Stocks That Are Monopolies: The relationship between monopolies and US consumers is full of contradictions. Americans are suspicious of companies that have a stranglehold on their respective industries, and they keep a close eye on whether and how those companies use their size and market share to drive profit.
However, they appreciate the benefits offered by economies of scale, and they are quick to patronize massive market leaders rather than the small family businesses desperately trying to compete. This behavior tends to encourage rather than discourage large businesses from growing their market share.
Investors know there are a number of stocks that are monopolies (virtually). The question is whether that massive market presence is an advantage or a disadvantage for shareholders.
Are Monopolies Illegal?
The definition of monopoly – pure monopoly – is a company that literally has no competition. No other sellers of the particular product or service exist. For example, there was a time when Microsoft was the only company in the world that sold software and operating systems for computers, so entities in search of computer-based tools had exactly one option for sourcing these products.
Pure monopolies are rare, but a number of today’s companies have what can only be described as a virtual monopoly. Though alternatives exist, the virtual monopolies dominate the market to the extent that competitors can’t gain much traction. Virtual monopolies can set prices and standards for the industry without fear of losing business.
In theory, a virtual monopoly shouldn’t be a problem, but in practice, the system doesn’t tend to work in consumers’ best interests unless it is monitored very closely. Without competition, monopolies can set excessive prices, deliver poor-quality products, and stamp out alternative products and services to generate profits for themselves.
While the law doesn’t prohibit monopolies outright, given the dangers, a variety of regulations have been put in place to keep such companies honest. The Sherman Antitrust Act is one of the biggest, and it has been used to break up companies that prevented competition, as well as prevent mergers and acquisitions that could have created a virtual monopoly.
Such regulations can put a damper on the profits of monopolies, but all in all, investors tend to like these stocks. After all, such market share is more likely than not to deliver growth and value over time, reducing some of the risk inherent in purchasing any security.
7 Stocks That Are Monopolies – Virtually
These seven companies meet the criteria for monopolization of their respective industries. While they are not completely without competition, they have enough market share to control the pricing, quality, and distribution of related goods and services.
Social Media: Facebook
While there have been other social media platforms before and since Facebook arrived on the scene, most would agree that the company sets the industry standard. In addition to its namesake, Facebook owns Instagram and WhatsApp, putting it in a leadership position when it comes to user-generated content.
Facebook is free to consumers, because the company’s revenues are driven by advertising.
The platform offers marketers a ready-made audience that has conveniently sorted itself into extremely narrow demographic categories. This is where Facebook holds something of a monopoly – no other company can boast the same depth and breadth of consumer data.
Further, Facebook has the attention of such a large share of consumers that it has the power to influence national and international conversation on the world’s most pressing issues.
Tobacco giant Altria owns approximately 50 percent of the market when it comes to cigarettes and smokeless tobacco. Top brands include Marlboro, Copenhagen, Skoal and Black & Mild.
Considering government regulations have basically closed the US market to new competitors, a 50 percent share is a massive business advantage.
Of course, with that said, the industry as a whole is under threat. There is intense pressure from all angles to eliminate tobacco products due to their health risks, and the market is steadily shrinking.
In 1965, 42.4 percent of adults smoked. By 2000, that figure dropped to 23.3 percent, and it was down to 13.7 percent as of 2018. Nonetheless, Altria’s stock continues to deliver shareholder value, so for the time being, the company’s strategy to stay relevant is working.
Search Engines: Alphabet
Alphabet, parent to search giant Google, owns what can only be described as a collection of monopolistic businesses. Many of its subsidiaries are pursuing innovative new products and services that are unlike anything available in the market today. Examples include Verily, Sidewalk Labs, Calico, and DeepMind.
Of course, the main attractions are Google and YouTube, both of which dominate their respective fields. Google has 86.86 percent of the global search engine market share as of July 2020.
YouTube boasts two billion logged-in monthly users. With statistics like that, it’s no wonder marketers turn to these platforms to promote their products.
The risk, according to members of the Congressional Committee who called Alphabet’s CEO to testify in July 2020, is that in its monopolistic position, Google can control what consumers see.
It has the power to prioritize preferred pages and sites. More importantly, it can – theoretically – suppress pages and sites at will, eliminating organizations and ideas that don’t suit the business.
It’s safe to say that Nielsen had a pure monopoly on media-related ratings data for decades, though there have been short-lived attempts to break that hold on the market.
The company owns patents on ratings technology that make it nearly impossible for competitors to break in, and it aggressively pursues claims of patent infringement when threats appear on the horizon.
With that said, courts have found that Nielsen doesn’t use its power to violate antitrust laws, as it doesn’t actively prevent clients from exploring other options. Some industry experts would disagree, as Nielsen continues to acquire companies that pose any competitive threat.
Either way, when it comes to media ratings, investors who want to buy in tend not to look farther than Nielson stock.
Commercial Health Insurance: Anthem
The healthcare industry is full of monopolies, virtual or otherwise. There simply isn’t room for significant competition among hospitals, specialty care providers, insurers, and other healthcare services in specific geographic markets.
Health insurer Anthem is one of a handful that make up the majority of the US market. It currently holds a 6.1 percent market share (depending which data you use), and covers 42 million members.
Anthem made a concerted effort to surpass the industry leader, UnitedHealth, with its plan to acquire Cigna Health. Anthem’s 6.1 percent market share and Cigna’s 2.7 percent market share would have made the combined company the largest insurer in the United States. Regulators weren’t comfortable with further consolidation of this industry and blocked the merger plans.
Despite the failed acquisition, Anthem still holds a monopolistic position when it comes to commercial health insurance.
Though it doesn’t control the US market as a whole, there are at least 11 states in which Anthem holds well over 50 percent of market share.
The proposed merger with Cigna could have increased that market share beyond 75 percent in these markets, which regulators believed would be too risky for consumers in terms of coverage cost and quality of care.
Satellite Radio: Sirius XM
Sirius has had its share of ups and downs over the years, but one thing is certain: when it comes to satellite radio, Sirius XM is the only game in town.
That wasn’t always the case – Sirius once had real competition from XM radio. However, when both companies found themselves on the verge of bankruptcy in 2008, they merged to form the only satellite radio company of any importance.
Streaming music platforms threatened to pull a limited number of audience members from Sirius XM’s subscriber base, but the company easily resolved this problem with the purchase of Pandora.
Today, SiriusXM offers users more than 175 channels, which include music, sports, news, traffic, Latin, and comedy.
Standardized Testing: Pearson
Pearson is a top provider of all sorts of educational services, from print and digital textbook publishing to standardized assessments, testing, and exam preparation.
In addition to its Pearson-branded products, the company is parent to a number of additional educational media brands. These include Peachpit, Prentice Hall, Longman, Scott Foresman, and Addison-Wesley.
The backlash against Pearson’s market dominance has been fierce. Parents, students, and lawmakers have criticized the company for its pro-testing lobbying efforts and its excessively high textbook prices.
Pearson’s response is that there are hundreds of companies operating in this space, and the high-stakes testing it provides in US schools makes up just 10 percent of its revenues.
Whether Pearson’s market share and collection of exclusive contracts makes it a monopoly or not, this is one area in which consumers have demanded accountability. It is likely that while Pearson will retain its market share in the years to come, it will move very cautiously as it works to grow and expand.
Investing in Virtual Monopolies: The Bottom Line
While there are certainly disadvantages to investing in virtual monopolies, those disadvantages tend to be predictable.
For example, if one of these companies becomes the subject of regulatory probes or a start-up threatens industry disruption, it doesn’t happen overnight. That gives investors an opportunity to assess their positions and make necessary changes before stock prices drop.
All things considered, that’s a good thing for shareholders, so these companies are typically considered smart investments.
Monopoly Trivia: In American Culture
Nothing illustrates the US love/hate relationship with monopolies more than America’s favorite board game – Monopoly. For nearly a century, players embraced a widely publicized origin story that spoke of the American dream. Legend had it that during the Great Depression, a man named Charles Darrow created Monopoly to entertain his loved ones. The game was so popular, he eventually sold it to Parker Brothers, making his own fortune in a quintessential rags to riches tale.
The truth is that Monopoly was invented decades earlier by a woman named Lizzy Magie. Her goal was to create a game that demonstrated the dangers of giving a single player – or business owner – too much power. Unfortunately, that goal was lost as the game became a staple of American culture – not for its warnings about power consolidation, but for its promotion of power consolidation as the ultimate path to success.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.