
There are three pharmaceutical wholesalers, and only one wholesaler for independent grocery stores.
And there are four big banks (with profit margins and returns on assets that often dwarf international competitors).
We have two major newspaper groups, one of which is owned by one of only three commercial television businesses.
There’s only a handful of radio proprietors.
Three telcos.
Now, as an avowed capitalist, I can appreciate the success of these businesses. To be able to be so successful that you get bigger and bigger — buying or killing the competition along the way — is a feat that shouldn’t be ignored.
But where are we now?
And how much is too much?
See, to function properly, capitalism must feature strong, robust competition, where abnormally high profits entice new competition and ensure the market delivers the benefits of that competition.
Now, here’s where things can get ideological. Those on one side say ‘well, if competition dries up, companies will get lazy and eventually get disrupted by a new competitor’. Those on the other side will point to the ability of large incumbents to squash any potential challengers.
For example, the effective duopoly of Woolworths Group Ltd (ASX: WOW) and Coles Group Ltd (ASX: COL) wasn’t enough to stop Aldi and Costco from turning up and shaking up the industry. On the flipside, the independent supermarkets are suffering, and would-be international competitor Kaufland actually spent a small fortune establishing a beachhead here, before deciding it was all too hard and scuttling its own plans.
Which, by the way, is why closed-minded ideology isn’t very useful. If you come to the situation sure that one or the other opinion is unquestionably right, you miss the nuance!
And yet, as an economy, it seems very clear to me that the number of serious competitors in almost every industry is reducing, sometimes markedly.
There was a time when Woolies and Coles had less than half of their current market share, and there were multiple independent grocery wholesalers (and supermarket brands) from which to choose.
I can rattle off maybe half a dozen long-gone financial institutions, which either closed or were merged into larger and larger entities. At least half of those were in the main street of the suburb I grew up in.
There’s nothing wrong with that, per se. In the ‘creative destruction’ of capitalism, the small, old and slow tend to be usurped by the young, disruptive and better.
Except, the big, today, seem bigger than ever.
And competition — judged by the evidence — seems harder and harder to come by.
It’s not just here, either.
There are only two mobile phone OS’: iOS from Apple (NASDAQ: AAPL) and Android from Google (I own shares in Google’s parent, Alphabet Inc (NASDAQ: GOOGL)).
When once America was worried about the dominance of Wal-Mart, that concern looks almost quaint and completely overshadowed by the rise of Amazon.com Inc (NASDAQ: AMZN) (I own shares in that company, too).
Movie studios are merging. Bookstores, video rental places, and even cinemas are falling victim to one or two behemoth replacements.
Google Pay and Apple Pay (plus Paypal Holdings Inc (NASDAQ: PYPL)) have designs on global domination of payments.
Epic Games, maker of the hit new(ish) game, Fortnite, has lashed out at the size of the cut taken by Apple (and Android) whenever anyone pays to buy something inside the game.
Uber and Lyft are in a two-horse global race to usurp local and national taxi companies.
Apple and Amazon are locked in a race to be the first company to be worth US$2 trillion. And that’s not investors getting carried away — these guys are cash generating machines.
Bigger is often better: better products, cheaper prices, more interoperability (imagine if each country had its own computer operating system) and more features. Indeed the only way Netflix can produce some relatively niche content is because it knows it has a global audience to sell to.
Indeed, it’s hard to argue that, in most cases, the growth of the behemoths has been anything but positive. In general, prices are lower, quality is better and we’re getting more than we could have imagined.
And yet…
That’s always been true… until it wasn’t.
The growth of the US railroads brought huge benefits to much of America. It opened up transportation routes for goods and passengers. It’s a simplification, but much of America’s growth in the late 1800s can be attributed, at least partly, to that boom.
Similarly, the successful drilling for oil greased the wheels (often literally) of American commerce, providing cheap fuel and making rail and automotive innovation possible (because it could run on economically-priced fuel).
And the steel industry provided the framework — again literally — for US growth and prosperity.
Except these three industries came to also have something else in common: they ended up having — and exercising — power that was significantly anticompetitive; raising prices and making demands that laid bare their essential monopoly/oligopoly power.
So much so that the US government broke up each of those three industries, to make sure they became more competitive.
I hope you can see the similarities with modern commerce.
Yes, the gorillas of today are bringing benefits. But are those benefits too costly? Or, more simply, would they cost less if the market had more, hungrier competitors?
It wasn’t just the 1800s, either.
In the 1970s, US telco giant AT&T was a monopoly provider of telecommunications services in the US, and it was subsequently split up to improve the competitiveness of its products, services and — importantly — prices.
Now, I’m no lawyer. Nor am I a judge, regulator or politician.
But at one point, Woolworths had the highest net profit margin of any supermarket in the world.
Our banks are some of the most profitable in the world (depending on the measure you use. In one study, they came out as number one).
Should we be proud of those numbers? We’re used to politicians wanting us to be the best at everything, but if our banks and supermarkets are more profitable here than elsewhere, who do you reckon is supplying that profit?
Yep, us.
And it suggests that those sectors aren’t as competitive as they should be.
Should Apple be able to arbitrarily take a 30% cut of every dollar that goes through one-half of the app-store duopoly? Should Google?
30% seems like a lot, doesn’t it? Would that sort of margin be possible if there were more competitors in the sector?
Should Amazon be able to use data from its retail operation to compete with its own suppliers by introducing cheaper home-brand alternatives as soon as the supplier creates enough demand?
Those aren’t rhetorical questions. They’re policy questions that deserve serious debate.
And we, as investors (and consumers), are going to end up with the results of those policies.
Would Woolies be as profitable if the government made it divest half of its stores (a la AT&T).
What happens to Apple and Google if they’re forced to open their App Stores to competition?
Can our banks continue their dominance, if overseas competitors turn up and start competing hard?
Do we trade off (potentially) worse search results to protect news organisations here in Australia?
Maybe those questions never get asked.
But right now, Google and the Australian Government are at loggerheads over media regulation and fair payment.
Uber and California are at war, which could see the former stop offering its rideshare services in America’s richest (by GDP) state.
And plenty of people are calling for the break-up of big tech.
There are smart, serious, well-meaning people on both sides of all of these debates. Policies are being discussed, which could change the competitive landscape.
And it’s not anti-business, either. Imagine how many new innovative companies could be unleashed by lower barriers to entry, and less-entrenched incumbents. How much faster innovation might happen, and what flow-on effects there might be for other businesses.
Indeed, there’s an argument that smaller, broken-up companies could actually perform better than their larger, whole, parents. That’s what happened to AT&T, the breakup of which one author called the ‘Deal of the Century’.
They’re hard questions to grapple with.
When does consumer benefit trump supplier cost? (For example, Apple’s ecosystem delivers huge benefits to its users, so maybe the 30% cut of app sales and less competition for app developers is worth it).
Indeed, what is the reason for competition law? Does the end justify the means?
Are consumer benefits more important than supplier benefits? Does it matter that there are only two airlines, if flights are cheap enough? Or does that stifle competition for their suppliers?
These are difficult questions. But they’re being asked, increasingly, among academics, policy wonks, regulators and politicians.
The answers, if they come, will determine the playing field for companies throughout the 2020s and beyond.
Investors need to watch closely.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Scott Phillips owns shares of Amazon. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Alphabet (A shares), Amazon, Apple, and PayPal Holdings. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends Costco Wholesale and recommends the following options: short January 2022 $1940 calls on Amazon, long January 2022 $1920 calls on Amazon, and long January 2022 $75 calls on PayPal Holdings. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Woolworths Limited. The Motley Fool Australia has recommended Alphabet (A shares), Amazon, Apple, and PayPal Holdings. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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