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The Power of Monopolies

I’ve studied dozens of monopolies while learning about business. When investing in high-return ideas, you quickly learn that monopolistic businesses have specific characteristics that compound returns over time. If you have played Monopoly, the board game, growing up then you might be familiar with these traits.

Before diving into the world of monopolies, there are a few resources you might want to read. The first are two books about building businesses: 7 Powers and Zero to One (Amazon affiliate links). The second resource is the Founders Podcast by David Senra.

I recommend the Founders Podcast because David provides a deep understanding of how great businessmen achieved success. He reads a wide variety of books like Titan, which is the biography of John D. Rockefeller. The Founders Podcast is an excellent resource if you want to learn how great businesses are built.

As for books, 7 Powers is good if you want to learn about power in business. Helmer defines ‘Power’ from creating conditions that lead to persistent differential returns. Building a sustainable competitive advantage, whether it is from scale, networking or another resource is a serious edge when it comes to business. I’m not a big fan of the book but it does a great job of defining key terms in business.

I really understood how monopolies worked when I read Peter Thiel’s Zero to One. Thiel broke out specific terms on why monopolies are essential for innovative companies to thrive. Given his experience investing in Facebook/Meta, Peter describes network effects and economies of scale with a first principles approach. I think the most important chapter from his book is regarding secrets. Thiel believes that great companies are built on valuable "secrets" about how the world works that are not yet widely known or accepted.

Now I mention all of this because the first monopoly I really studied was Microsoft. In fact, Bill Gates recently published his own autobiography called Source Code, that I look forward to reading.

In the late 90s, Bill Gates and Microsoft were under significant scrutiny because of their antitrust practices. The most notable ones came from the Browser Wars when they were facing off with Netscape. It was one of those moments when I learned how monopolies can leverage platform powers. Microsoft owned the Windows operating system and flexed their muscles when it came to acquiring more market share.

Google's Antitrust Case

This week Google was hit with an antitrust case for online advertising. Last summer they received an even larger antitrust lawsuit regarding internet search. Advertising and Search are the core profit centers for Google. I know multiple government agencies have attempted to go after tech monopolies but most of the efforts seem futile.

The primary reason is because this new stage of technology businesses are hyper-focused on reducing costs for the customer. Even Rockefeller was focused on achieving economies of scale with the sole goal of reducing costs for customers. Now some of Rockefeller’s tactics might have been aggressive but I think the outcome was a win-win for the markets. I think the same is happening with major tech monopolies today.

For example, Amazon is hyper-focused on lowering prices and their cost structure. This flywheel feeds itself because more customers will shop at Amazon because of their ability to lower prices. Very businesses have this flywheel embedded in their business model. Now Amazon is acquiring significant market share over other ecommerce companies but not in the same monopolistic ways as high margin businesses like Apple. (Yes, Apple has a monopoly with the App Store and iOS ecosystem to lock in users to charge high prices).

Even Google’s core business model, Search, is inherently free. Any customer, consumer or enterprise, can use Google Search for free. It’s hard to say Google owns this niche because anyone can choose to compete with this business model. In fact, anyone who thought Google had a monopoly search had to reframe their thinking about OpenAI releasing ChatGPT in 2022. The chatbot became the new search model and has been eating away Google’s market share in some cases. Of course Google has fought back with Gemini, which is their own A.I. tool.

The debate surrounding tech monopolies like Google is complex. While concerns about potential anti-competitive practices are valid, it's important to acknowledge the consumer benefits these companies often provide through cost reduction and innovation. I think Google doesn’t face significant threats from these antitrust lawsuits but from new competitors racing to build Artificial Super Intelligence. Right now I think Google is within the top three best A.I. tools but the leadership position is constantly changing. Whoever wins A.I. today will dominate Search tomorrow.

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