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The "Winner Takes All" Bubble

Brendan Brown

Stock market booms are usually founded on great optimism about the economic future. The present boom led by Wall Street has a more sinister underpinning – the belief that the age of digitalization has brought a significant rise of monopoly power and correspondingly of profit margins. “Winner takes all” is a popular theme amongst the storytellers at the present party.

According to the tale, the most efficient firm in each industrial sector now has much enhanced scope to reap profits over a long period of time. Customers find it much easier to find the most efficient supplier who in turn rapidly gains market share and related market power (buttressed by “crony capitalism”. And where the winner is in control of a “gateway” into a key area of the digital universe, the potential for monopoly profits is virtually unlimited.

This is all very exciting for equity investors, especially at a time when a giant experiment by the central banks has created a famine of interest income from so-called safe monetary assets. Yes, economic growth in most of the advanced economies remains feeble by historical comparison. But the storytellers convince the investors that profits and earnings growth can continue at a rapid pace.

There are multiple grounds for scepticism. The first is creative destruction – the process which Schumpeter described as the engine of prosperity in a capitalist economy. Today’s corporate might is vulnerable faster than we might think from entrepreneurship and technology.

Then there is the weakness of the evidence. A burgeoning literature links the “rise of superstar firms” to the fall of the labour share (and rise of the profits share) in the US and much of the advanced economies. But the data is based just on recent experience and does not yet stretch to a whole business cycle.

Moreover today’s business superstars may prove to be tomorrow’s epicentres of mal-investment. Current or prospective profits may look rosy through the prism of a capital market that is feting acronyms (for example FANGs) and depressing finance costs most of all for a the big and the powerful. And there are grounds for wariness regarding the extent to which superstar profits reflect financial engineering.

Take as an example Amazon which many analysts believe will gain monopoly power as the principal gateway to online retailing. The enthusiasts of its stock admit that today’s profits are weak – but Eldorado lies just a few years ahead. The story can be turned on its head.

Amazon is the winner takes all in online retailing precisely because it enjoys an adoring shareholder public who will follow its messianic founder. This enables the company to plough back ever larger amounts of capital despite fragile overall profitability whilst continuing to undercut and out-service online and brick-and-mortar rivals. If adoration gave way to normal scepticism there would be a plunge of the share price and Amazon could not continue on the same expansionary path. The huge investments and related competitor destruction by this company could be revealed to have been one of the biggest mal-investments during the present monetary cycle.

The tech giants, in contrast to Amazon, already make high profits and possess actual monopoly power. Take for example by Google. As gateway to the internet its advertising revenues seem driven by a permanent exponential growth machine. The same is said in a different context about Facebook. Yet the narrative is open to challenge – for example the clicks that are by robots and which add to phoney claims of advertising power. Disappointed advertisers could cut back spending especially in the next business cycle downturn. Some may even invoke the force of law to demand misspent money back. Legal disputes, civil or criminal, accompanied by calls for regulation and taxation of monopoly profits, are no strangers to the student of bubbles and bust.

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