Corporations dream of outcompeting rivals and reining supreme in their respective industries. Some companies actually achieve this level of dominance, eventually creating near-monopoly conditions that allow them to earn outsized profits and keep their customers eating out of their hands. (To learn more about monopolies, check out A History Of U.S. Monopolies.)
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As you might imagine, once a monopolistic status has been achieved, many forces develop to try and break down the outsized influence that some companies end up wielding on the marketplace. Technological advancements are a frequent disruptor, as is government involvement to regulate away excessive control over a customer base. Below are three groups of companies that have seen these dynamics play out in recent years.
In one of the best examples of the breakup of a firm with monopoly power, phone giant AT&T was forced to break into a number of local phone companies back in 1982. The breakup was into approximately seven regional bell operating companies (RBOCs) and included Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell and U.S. West.
It took more than a decade, but these RBOCs eventually began consolidating. The first mergers started taking place in 1996 Ameritech was eventually acquired by Southwestern Bell in 1999, which changed its name to SBC. Bell Atlantic was bought by GTE 2000 and eventually became known as Verizon.
Today, AT&T and Verizon control most of the market and dominate the declining fixed line business as well as the growing mobile phone space. AT&T is looking to acquire T-Mobile to further boost its mobile capabilities and match Verizon, which is currently the market leader. Industry dynamics have changed greatly since the breakup of the original AT&T and the Internet could continue to force it to evolve. (For more on phone companies, read Dial Into Cell Phone Profits.)
The dominance of AT&T and Verizon has been matched in the personal computer industry by the likes of Microsoft and Intel. At one point referred to as Wintel, they respectively controlled the software and microchips that formed the inner workings of nearly every computer manufactured on the planet. This dominance peaked around 2000 and has waned somewhat in recent years, but these two giants still control an estimated 80% of the market for PCs today.
These firms have faced antitrust accusations regarding their dominance and allegations they used this power to keep competition out from the PC industry. For example, Microsoft had been accused of keeping web browsers other than Internet Explorer off computer desktops, while Intel has also been accused of forcing suppliers to only use its chips and avoid rivals such as AMD. Both have faced heavy fines in the U.S. and Europe for trying to exploit their dominance, but have still been able to operate successfully and bring in high profits for shareholders.
As with AT&T and Verizon, the Internet is causing the computer industry to evolve rapidly. The advent of smartphones and tablet computers is proving that consumers may only need access to the Internet to access software and applications. This could lessen the dependence on the Windows operating system and computing power delivered by Intel's chips. However, both are likely to continue to exert significant influence in the personal computing industry.
Credit Ratings Agencies
The credit ratings agencies provide opinions on the credit worthiness of companies and government entities. Standard & Poor's and Moody's dominate the industry, with Fitch an important player but still a distant third. The law has designated these firms as Nationally Recognized Statistical Rating Organization (NRSROs) and requires that banks and other financial institutions use these credit ratings as part of their research process.
Credit debacles, including the demise of Enron, much of the U.S. residential housing market and a recent downgrade of the U.S. long-term credit rating, have put stress on the ability of the credit ratings agencies to operate with the benefit of what is basically a duopoly. The credit ratings reform act of 2006 also sought to rein in their influence, but many critics felt it fell far short of actually altering the way they operate.
From an investment standpoint, buying leading firms that operate at or near monopolistic status can prove lucrative. These firms are usually able to earn outsized profits that rivals are unlikely to be able to steal. However, as the above cases demonstrate, events quickly develop to break up firms that dominate their industries. (For more see Early Monopolies: Conquest And Corruption.)
Disclosure: At the time of writing Ryan C. Fuhrmann was long shares of Microsoft but did not own shares of any other company mentioned in this article.