Understanding natural monopolies

Natural monopoliesFor an investment to be safe as well as profitable, it is advisable that the companies in which we are going to deposit our savings have competitive advantages sustainable. Some of these competitive advantages may come from a natural monopoly. This post is a translation of the article “Understanding natural monopoly”By Seth Godin, along with my take on this and natural monopolies.

Understanding natural monopolies

Why is there only one Twitter? And a centralized telephone network?

A natural monopoly is one that benefits its users by being the only one. If there were two telephone networks, you would need access to both to call people and remember who is on each network.

La Metcalfe's Law says that the power of a communications network increases in proportion to the square of the number of people who use it. In communication networks, there is a penalty for having a second network.

An expensive shared resource (such as power lines) is also a natural monopoly, as the incremental cost of adding a new user to the first line is much less than the cost of building a second line next to the first.

It is possible to transform a service that may not be a natural monopoly (an application that helps you monitor your workouts) into one that can be (an application that allows you to share your workouts with others)

Many natural monopolies exist in microspaces, as opposed to the universal monopolies used by everyone like the telephone network. We only "want" there to be a trade fair for our industry, a single business association, a single certification council.

Over time, natural monopolies fade away, but when you're looking for new breakthroughs (especially as an investor), the jackpot will be to find the next one.

My opinion on the article

I agree with Seth Godin that investing in a company that can become a natural monopoly can be very profitable for those who trust them from the beginning by contributing their capital.

However, I think Seth omits two relevant facts:

  • On the one hand, it is very difficult to find companies that do it.
  • On the other hand, there is a high risk of failing in the attempt to become a natural monopoly.

My recommendation is not to look for the next natural monopolies, but rather monopolies or quasi-monopolies in sectors in which innovation is conspicuous by its absence. It is possible that we will not obtain spectacular returns (at least in the short term), but we will minimize the risk, in addition to obtaining a good return for our savings if we can buy at an appropriate price.