Who doesn’t know the boardgame Monopoly? What is either boring or very exciting to its players, has an important message for real life investors, like us. In today’s Weekly, we look at the origins of this game, what you can learn for your investment journey and why Warren Buffett likes such structures. By the way, as an investor you should, too!
In easy words, a monopoly is a controlling entity without competition. This is the shortest explanation I was able to formulate.
When I think about the words “monopoly” or “monopolist”, the things that come to my mind immediately are the famous boardgame (I really enjoyed playing it with my younger brother, even for hours!) and corporate entities that have no competition, like for example electricity grid operators or railroads (there are no two different operators or railroad companies competing exactly on the same route).
What does not come to my mind, however, are the spread misinformation and consequently negative emotions by governments and related organizations. When they say that Big Tech firms have monopolies, this is false by definition.
Maybe this is why there have not been any break-ups or dissolutions so far in the modern age.
The topic for today spins around monopolies. Of curse, we start with an overview of the classic boardgame, where and how it originated as well as what the core message of the game is.
Then, we look at history and famous former monopolies that no longer exist today in their original structures, because they have been broken up or even degenerated on their own. In this context, you will learn from an investor’s perspective why concentrated market structures are favorable.
Finally, we examine briefly a quasi-monopoly that exists today and I explain why the Big Tech firms do not have classic monopolies.
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History and goal of the boardgame Monopoly
See here, here, here, here, here or here for sources.
The famous boardgame is a fast-dealing real estate trading game with fictive play money. As the majority of my readers will know with certainty, the goal is to become the “last man standing” and knock all other players off the game.
You are doing this – besides some luck – by making investment decisions. Due to several events like paying rent to other players or losing money for tax payments, sooner or later one after another player has to quit the game due to bankruptcy.
Less and less people stay in the game, but with time and less competition, the remaining solvent ones get more powerful. All the available properties concentrate in less and less hands.
If one player buys all properties of one color, then he has the monopoly to increase the value (and his rents) by building houses on the single fields. The winner finally becomes the monopolist – however, there is no one left to pay rent anymore…
Monopoly is one of the most successful boardgames of all time. From what I could find, more than 250 million copies of the game in over 300 themes and topics, have been sold. For example, I have the Euro version at home, that debuted shortly before the Euro became the official currency in several countries.
More interesting and even somewhat surprising is the origination of the game. There is even a book about it, titled The Monopolists: Obsession, Fury, and the Scandal Behind the World’s Favorite Board Game by Mary Pilon.
This book was written and published, because the official founder, Charles Darrow, a then during the great depression unemployed heating engineer, seems not to be the true first inventor of the basic concept. It seems rather that he made an idea successful that a woman with a leftist political attitude (yes, I was surprised, too!) and even a patent since 1904 could not do herself for about 30 years.
The concept was similar, however, the message differed.
While the goal for Charles Darrow was to become the monopolist and the most successful one – the winner – Miss Elizabeth Magie intended to show the players of the game how evil monopolies were.
Because Magie could not “teach” enough people in here evening classes about her political beliefs, she was on the search for a more creative and interactive way for more reach. Boardgames were on the rise during the late 20th century, so she tried this route. This was a more subtle way of indoctrination by just playing a game.
She didn’t call the game “monopoly”, but “Landlord’s Game”, as the game consisted of land and properties to be bought. It was about showing how greedy and unfair (seems familiar?) real estate owners were – from her perspective – because she “felt” the inequality brought by monopolists back in those times around the turn from the 19th to the 20th century.
Indeed, back then there were true monopolies, as I will show you later in this article.
She even is said to have written in a political magazine back then:
It is a practical demonstration of the present system of land-grabbing with all its usual outcomes and consequences. It might well have been called the ‘Game of Life’, as it contains all the elements of success and failure in the real world, and the object is the same as the human race in general seem[s] to have, ie, the accumulation of wealth.
Magazine: The Single Tax Review
Darrow actually picked up the idea during the Great Depression while together with his wife visiting a befriended couple, where the host introduced them to “the monopoly game”.
The host, Charles Todd, had never written down the rules, nor intended to start selling this game. The other Charles (Darrow) had the idea and made millions from it. He sold the idea to the Parker Brothers (taken over by Hasbro in 1991) who first didn’t believe in the potential and turned the offer down. But Darrow could prevail.
Interestingly, the Parker Brothers bought all rights and patens from Magie for 500 USD (around 10,000 USD in today’s purchasing power, see here), but without royalties. One and done. Darrow, however, received royalties throughout his life.
More interesting side-facts:
– In the original North American version, the real estate fields were named after real streets of Atlantic City, New Jersey
– The total mount of money in the bank equals 20,580 USD
– The longest game is said to have lasted for 70 days or more than two months
What “Monopoly” teaches you as an investor
It is an interesting question to think about how monopoly relates to real life. Especially, through the lens of an investor.
Monopolies are market structures characterized by concentrating power on them.
A pure monopoly can only consist of one big player that controls one special market or sector. That’s the plain definition (see here).
It is important to know and differentiate between:
- regional monopolies vs. global / supra-regional monopolies
- monopolies or oligopolies (several players controlling one market)
A monopoly does not have to necessarily spread over the whole world. In fact, in reality it even seldom does. It is not impossible, but I have to think for quite some time to name one pure monopoly which I will discuss later.
Most often monopolies are regional. Here one does not have to increase the clock speed of one’s brain massively to list a few examples. Think of energy grid operators, railroads, utilities or water works. It can happen in certain countries that some of these are in the hands of the government.
This way and also due to no competition, governments themselves are monopolies – but all on regional levels.
With less competition, at least in theory, there should be more power for the remaining entities and thus less alternatives for customers, but also for suppliers. This increases bargaining and pricing power of the bigger companies.
But it could also lead to lower quality or less innovation, because there are no incentives for improving products or services for the monopolist. If consumers have no choice, the controlling entity can fall asleep.
If led with a view towards efficiency, margins should be higher than in a competitive environment. Economies of scale play an important role (see here).
Note that I wrote above “in theory”, because many especially state owned enterprises or those with a big say by government, not always are high-margin businesses.
Think in Germany of Deutsche Bahn, the railroad operator. It is a catastrophe and I would not be surprised if they never had a positive bottom line throughout their history.
We have a running joke here that 50% of their trains are on time (which is a disaster on its own…) – but only if you do not count the ones that do not drive at all and stay in the station.
It is said that competition is good and revives the business. But that is indeed not always the case. Sometimes monopolies can be the better option. It depends of course on the goals you have and how the businesses are led.
Competition could be even inefficient, if it is about economies of scale and lower prices. You could think of capital intensive infrastructure that does not make sense to be duplicated and operated twice. Maybe smaller players would not be able to stem bigger projects on their own due to lack of scale or capital.
For example, if you had instead of one big water work three smaller water works, you should assume that prices would be higher in this regard due to the investments that needed to be made several times, but in smaller scale.
The same applies to an electricity grid operator. Why should customers choose between several of them and pay higher prices for smaller scale? Not to mention that there would be more grids standing and taking more space from the environment without a clear benefit for the consumer.
With political interference you can also expect those monopolies not to be price makers. Such companies more often than not will have the tasks to employ many people and offer low prices to customers – not profit maximization.
Are monopolies illegal? They are not completely forbidden, but you can assume that the higher the market concentration, the higher the probability that government watchdogs would have an eye (or two) on them.
In Europe we have the EU Antitrust Policy which wants to ensure fair competition (see here). In recent years, they had some disputes and imposed penalties on some of the Big Tech firms like Google / Alphabet (ISIN: US02079K3059; Ticker: GOOGL) – for example, see here or here.
In the USA there is also something comparable with the Sherman Antitrust Act from 1890 (see here), the times when there were really some big monopolies. The idea was to prohibit concentrations and restrictions on trade and commerce. Violations were punishable by fines or imprisonment. Even company dissolutions were not only theorized, but actually practiced in several cases.
We look at them in the following next section.
Historic monopolies that were broken up
Standard Oil
When thinking about true historic monopolies in the private sector with no government interfering in everyday operations, likely rather sooner than later John D. Rockfeller’s Standard Oil will be mentioned.
In 1870, Rockefeller established the Standard Oil company which at the height of its power controlled around 90% of oil production, refineries and pipelines in the USA (see here). Critics accuse Rockefeller of having pressured competitors out of business with unfair anticompetitive practices.
But it is also true that only with the size of Standard Oil, it was possible to increase oil drilling and production in this then emerging industry.
Not only that, due to its scale Standard Oil by accident discovered that by-products of oil could be used, instead of being poured into rivers as waste. This way, they discovered what is today known as vaseline – yes, that’s a by-product of oil that some people are smearing on their lips (see here)!
In 1911, Standard Oil got hammered into several pieces, also called the “seven-sisters” (see here). Among them were all the major Big Oil or “supermajors” of today:
- Exxon (ISIN: US30231G1022, Ticker: XOM)
- Chevron (ISIN: US1667641005, Ticker: CVX)
- BP (ISIN: GB0007980591, Ticker: BP)
- Shell (ISIN: GB00BP6MXD84, Ticker: SHEL)
They were quite different and indeed seven independent companies back then, but after some mergers, today’s four mentioned companies from above emerged.
American Tobacco
While seemingly everyone has heard of Standard Oil, this is not always the case with American Tobacco.
Tobacco was consumed in North America by its native inhabitants for medicinal and ceremonial purposes, already long before the settlers from Europe arrived. Due to favorable climate and soil conditions, tobacco could grow in America. This was not the case in Europe, however, as planting it on the old continent failed (see here).
With time, an industrial conglomerate and the world’s largest cigarette manufacturer of that time arose, named American Tobacco. It emerged after the American Civil War and was build by the Duke family who bought several cigarette manufacturing cites and created this giant by 1890.
American Tobacco in the following period was under suspicion of charging too high prices for cigarettes. Keep in mind, though, that cigarettes had quite the opposite image and standing in society as is the case today. While it is a harmful and dirty sin nowadays, back then consuming tobacco was seen as a cure for many diseases, like asthma or even menstrual cramps, due to its relaxing characteristics.
Finally and coincidentally with the break-up of Standard Oil, also in 1911, American Tobacco was slashed into pieces. The main sole manufacturers became (see here):
- R.J. Reynolds – today part of British America Tobacco
(ISIN: GB0002875804, Ticker: BATS) - Liggett & Myers
- the US business is today part of Vector Group
(ISIN: US92240M1080, Ticker: VGR) - the international business is today part of Philip Morris
(ISIN: US7181721090, Ticker: PM)
- the US business is today part of Vector Group
- Lorillard – today part of Loews Corp (ISIN: US5404241086, Ticker: L)
By the way, if you thought American Tobacco mainly consisted of what Altria (ISIN: US02209S1033, Ticker: MO) or Philip Morris are today, you are completely off the track!
Once being one company, the ancestor with the name Philip Morris & Company was just incorporated in 1919 (see here), but rose to its size by acquiring many small companies. Only during the 1980s did it become the largest US cigarette manufacturer.
In 2003 Philip Morris changed its name to Altria. In 2008 Altria spun out Philip Morris. The former focused on the US market only, the latter on the international operations.
(Old) AT&T Corporation
The American Telephone & Telegraph Company was the dominant provider of long-distance telephone communication services and for a time the world’s biggest corporation with over a million employees.
Its founder Alexander Graham Bell was also the inventor of the telephone in 1876.
Interestingly, AT&T (ISIN: US00206R1023, Ticker: T) and Western Union (ISIN: US9598021098, Ticker: WU) were fighting over patents and finally agreed to focus each on one business. In 1879, AT&T became a sole telephone company, while Western Union solely operated in the telegraph business (see here and here).
While the patent for the telephone expired in 1894, AT&T built much of the local, but also the long-distance telephone network in the USA. In 1939, AT&T controlled – also due to several acquisitions – around:
- 83% of all US telephones
- 98% of all US long-distance telephone lines
- 90% of all US-manufactured telephone equipment
It stayed in more or less the same form until its break-up in 1984.
This was mainly because AT&T was a tolerated and even a government-supported “natural” monopoly (as it was called). In this case, being an essential public utility with a very capital-intensive business, AT&T with its scale made the telephone industry more efficient – like Standard Oil in its sector before.
With the break-up of the big AT&T, 22 so-called “Baby Bells”, reorganized into seven independent companies and regional players, were born. In the next years, however, many of those Bells re-merged with each other and increased in size again to serve wider areas.
After the separation, AT&T went out of the local businesses and kept the long-distance operations. Plus, in the 1990s it entered the cellular business with another acquisition.
One of those Bells, Atlantic Bell, in 2000 merged with GTE Corp., the largest independent company of the sector, to create today’s Verizon (ISIN: US92343V1044, Ticker: VZ) (see here).
The lessons learned from the operations and the subsequent break-up of Standard Oil most likely influenced the governments along to let AT&T operate as a quasi-monopoly. It built up a reliable and advanced infrastructure to deliver low-cost services to its customers.
This way, it was avoided to let many smaller companies compete in a capital-intensive area that would have only produced higher costs and likely even lower quality service.
One dissolution and two failed break-ups
Carnegie Steel / U.S. Steel
The steel-tycoon, Andrew Carnegie, build an empire and quasi monopoly in the steel industry. However, he retired relatively early to become a full-time philanthropist. Unlike many such modern pretend to be philanthropists, Carnegie donated most of his accumulated wealth (see here).
In 1901 he sold Carnegie Steel for around 500 million USD (today more than 17 billion USD) to JP Morgan (the person, not the bank).
Morgan subsequently merged Carnegie Steel with several other businesses and this way formed U.S. Steel (ISIN: US9129091081, Ticker: X), a company that is still alive today, but far away from its former glory.
This is today’s only example of a company that was so big (the world’s first billion USD corporation) that it lacked innovations and became the victim of its own success (see here). Unlike Standard Oil, which U.S. Steel came close to in size, the latter begged the government for protective tariffs “to stay competitive” internationally.
U.S. Steel in its hay-days was in control of “only” around 60% of steel production. Its competitors were more innovative and finally beat U.S. Steel which lost market share with time.
Failed break-ups
The most prominent failed break-up likely is the one of Microsoft (ISIN: US5949181045, Ticker: MSFT).
Even though it even lost its antitrust lawsuit, it didn’t get broken up. Microsoft was suspected of abusing its market dominance as a so-called “non-coercive monopoly”. This means that although there have been alternatives in place for consumers, many were too lazy or too sticky to switch to a competing product.
Brand loyalty or, where applicable, high switching costs, prevent users from going over to different products. Hence, they stay.
In my personal case, I don’t use any Microsoft products (I would not even notice, if it disappeared), nothing from Facebook / Meta Plattforms (ISIN: US30303M1027, Ticker: META) and only YouTube from Alphabet. But I am sitting in the “non-coercive monopoly” of Apple, because I very much like many of their products.
Like U.S. Steel, Microsoft was not an innovative company. By the end of the 1990s it even became a “lame duck” in the business. The quasi-monopoly of Microsoft existed, because the company was offering bundles to its users. For example, if you bought their Windows operating system, you were given certain other software for free that would have cost you extra, if you chose a competitor’s alternative.
This way Microsoft “outcompeted” the former leading internet browser Netscape.
Today, however, Microsoft does not play an important role anymore in the browser segment, which is dominated by Google’s Chrome browser (see here).
Another failed break-up attempt, though without lawsuits, was the approach to separate Apple (ISIN: US0378331005, Ticker: AAPL). It was said that Apple would have a too dominant position, especially with its AppStore.
However, Apple is far away from having a monopoly with its hardware products, especially in the international markets.
In the picture below, you see the development of international iPhone sales. Is this a monopoly?
It is a comparable situation with its other products like iPads, Macs or newer products like the Apple Watch or AirPods (though the watch and pods seem to have very high market share relatively, unlike the older products).
The only thing that could be problematic with time, is the fact that Apple controls its likely high-margin AppStore which makes sense to keep apps malware-free. But who knows what will come around…
Monopolies Warren Buffett invests in
I don’t think it’s necessary at this point to delve very deeply into why Warren Buffett prefers companies with strong competitive positions. If you have read my article until here, you will be aware of why this is the case.
Less competition brings more earnings and better returns, in case the company is led appropriately.
But does Buffett also have monopolies in his portfolio? Below we have a table that shows Berkshire’s latest public holdings from John Vincent, which he posted on Seeking Alpha.
Let’s have a look:
Unfortunately, the list only contains publicly traded companies. But we know that Buffett also took over several businesses completely that subsequently got delisted. However, we are only focussing today on the list above.
It may surprise you, but there is no true monopolist on the list – except one, namely: Verisign (ISIN: US92343E1029, Ticker: VSGN).
Verisign is the provider of certain domain name registry services which tend to be the most often used ones. In case you don’t know, Verisign is the company that holds so-called “top-level domains” like .com and .net (as well as some further domain-endings like .gov or .edu).
If you want to have a personal website with a certain domain-ending (like mine), you only have the option to become a customer of Verisign.
But to take some hot air out of the balloon, Verisign is heavily regulated. The non-profit organization ICANN (for “Internet Corporation for Assigned Names and Numbers“) and the U.S. Department of Commerce are in full control of this company.
Verisign is not allowed to increase prices, as they like. Before every increase they have to receive the permission of ICANN.
Nevertheless, their business is insanely profitable and requires very little capital to be operated:
- operating profit margin: approaching 70% (!)
- free cash flow margin: close to 60% (!)
Do you know any other company with such margins?
The interesting question now, of course, is whether Verisign could be a good investment.
You know that I do not give any sort of advice or recommendation, here.
Solely in my personal opinion, I don’t like the valuation of Verisign. It uses roughly its complete free cash flow (and sometimes more) to buy back its shares. But at high valuations – like we have in this case – the return is limited.
Over the last ten years, Verisign bought back 29% of its stock outstanding. Revenues and cash flows only grow slowly in the mid-, sometimes high single-digits. However, because it is such a reliable business, its valuation parameters are also high.
You are still paying nearly a 30x free cash flow multiple for a slow-growing business. The last time the valuation was interesting, I would say, was during 2014–2015. We had multiples of around half of what we find now, back then.
The price per share has gone up by about 3x since then, and even nearly 5x compared to its top at the end of last calendar year.
Hence, it is a nice business and stock to watch, but not more (for me). There is not enough upside potential to get me interested.
Conclusion
In those cases where a true monopoly delivers high quality products, saves costs compared to a capital-intensive, competitive environment and passes these savings on to consumers, it more often than not is even favorable to allow such structures to exist.
Monopolies even can, due to their scale, be the only structures to develop or operate certain project and services.
Such sectors tend to be infrastructure and utilities businesses of all sorts where diversification would not make much sense and where costs for building these services are too high.
Governments should be watching, but not interfere, especially not into everyday operations of a business. Its sole task should be to regulate where necessary and to protect the consumers. I am not sure, however, if this is actually practiced this way.
Interestingly, governments by themselves are monopolies…
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