Monopoly

The How-to Guide for Investing

   When George Eastman’s invention, the ”Kodak” camera, came to market, it was an instant success. Kodak quickly became one of the most profitable companies in existence, and Eastman one of the wealthiest men in the world. Since Kodak was the only camera on the market, they enjoyed huge margins and a stream of recurring revenue, as customers repeatedly bought (and developed) film. For all practical purposes, they had a monopoly - for a while. Their astonishing success spurred competition, who responded by bringing similar products to market. As is always the case in business, competition cut into Kodak’s market share and compressed its profit margins. As a result, Kodak is no longer the cash cow it once was.

   The Kodak story is not unique in the business world. Plenty of companies made a killing by bringing popular products to market, only to watch the competition pile in and drive profit margins down to the point where even the best-run companies struggle to make a buck. Ford, US Steel, Nintendo, Cisco Systems, and Xerox are all good examples. There was a time when every one of them was among the most profitable companies on the planet. Like Kodak, their days as corporate giants were temporary because they were all one-hit wonders in what have become highly competitive, low-margin “Commoditized” industries.

   While bringing a wildly popular product to market can get you to the top of the corporate world, staying there requires constant innovation.  Successful new products will allow companies to stay a couple of steps ahead of the competition. Do that, and profit margins will remain robust like they have for Apple, Merck, Microsoft, and for a time, General Electric. GE’s first hit product was the light bulb. From there, they built everything from toasters to turbines. They were, at one time, the biggest company in the world. Lately though, there has been very little in the way of innovation from GE. Their margins on existing products are getting squeezed by competition, and as a consequence, GE has been sliding into irrelevance like Kodak, Xerox, etc…

  Bag is astounded at the number of corporations whose entire business model is trying to find the next new hot product. Considering the lucky few fortunate enough to find it will have to innovate to stay successful, it does not seem like a good business model. It isn't easy to continually reinvent the wheel. Long term, this doesn’t bode well for the Apples, Mercks, and Microsofts. There are, however, a handful of highly successful companies in the last 100 years that have traveled a much different path. Consider these companies:  Google, JP Morgan Chase, Amazon, Ma Bell’s At&T, Netflix, and Standard Oil.

      These companies are/were all absolute behemoths. In fact, Ma Bell’s AT&T and Standard Oil were so big - that the US Government - under the guise of busting up a monopoly, broke them up into smaller companies. What is really interesting about these six companies is they did not bring a single money-making product of any note to the market. Not one. They invented nothing and produced nothing to get atop the corporate world. The only product Google ever brought to market was a search engine, and they gave that away for free. JP has positioned itself as a go-between for those who need money and those who have it. Admittedly, Netflix does produce some of its own content today, but make no mistake: it didn’t become the giant it is because of the content it produced. Amazon has no products of its own; they just sell for others.

   The “no product” business model of these companies has placed them in the enviable position of not having to constantly innovate to stay successful. They all recognized that both corporate longevity and the real money are not in products, but in controlling the distribution network. If you think about it, Google is nothing more than an information network, JP a financial network, Amazon a retail network, AT&T a communication network, Netflix an entertainment network, and Standard Oil an energy network. In the business world, a network is the best path if you want longevity.

  Standard Oil made Rockefeller the wealthiest man on the planet, not because he had better wells, or the most efficient refineries (he didn’t), but because he monopolized the distribution network for Oil. The best-producing oil well in the country was worthless without a means to get that oil to market. Rockefeller’s empire was built on the fact that if you wanted to get Oil to market, you had to go through him. In effect, Rockefeller was living proof the distribution network is far more valuable than the product itself.

The story of AT&T, like that of Standard Oil, is more proof.  In the 1870s, Alexander Graham Bell offered his telephone patent to Western Union for $100,000. That was about two days’ revenue at the time for Western Union. They were enjoying their monopoly on the telegraph business, and thus were in complete denial about the revolutionary power of a verbal communications network. And so Western Union, who couldn’t see a use case for it, declined to purchase Bell’s telephone patent. Bell went on to cofound AT&T, which became the biggest communications company in the world. They didn’t get rich by selling telephones, they got rich because they monopolized the network which connected the telephones.

  Western Union’s failure to purchase Bell’s patent speaks volumes about how the value of networks as they are being built is hard to recognize, even for people in the business world. The reason it's so difficult is that it requires the foresight to see both the network AND the products and applications that will benefit.  At first glance, it might seem like a network is worthless without a product or application to use it. But that is simply not true. Once the network is built - the revolutionary products will find and enrich those who control the network. If Bag invented the longer-lasting light bulb, do you think it would be wise to market the product myself - or would it be cheaper, better, and faster to partner up with Amazon and their retail network?

   Imagine the returns on an investment in any of these six companies, as the network they were building was in its infancy. Bag has no idea what the exact numbers are, but he is willing to bet they are all 1000x your investment or better. If you are like Bag, and looking for returns like that; you need to find a network still in its infancy that can deliver products and applications that can’t get to market any other way. That network exists, and it is a monetary network still in its infancy, which goes by the name of Bitcoin.

   While Bag understands the difficulty many people have in seeing the value in Bitcoin itself, what can not be denied is the near-limitless applications Bitcoin’s decentralized blockchain network can provide. Their network is revolutionary and unique in that it allows immediate settling of peer-to-peer transactions on an immutable, open, incorruptible ledger. Peer-to-peer directly connects buyer and seller, eliminating the need for middlemen. This places a bullseye squarely on any company (or industry) whose entire business model is that of a middleman. This would include Visa, Uber, Travelocity, Charles Schwab, AirBnB, American Express, Goldman Sachs, Wells Fargo, and hundreds of others.

  As of the time this is written, Bitcoin is approximately a 950 billion dollar market. When you start adding in the market cap of all the companies, and industries for that matter, a decentralized blockchain will likely replace over the next couple of decades - it becomes easy to see how Bitcoin could 100x from here. As crazy as it sounds, Bag believes 100x in price is the worst case. The best case is that Bitcoin also wipes out all fiat currencies, including the US dollar. Should that come to pass, the 950 trillion dollars in existing assets on planet Earth divided by 21 million Bitcoin yields a price of about 45 million per Bitcoin. Assuming our Government never prints another dollar … lol …, then Bitcoin is 1000x from here. Bag is not saying 1000x is a sure thing, but take a deep breath and allow this next sentence to land:

There is no corporation or Government on the planet with the resources, power, or capability to create another truly decentralized network.

   Simply put, Bitcoin is a one-of-a-kind. If you take nothing else from today’s article, recognize there is tremendous value in Network monopolies. Bitcoin has one, with NO possible competition. While other entities could issue their own digital currency, what they can’t do is create another decentralized network. Since it’s the network that matters, 1000x certainly seems plausible. In Bag’s estimation, it’s worth a wager.