Friday, August 24, 2007

NOTHING beats a good monopoly

Before I finished my last posting, I had grabbed the dead tree edition of Fortune from the department mailroom. Even more blatantly than previous years, Fortune, Business Week and the Wall Street Journal are using teaser rates and faculty promotion to get our help hooking business students on their respective periodicals. (I can see why it works — I’ve been reading the Wall Street Journal for over 25 years although — after this year’s redesign shrunk the space for news — I’m getting ready to dump the paper copy.)

Fortune 2007-08-20As implied, the cover item was about Carlos Slim, the Mexican oligarch who’s now the richest man in the world (who others speculated earlier this year had passed Bill Gates). It was the first detailed account I’d seen of how Slim had made all his money.

Fortune presents the org chart and the Slim’s holdings, now worth $58.5 billion. The short version is that Slim was a savvy investor who bought 20% of the (newly-privatized) Telmex telephone monopoly — and then leveraged that into América Móvil, the Latin mobile phone franchise. The two holdings are now worth $13 billion and $31 billion, respectively.

At a time that the telecom industry was embracing liberalization, Slim got the government to guarantee monopoly protection for the next seven years — keeping competition out of the Mexican market at the one time there was foreign capital to available to create new competitors. Winning political influence was easy during seven decades of single-party rule:

“He made his billions because of an extremely close and advantageous relationship with the Salinas government,” says professor [George] Grayson of William & Mary. More recently Slim has been pragmatically investing in multiple parties, a common practice among Mexico's oligarchs.
Interestingly, this is one of the few places the liberal Fortune and the conservative WSJ would agree: Fortune doesn’t believe in monopolies, and the WSJ doesn’t believe in government distortion of the markets (whether through bribery, lobbying or sheer ignorance).

Clearly, if you can’t inherit a monopoly, the next best thing is to be able to buy one at below market prices. Such monopoly (or oligopoly) restraint of trade is a focus of the economic subfield of industrial organization — best known for Michael Porter’s five forces model studied by MBA students around the world.

IO economics has been criticized for over-emphasizing structural explanations for profitability. But real monopolies — like that enjoyed by Señor Slim — are still a sure path to riches. (Or more riches, as the case may be.)

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