Rational competitors can innovate together
Last winter we wrote about our investments in Visa and Mastercard. Today we revisit the topic of owning two dominant companies in the same type of business.
Others in our portfolios include: 1) S&P Global and Moody’s, and 2) Priceline and Expedia. S&P and Moody’s dominate the bond rating business, while Priceline and Expedia do the same in the online travel agent space.
We didn’t set out to build portfolios filled with these types of combinations, but as we search through our list of high return businesses, they keep showing up. Here are some reasons we think this keeps happening:
- They learn from each other. While each company will have unique strengths, there are enough similarities that watching what works for the other guy drives constant incremental improvement, something often found in great businesses. As they compete for customers they learn and adapt. Both get stronger without killing off the other.
- The dominance of the two major players in an industry discourages competition. S&P and Moody’s have Fitch, a distant third in the market. Priceline and Expedia have TripAdvisor. In both cases it is extremely difficult for a new entrant to make a dent in the market. And if the little guys do succeed, the large players are likely to buy the up-starts.
- Since neither company solely dominates an industry they can avoid some of the most damaging aspects of antitrust regulations. Achieving a 90%+ market share didn’t help Microsoft or AT&T. Maintaining a certain level of “rational” competition might be the best course to follow for powerful companies.
None of this sounds “fair”. It certainly isn’t if you are trying to compete with these companies. But as long as customers are happy enough to not switch to a new-comer, most parties win.
We’ve always said we are looking for businesses with unfair advantages. We just didn’t know they would come in pairs.
Daniel A. Ogden
Disclosure: Dock Street Asset Management, Inc. and our clients may own securities. This article is not intended to be used as investment advice.