Regulating Zuckerberg and friends like Rockefeller—is that even possible—and will the stock markets then fall?

The hoopla over Cambridge Analytica, the election campaign of The Donald, and its connection with Facebook’s use of private data was big. We almost got the impression that Hannibal Mark had climbed the sugar hills of the western Alps with his data elephants and was threatening the comfort zone of the Offline Occident.

A call for regulations rang out immediately and loudly. However, in this context the question arises who could regulate what und whether that would even bring an improvement (of what?).

As part of freedom in a free society, citizens of age may certainly give away their possessions as did numerous founders of religions before them—and they may do so with their data, too. With one click you make your donation to someone else’s data collection.

I. Regulated like Rockefeller

John D. Rockefeller is considered the richest person of modern times. In Middle Ages, only Fugger was probably even wealthier. Rockefeller created his wealth by building a monopoly in the refinery and distribution of oil, with a world market share of more than 90% at its highest. His corporation Standard Oil was the subject of a decades-long, complex controversy in the American public. It culminated with the U.S. filing a lawsuit under President Theodore Roosevelt in 1906 based on the newly adopted antitrust laws. In 1911, Standard Oil was broken up into 34 successor companies. Many of them still exist, such as ExxonMobil, ConocoPhillips, or Chevron.

Rockefeller scored a significant increase in wealth after the break-up. The prices of the successor companies initially suffered an abysmal drop. But Rockefeller realized that the companies would be very valuable in the future and bought into them grand-scale and for a steal. It wasn’t coincidence that he temporarily held a unique monopoly. His strong entrepreneurial spirit enabled him to use his own loss for a profitable deal. He especially profited from soaring oil prices as a result of newly invented cars and the First World War. Topic-oriented investment à la private equity from the lesson book.

Regulation per se guarantees neither profit nor loss—it represents one stock exchange factor out of many.

II. Regulating oligopolies

All societies that are organized in the form of a market economy have antitrust agencies specifically tasked with regulating monopolies and cartels. The European Union has an undisputedly strong position in this area of topic. Just think of Jack Welch, the former king of GE. He had annexed dozens of corporations over the decades. At the end, he wanted to swiftly swallow Honeywell. But the EU Commissioner for Competition, Mario Monti, thwarted his plans. Not willing to engage in drawn-out negotiations right before his retirement, Welch canceled the transaction without further ado.

The New Yorker: Oligopolies are the problem today.

 

Neither GE nor Honeywell holds monopoly positions that are even remotely comparable to that of Rockefeller. The topic today is more the so called market dominating position and, in this context, also the topic oligopoly. Not only industry magazines write about it, the  New Yorker, too, has already tended to this topic extensively years ago.

 

The Economist, August 13, 2016

Oligopolies are a widespread phenomenon.  The Economist went as far as alleging that Warren Buffet’s focus on oligopolies that are hard to attack is his investment strategy. It’s frequently called economic moat. Of course, many value disciples don’t want to hear this, but the allegation is spot on: The focus on oligopolies is the alternative today to the focus on monopolies à la Rockefeller.

III. Oligopolies not only at the gas station

Everyone knows it, the newspapers are writing about it, but nothing can ever be proven—with regard to the oligopoly at the gas station. And that is not going to change. One of the key characteristics of an oligopoly is that there are aligned interests among oligopolists, which don’t require a direct agreement because the optimal behavior is obvious.

In Hamburg’s City Nord, oil companies don’t have to put a pennant in their windows so that the competitors know to raise prices. The gasoline market in Rotterdam, Netherlands, is public, the direction of the prices, as a result, clear, and in well functioning oligopolies no one does what would be the most uncomfortable thing: a price war. One raises the price of gasoline by a cent, the others reflect on what may be good for them. There are no phone calls, no emails, and certainly not a cartel transaction in the form of a company acquisition. It may, after all, interest consumers whether the price is rising or falling by a cent. For oligopolists it’s much more important that the margin isn’t impacted negatively. That would be the case in a price war. But the governments are happy to assist: it’s called ANTI-DUMPING. You have certainly heard about it recently in connection with Trump, steel, and China.

The structures which oligopolies act within are mostly completely normal. And the stakeholders—above all unions and politicians who impose taxes—have little interest that any of this changes. Who pays for this: you, of course. Through higher prices and less innovation. Then that is the opportunity for the small companies—and there’s so many of them in Switzerland and Germany that the Chinese and the Americans are rather envious.

IV. WWW-Monopole

Donald Trump isn’t zeroing in on China’s tariffs only. Amazon isn’t safe either. It’s true in this context, too: while many Europeans believe that with this topics, too, Trump is polemizing, it turns out to be different when you look closer. Amazon is a market place at which companies independent of Amazon can offer their products and process the sale and payment. The side effect is that Amazon as platform sees exactly which products from other companies are selling well on its own platform. Hard to believe, but it’s a common practice of Amazon to simply have these products manufactured as well and then offer them in direct competition with the companies that originally had the idea. Studies of the renowned U.S. university Yale presented on U.S. Stock exchange TV during prime time, make it evident that Trump isn’t simply polemizing.

Amazon’s antitrust paradoxThe problem is clear:
The return on innovation for small businesses is going down the drain. Amazon is currently still pocketing it, but over time the entire model is suffering because clever entrepreneurs will not be tolerating this. They will be going to a different market place instead—what was that one called again?

If Amazon is being categorized by the antitrust agencies as “Standard OIL Delivery” Coroporation which doesn’t show real profit because, among other reasons, other markets are being tapped, then it’s clear what will happen. See above—regulation and change in structure. If that will keep Jeff Bezos from financially catching up to Rockefeller is questionable (see above).

IV. WWW oligopolies

Data Hannibal Mark provided a striking example in the past days. Facebook has a huge data base and explains that it has a new offering. Dating. The prices of the publicly noted dating portals in the U.S. tumbled. Of course, it was noted that Facebook had tried this in the past without success. I thought the comment of an FT reader was more accurate: “For dating, I’m waiting on Amazon. They offer delivery, too.”

But all jokes aside, the problem is becoming evident: the lines between monopoly position, unfair competition, and legal product innovation are blurry. Increasing regulation in this area is certainly necessary to base the handling of data on a safe foundation. But experience has shown, too, that more regulation is a classic measure for promoting oligopolies.

In summary: more regulation is a topic. However, we don’t expect that this will dampen the increased wealth in Silicon Valley. The concentration will probably continue to increase. The stock exchange should profit from this as the stock exchanges are the stomping ground of the oligopolists of all countries.


 

 

 


Georg Oehm

Georg Oehm founded Mellinckrodt & Cie, in Zug, Switzerland, in 2008. He served as general manager and partner in a financial communications boutique in Frankfurt am Main, founded the CFD Association e.V. and served as its first general manager. He worked in business development and in the M&A business at the Metallgesellschaft AG for five years, followed by a five-year tenure in the field of special restructuring projects. From 2011, he was a member of the administrative board at the Zenergy Power Plc and at the Synety Group Plc from April 2011 to January 2016. Dr. Oehm serves as chairman of the advisory board at InCity Immobilien AG. He completed his Ph.D. at the University of Kiel, department of economics and social sciences. He started his career as a banking apprentice at the Dresdner Bank in Frankfurt am Main. Subsequently, he earned a degree in business administration in Mainz and Kiel.

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