Everyone loves a sure thing. And for Wall Street a sure thing is a monopoly. I’ve written about this before, e.g., The stock market blindly lusts after exploitative monopolies. But the siren call of monopoly is an evergreen topic. Especially as software eats the world, and natural monopolies become more common. So it’s worth a quick revisit.
Consider Horace Dediu’s recent post on Apple’s stock market valuation:
This should make valuing Apple easy.
80 million Mac Users and 500 million iOS users add up to about $169.3 billion in sales per year. If we assume that the number of Mac users grows to 90 million and 600 million for iOS then next year Apple should get another $200 billion from its population of users.
So over the next 30 months Apple sales should easily be higher than its current enterprise value.
This would be the forward price to sales ratio of about 2.5. Each sale yields a certain net profit, which for Apple is on average 21%. Multiplying 2.5 by (1/.21) gives 12 which is about the P/E ex cash.
This exercise summarizes Apple’s valuation nicely: Apple is expected to keep its current customers for about a decade and then disappear.
Such a great last line. Wall Street says they want innovation, but they don’t value it. Or more accurately they believe Apple’s approach to innovation is not sustainable. The irony here is Wall Street lusts after the certain profits of monopoly, but if their wish were completely fulfilled we’d have a kind of monopolistic socialism. In that case we wouldn’t even need a Wall Street. Wall Street wants monopolies without the messy antitrust and systemic consequences. Markets make life difficult by competing away profits, so they get no love.
If Wall Street doesn’t value innovation, what about business leaders? Well, let’s go to this classic quote from Adam Smith’s The Wealth of Nations:
People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.
Still as true today as it was over two hundred years ago. Businesses often think monopoly is great, but only for their own industry.
Ok. But surely software developers hate monopolies. Well, to be fair this is true at some level. But that doesn’t stop people from venting. Development would be much easier if there were only one mobile platform instead of two, Google Android and Apple iOS. The heat behind Steve Cheney’s post from last year, “Why Android First is a Myth,” shows how much pain goes into deciding which platform to develop for, or how to do both. And it is a pain of course. But the single OS model was tried with Microsoft Windows on the desktop. So there’s that. If only we could have a single common development platform, but magically avoid the consequences.
What I think is greatly under appreciated is how highly contingent the mobile world of today is. It’s normal to assume history has an inevitable push toward however things turn out. But roll back the clock, and assume Steve Jobs died of cancer a decade earlier than he did. It’s easy to imagine a single mobile OS monopoly today. I think we’ve been historically lucky. At least we have a duopoly. In fact to take the contingency idea just a step further, wouldn’t it have been great if Apple could have held on to large enough share of the premium market for PCs? That would have left Microsoft Windows in the spot Android has on mobile. And would have provided a lot more innovation during that era. And yes, there is an open source/standards based version of monopoly that’s ideal for developers. But I think open source winning mobile was very unlikely, for the same reasons Linux never dominated the desktop. Open source and consumer usability design never fit very well together.
What about startups? Maybe they are immune to the allure of monopoly. In some sense that is true. Startups don’t want to compete against monopolies. Rather they want to become monopolies. Or at least that’s the pitch of nearly every software startup company ever. Invest in us, and we’ll have a monopoly moat protecting us. The pitch typically talks about network effects, economies of scale, etc, etc. I used the diagram below in my post on the Innovation/Monopoly axis.
Companies are born on the left with innovation and angry investors, and try to move to the right to get monopoly and happy investors. Without the regulatory consequences of course. Problematic as they are, messy markets could use a bit more love.