Sunday, March 23, 2008

Nothing beats a good monopoly (2)

As I’ve said before, nothing beats a good monopoly. Eventually, the monopoly may come to an end due to substitutes, or the monopolist may squander his billions, or the would-be monopolist could even help his enemy get ahead.

If you can’t get a monopoly, then a duopoly or oligopoly can be nearly as lucrative. In fact, if there are high entry barriers and orderly competition (i.e. no price wards), the oligopoly may be preferable because it invites less antitrust scrutiny from the government.

This week saw the biggest IPO in US history, when the bank-owned Visa Inc. (NYSE: V) raised $18 billion in its offering Tuesday. In the first two days of trading the stock was up 17%.The markets were closed today for Good Friday, but at Thursday’s closing price of $64, counting the Class B shares Visa has a market cap of more than $62 billion, more than twice that of rival MasterCard (with a higher multiple).

Most people forget that Visa began life as BankAmericard in the 1950s, IIRC a decade or more ahead of MasterCard. At the time, it seems like BofA competed with AmEx and Diner’s Club by being slightly less exorbitant in merchant fees. BofA also pushed beyond the standard T&E (travel & entertainment) business to merchandise, and (IIRC) was less elitist in who it targeted. The network effects made the BankAmericard (later Visa) and MasterCard more widely usable, more widely adopted, and so on in a virtuous cycle that swamped the first movers in T&E cards, Diner’s, Carte Blanche and AMEX.

Both consortia leveraged their credit card oligopoly to win comparable merchant fees for debit cards — where they bore lower costs and lower risks — crowding out attempts to build a rival (competing) debit card fulfillment system. With two main credit card networks, not surprisingly there is little competition and high prices (hence the lucrative IPO this week).

The banks have even managed to delay (if not defeat) the world’s most powerful retailer. To avoid paying high bank fees, Wal-Mart tried to open its own bank but the banks were able to exploit Walmartophobia* and round up the usual suspects in their (thus far) successful lobbying to have the government block Wal-Mart from such vertical integration. (Although Wal-Mart is offering its own VISA debit card for undocumented workers and others in extreme poverty).

Of course, when someone sells an asset, you wonder why. Selling shares is improving balance sheets for banks at a time when they desperately need it. But, with the debit card shift nearly compete, are Visa’s best days behind them — or will their share of the oligopoly deliver high margins and high growth for decades to come.

* Walmartophobia. n. 1. An irrational fear of large chain store retailers; 2. political demagoguery that seeks to increase and exploit such fears.

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