Few companies have a true monopoly in any market. More common are “virtual monopolies” or “near-monopolies” that exist due to geography or brand recognition. When consumers hear the term monopoly, the first thing that comes to mind is often price-fixing and other illegal business practices. We are not accusing the companies we reviewed of any wrongdoing.
At one time, Forbes kept a Monopoly Index, but it only required for companies to have 50% or more in market share to be included. Virtual monopolies or monopolies in the making don’t have that kind of market power, but they are plenty powerful. Investors would be advised to consider the ones reviewed by 24/7 Wall St.
1. Streaming movies, future rental monopoly opportunity in the making…
Netflix is expected to have more than 19 million subscribers at the end of 2010. Its growth may explode in the coming years Back in April, Trefis Research predicted that it would eventually reach as many as 47 million subscribers. That represents 39% of US households with DVD players. Where Netflix wins is with its library of more than 20,000 titles and its flexible business model that accommodates streaming or DVD by mail.
To be sure, many companies do what Netflix does. Hulu is available for online TV and now movies. Coinstar Inc. (NASDAQ: CSTR) has its Redbox rental kiosks and is expanding online. Cable companies also offer video on demand for a fee though they have many free offerings as well. Amazon and iTunes offer downloads of movies and television shows. Vudu is another competitor, but its movie library has yet to approach a critical mass even though it claims to be the HD king
Netflix’s biggest risk is the movie studios. Now that they have figured out how to win in the digital world where piracy is rampant, having access to the company’s distribution network will be far more cost-effective than dealing with smaller upstarts. It seems that the biggest challenge for Netflix may be staying an independent company. The stock is expensive, but that is how the stock market values future monopolies.
2. Downward Dog… A Future Monopoly in Yoga
A Yoga Journal piece from 2008 said Americans spend about $5.7 billion a year on yoga classes and products. This was up 87% from a previous study in 2004. What it will be in 2012? Higher, of course. The company recently forecasted 2010 revenue of $645 million to $650 million. Its biggest market is the U.S. but it it is also strong in Hong Kong and Australia. The number of new markets for Lululemon to enter is almost endless.
Comparing about $650 million in annual sales to a business segment with some $5.7 billion in sales may not seem fair. Here is a challenge: go find another large public company that dominates the yoga market. Gap Inc. (NYSE: GPS) is one of the few threats to Lululemon with its Athleta clothing segment which Gap acquired for roughly $150 million. Gap, though, has been troubled for some time. Nike Inc. (NYSE: NKE) is a monster in sports apparel, and it did not skip yoga . Prana and dozens of smaller sportswear companies are also in the yoga business.
The closest competition is Gaiam, Inc. (NASDAQ: GAIA), which claims more than 8 million customers. The problem is that Gaiam is worth only about $165 million and its revenues are expected to be about $278 million in 2010 and about $306 million in 2011.
The market capitalization of Lululemon is now a whopping $3.4 billion. It is profitable and can expand through acquisitions to become exponentially larger than it us today. About the only thing that can hold it back is a possible takeover by a larger company.
3. Radio… a monopoly in satellites
SIRIUS XM Radio Inc. (NASDAQ: SIRI) is a monopoly in satellite radio, yet it represents a tiny part of the radio business. Radio was roughly $20 billion business a decade ago. A BIA/Kelsey report earlier this year forecasted that 2009 revenue was $13.7 billion and 2010 revenue would be about $13.9 billion. SIRIUS XM is expected to have 2010 revenues of $2.83 billion and nearly $3.1 billion in 2011 revenues.
For all practical purposes, there is no competition for SIRIUS XM. Howard Stern is still a wild card in the scenario, but the company is less dependent on the shock jock than it has been before. Its new plug-in device is also a plus because it enables users to take SIRIUS XM with them in any car. SIRIUS XM is expected to have more than 20 million subscribers at the end of 2010.
The threat by Pandora is an obvious one, but even if that service takes off SIRIUS XM is the king of its niche. Advertising is close to nil, far from the case for terrestrial radio and Pandora. There have been several attempts to compete in satellite radio, which have all been scrapped. Launching satellites is not cheap and that creates further barriers to entry. As part of the merger between SIRIUS and XM, the company agreed to lock in prices. The end of that pact is nearing but SIRIUS has to avoid raising prices too quickly to avoid angering subscribers.
4. How much competition is there is water?
American Water Works Company, Inc. (NYSE: AWK) is by far the best water investment out there and is so solid that this was one our Top 10 Stocks for the Next Decade. Is the company a true monopoly in the United States? No. It does have a virtual monopoly is in its markets where it operates. There is competition in many markets for electricity, but that is not the case for water.
The company is the largest public U.S. water and waste water utility. It has 16 million customers in 35 states and two Canadian provinces. Companies need the approval of regulators to hike rates. Still, how many water utilities can exist in a single geographic location?
As far as the future, American Water Works can grow by acquiring adjacent water utilities. It just so happens that American Water is the best of the best. With a $4.3 billion market cap, it is the largest by market cap of its water utility brethren.
5. A near monopoly in credit scoring…
Fair Isaac Corp. (NYSE: FICO) is small enough to be considered a virtual monopoly in the credit reporting business After all, it has a market capitalization of just under $1 billion. There are other credit scoring services, but “FICO score” is to credit what the Dow Jones Industrial Average is to investors asking about “the stock market.”
Fair Issac is the developer of the industry-standard FICO score, which the company says “is used by the vast majority of lenders to make credit decisions.” The revenue stream behind this monopoly is rather small. The company is expected to have revenues of about $623 million in 2011. In August 2009, FICO said that IDC data showed that the company dominated the category for the fourth year in a row with a 24.4% market share, which was more than three times as much as the nearest competitor.
Experian, TransUnion, and Equifax are the three major credit bureaus. None have the impact of the FICO score.
6. A move for rare earth elements, in the U.S…. a potential domestic monopoly
Molycorp Inc. (NYSE: MCP) has claimed to be the only domestic producer of rare earth elements in the United States. We would point out that Rare Element Resources Ltd. (AMEX: REE) makes the same claim. Still, it is Molycorp that is tops in domestic rare earth elements and rare earth oxides.
What is odd here is that its major facilities are not even in operation and that will not occur until the end of 2011. The company’s IPO is one of the top performers of 2010, and it is already signing pacts with suppliers. China’s recent move to limit its scarce resource exports has created an opportunity here. Considering that defense and electronics firms need rare earth elements, it is crucial that the U.S. government secure domestic supplies for national security reasons.
The opportunity is huge, hence Molycorp’s $3 billion market capitalization. Investors, however, have had to stomach many painful lessons when it comes to investing in emerging mining and minerals companies. Fortunately, Molycorp’s Mountain Pass operation has proved reserves and those do not exactly get up and move away without the involvement of mining.
Is Molycorp’s opportunity in the billions of dollars? Perhaps. We have found that many Canadian miners making many of the same claims and Rare Element Resources Ltd. (AMEX: REE) has some of the same opportunities. It was the CEO’s claim at the IPO that threw light on a monopoly in the making. You will not really know until 2012 if the company lived up to its potential or not.
7. Atlas Shrugged?…. The Misunderstood Seed Monopoly
What about Monsanto Co. (NYSE: MON)? Whether Monsanto ever qualified as a monopoly depends on who you ask. Missteps have knocked down the giant, and DuPont (NYSE: DD) is a formidable competitor in seeds. After having been valued at $140 per share, shares dipped to under $50 on concerns over SmartStax and Roundup Ready 2 before their recent recovery.
The New York Times pointed out last month that the Justice Department is investigating Monsanto for possible antitrust violations. DuPont is also on the move. Monsanto put its market share at 36% in 2009 and says it has remained flat this year. DuPont puts its share of the soybean market at 31% after a seven point gain over the last two years, while Monsanto lost share and came in at 28% last year.
The world’s largest seed company produces around 90% of the world’s genetically engineered seeds. Outsiders and smaller players are the ones that consider Monsanto to be a monopoly Having the stock ticker “MON” had nothing to do with “Monopoly.”
The term monopoly has evolved through time. Intel Corporation (NASDAQ: INTC) is often considered a monopoly, yet as gadgets shrink they are not as dependent on the company’s chips. What about Google Inc. (NASDAQ: GOOG) having 70% or more in the share of domestic search?
Remember that one person’s monopoly is another person’s opportunity.
JON C. OGG