Will Your Monopoly Stock Rise or Fall?

Dec 8, 2021

Will Your Monopoly Stock Rise or Fall?

The best example of a monopoly business, nearly two decades back, was the tiny photocopy shop at university campuses.

There was usually just one such shop in each campus, with no competition. In a world without smartphones, the photocopy outlet or what most called the Xerox shop, was a saviour.

The services of the photocopy shop were critical to students and professors alike. Waiting in long queues, paying double the price or tolerating poor quality of printing paper did not matter.

I remember wondering why the universities allowed such a monopoly to flourish. Until my prayers were answered and there were three more such outlets in the vicinity.

To begin with, the photocopy shop lost its monopoly, lowered charges, and offered better quality print. By the time I finished university, laptops and smartphones had literally put the photocopy shop out of business.

That taught me an important lesson. Not every monopoly thrives forever. On the contrary, many go downhill or even fail.

Years later, I read an interesting example of a monopoly business in Peter Thiel's bestselling book, Zero to One. He compared Google with America's airline industry.

--- Advertisement ---
Govt's 257 Bn Rupees Boost for EVs- Your Chance for Potentially Wild Profits

Recently, the government announced that it will be pumping a whopping 257 billion rupees into electric vehicle initiatives by 2025.

We urge you to become a part of the EV gold rush that's happening now and gain the early mover advantage.

We have closed in on 3 EV stocks which could potentially hand you over insane profits in the long run.

We will be revealing all the details in one of our upcoming special online event.

Sign Me Up For the FREE Event

Thiel highlighted that the US airline companies serve millions of passengers. It generated hundreds of billions of dollars in revenues each year. Yet captured an insignificant amount of this value.

When one compared the airlines with Google, it was evident what was amiss. Despite a third of the airline industry's revenues in 2012, Google's profits were 100 times higher.

The reason was simple. Google was and is a near monopoly. The airline industry operates in a perfect competition market.

Google could plan for the long-term future and invest in innovation for decades. Airline companies are focussed on protecting today's margins.

They can't think beyond protecting their margins. Nor do they have the flexibility to care about employees, invest in innovation or build sustainable moats.

It's clear why investing legends like Warren Buffett are attracted to monopoly businesses. Back in 2012, Warren Buffett bought into Verisign and then increased his stake over the years.

How is Verisign a monopoly? Verisign is the registry for the .net and .com URL extensions, which together account for 55% of all top domains in the world. When some registrar registers an URL ending in one of these extensions, it has to pay a yearly fee to Verisign.

But this monopoly is subject to licence regulations.

To think that all monopolies are risk free is a huge mistake.

Revealed: Richa Agarwal's Top 3 Stocks for 2022

Pharma companies that enjoy patent monopolies lose their edge after patent lapse. Similarly, companies that are monopolies in certain geographies eventually see competition eating into their share.

If you are wondering whether monopolies in India have destroyed wealth, look no further than the public sector units...

Coal India

VSNL (bought over by Tata Communications)



And of course, there are the unlisted ones like Air India which accumulated billions in losses over decades.

It's not that the private sector monopolies stay untainted. Bharti Airtel lost its wealth creating potential as soon as India's telecom sector saw stiff competition.

Maruti Suzuki and L&T have struggled to retain their market share over past decade.

So, it's not the absence of competition or the market share that determines true wealth creating potential of monopolies.

Pidilite and Asian Paints have proven that a monopoly is not necessarily a moat. The company doesn't need to be born with. It's just something that must be consistently nurtured.

Asian Paints removed all layers of channel partners and reached out directly to paint dealers.

--- Advertisement ---
Markets in Downturn? Here's What You Must Do...

The markets corrected sharply in recent days...

And it's impossible not to be reminded of the bloodbath we saw in March 2020.

The truth is...

Stock market corrections and recessions are inevitable and painful...

But this #1 video with Rahul Shah has the power to change how you perceive corrections and crashes. In fact, you'll master the art of turning every market crash to your advantage...

Watch the COMPLETE Lazy Millionaire Summit Right Now

Similarly, Pidilite created a pull-based demand for its products by targeting carpenters, educating them about the benefits of these products.

Constant product innovation, adapting to latest technology, strengthening supply chain etc can all help companies enjoy monopoly like fortunes.

Traditional companies must pivot their business models to continue their monopoly-like edge. You should not be surprised to find auto makers investing in EV technologies. Or banks investing in fintech like applications.

Similarly, new age fintech companies, ecommerce ventures, and EV makers, must ensure that being early entrants does not force them to compromise on their monopolistic edge.

Some solid monopoly stocks have been big gainers in the market rally over past 18 months.

But the problem is that not all will retain their edge. Most do not have the virtues to make them permanent wealth creating franchises.

You must evaluate your favourite monopoly stock like any other business, which has chances to fail. And you must not pay a price that you may regret.

Warm regards,

Tanushree Banerjee
Editor, StockSelect
Equitymaster Agora Research Private Limited (Research Analyst)

Recent Articles

The Right Way to Profit from Disruption January 28, 2022
You might be betting on the right megatrend, but are you betting on the right stock?
Why You Should Not Buy Stocks Like Zomato in this Market Crash January 27, 2022
The margin of safety is still not favourable for tech stocks.
Why the Correction in Indian Tech Stocks Should Excite You January 26, 2022
A few tech incumbents are all set to become very attractive to investors.
Stocks to Buy in this Market Sell-Off January 25, 2022
How you approach this correction will determine your wealth for the years to come.

Equitymaster requests your view! Post a comment on "Will Your Monopoly Stock Rise or Fall?". Click here!