Gophers, upsides, downsides and limiting monopolies
You dose of nonsense - Tuesday, 10 November 2020
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Source: Tierfotoagentur/Alamy via the Guardian
Source: Katie Burandt via Pexels
Source: Oregon State University
TL;DR - long context-building bits at the top; news-related stuff at the bottom:
Benefits of consolidation to the customer
If you enjoy shopping, generally, the more choice of products and vendors are present, the happier your shopping experience would be. You thrive on variety. When you’re in this zone, your raison de vivre is in being able to touch, feel, and smell each product, and then having the discerning mind and iron cladded courage to get the best bargains.
But for many of us, that may be too overwhelming an experience. Sometimes you just want something that just does what it says on the tin, with minimal fuss, and just be done with it. For example, you may not want to agonise on Amazon which set of disposable partyware you’d like to buy - you just want something cheap and will last long enough before it is thrown away. It’s just not worth your time - you have other more productive things to do! (I once got a survey request from Tesco asking if I was satisfied with the variety of partyware available in-store. I certainly couldn’t care less)
But sadly, there are many things in life that are by nature a tad bit more complicated than choosing what kind of cup would you like to get drunk out of. Banking, for example.
If you are a CEO of a company that manufactures flying cars, honestly, your time is likely to be better spent on focusing on your product because that’s your area of expertise. But nonetheless, money is what makes the world go round - you still have to sort your company’s banking needs. So what would you be inclined to do?
Enter the universal bank, i.e. the one-stop shop for all your banking needs - a business model that thrives on busy CEOs who have better and more productive things to do than to worry about banking. You want to open a current account and set up scheduled payments for your staff’s salaries and your suppliers? Sure! We can do that! You want to buy another company? No worries there too! We’ll send you our best M&A guys, and we even have our traders and salespeople to sell bonds should you need to borrow money for your purchase! And your personal banking? Mate, meet your very own private banker - you can call them 24/7, 365 days a year for whatever you want!
From a customer’s point of view, all this sounds efficient, right? Everything is done in one place, under one roof.
Well, that is true, until...
The downside of excessive consolidation
Let’s say that the universal bank that you bank with has been so successful that it has put every other bank out of business.
Now, you, the ever so smart and optimising CEO of your flying car company, might opine that this means that the banking services you receive is only going to get better! You reason:
The bank’s fixed costs would be spread out over an even greater customer base. That means that the bank can pass on these savings to you;
The bank has all the contacts of every single investor - surely, you can benefit from this network to raise the best funding that you can; and
The bank has all transaction and customer data in the world - surely, they can leverage “Big Data” and “AI” solutions to help you do business smarter.
Yes, this hypothetical monopolising bank can choose to do that. It can choose to do the right thing by:
Passing on savings to you;
Get you access to the best investors at no additional cost; and
Invest time, money and effort to build up its smart IT systems.
But honestly, at this point, what’s stopping it from:
Keeping the savings all to itself;
Charge you extra for the privilege of its rolodex (I love this device, especially when it is so irrelevant nowadays); and
Using that time, money and effort to bully new competitors and buy them out at fire sale prices, especially when this may cost a fraction of building a new IT system.
I mean, what are you going to do? Go to another bank? There are no other banks to go to anymore!
How are you going to trust the bank not to be evil? I can’t even trust myself with a large bag of crisps!
(As an example of using your monopoly to bully your smaller competitors and forcing them to sell their business to you, here’s an excerpt from NPR’s brilliant podcast on Standard Oil, the original modern day monopoly -
In 1872, Rockefeller [head honcho of Standard Oil] had about 30 rivals, these other refineries in Cleveland. He basically said to them, you can either join me, get in on this amazing Standard Oil stock, or you have to compete with me. And if you don't sell to me, I'm going to lower my prices more than you can. And I will crush you.
Of his nearly 30 rival refineries, Rockefeller was able to buy up 22 of them, six of those in one 48-hour period. They called this the Cleveland massacre. And he kept using this move all across the country - New Jersey, in Kansas, in Oklahoma and California. When all the dust settled, Standard Oil controlled around 90 percent of oil refining in America - 90 percent.)
Preventing excessive consolidation
The traditional way people use to prevent excessive consolidation is by empowering the government to:
Break up existing monopolies (e.g. Standard Oil was eventually broken up after Standard Oil Co. of New Jersey v. United States into Exxon, Mobil (which later teamed up again to the ExxonMobil that we have today), Chevron, and all the other companies shown here:
Source: u/SkylarWeston via Reddit
Stop mergers of potentially monopolistic entities.
A very recent example of the second method is the US Department of Justice’s legal action against Visa, who has acquired the fintech startup Plaid.
The summary of the legal complaint is:
There are just so many banks in America;
Visa’s business model is to facilitate payments between banks (by connecting the buyer’s and seller’s bank accounts during a purchase), so it has a vested interest in keeping other players out of this field;
Plaid’s current business model is to aggregate all interaction with the various banks in the US, and present them as a single unified API to any software developer who wants to connect to any of these banks.
This means that Plaid is a potential threat to Visa, who was the original interbank interfacing service.
Therefore, the DoJ claims, Visa’s acquisition of Plaid is a preemptive means to kill competition.
This was also interestingly supplied with the complaint:
Source: US Department of Justice
But of course, if you are a government with many more powers than Uncle Sam and are not afraid to use them, you could choose to do what China’s government is doing to Ant Group.
While I have written in a previous newsletter that this may be a political move to put Jack Ma in his place in China’s hierarchy, some of the changes that Ant would have to take on are related to concerns of Ant:
Being able to benefit disproportionately from unclear or non-existent regulations (FT: Ant currently funds only 2% of its total Rmb1.7tn in consumer loans itself with most of the remainder coming from its partner banks);
As a result, it has grown to a point where it can bully other players in the loans business (as much as Ant tries to brand itself as more of a tech company than a financial one) (FT: Ant extracts an estimated fee of 2.5 per cent from its partner banks for each loan it arranges and takes on none of the risk.); and
Being too systematically important aka too big to fail (Economist: Alipay has a 54% of the Chinese mobile-payments market by value).
PS: None of my content is sponsored content. All opinions are my own. Nothing in this newsletter is investment, legal, business, medical, or life advice (my subtitle is “Your daily dose of nonsense”). Don’t be believing everything a random guy on the internet says.