Antitrust regulators are focused on preventing restrictive agreements between companies that stand in the way of fair market competition and excessive market concentration.
Despite their concerns, concentrated markets are not uncommon. Indeed, some typical protections, such as patent and trademark rules, can anchor the power of dominant companies. In other cases, the barrier to entry is a high cost of capital.
Global duopolies, where only two participants control the delivery of a particular good or service, exist in some industries, such as aerospace, where most of the world’s largest commercial jets are made by Boeing in the US and Airbus in Europe.
However, market power does not necessarily translate into excessive profits or high shareholder returns. A closer look at the commercial aviation market offers lessons on this point.
Europe airbus renewed the market this week on its 20-year forecast for global jet demand, pushing it to 40,850, about 3 percent higher than last year’s outlook. If past history is any guide, Airbus and Boeing should split many of those orders equally.
The commercial aircraft market has become even more concentrated during that time. Boeing and Airbus managed to prevent Bombardier from competing in narrow-body aircraft. The Canadian jetmaker had invaded the territory of its larger cousins in the 2000s with its C-series aircraft.
Backed by the US Department of Commerce, Boeing succeeded in 2017 in crushing Bombardier’s efforts to sell in the US, the aircraft’s largest market. The use of a dominant market position resulted in near financial ruin for Bombardier. The C-series project was eventually bought out by Airbus and has since been renamed the A220 series. The competition authorities hardly looked at the deal.
Government financial support and lobbying efforts bolster the duopoly’s position in airlines. But also in-depth expertise and large investment requirements create a moat that protects both companies.
Geopolitics is important in aircraft construction. Both Brazilian manufacturer Embraer, a distant third globally, and Chinese state-backed Comac have strong domestic market shares. Both strive to expand their global market share.
Market power does not necessarily mean good news for shareholders. 2006 research by financial academics Kewei Hou and David Robinson found just the opposite. Lack of competition reduces a company’s willingness to take risks – high barriers to entry result in less downside risk to the share price, but can also lead to less profit. There was some evidence of this at Boeing, which apparently underinvested, leading to bigger problems later on.
Returns are often lower. The least concentrated sectors had annual returns 4 percent higher than the most concentrated sectors, the study found.
All this suggests that investors can understand when innovation is at risk from too much concentration of market share. Antitrust regulation should complement this market effect.
Microsoft/Activision Blizzard: The Devil’s Work
Watchdogs are often wary of dominant companies and their pricing power. Witness the recent attempts by regulators in the US and UK to block Microsoft’s acquisition of game software maker Activision Blizzard.
Both the US Fair Trade Commission and the UK’s Competition and Markets Authority fear that Microsoft, maker of both Xbox consoles and games, will only gain more pricing power by acquiring the maker of certain top-selling games.
The FTC’s theory is that Microsoft will use Activision’s gaming portfolio to force consumers to use the less competitive XBox console hardware. However, the two companies say that gaming is migrating to mobile devices. This remains a fragmented and competitive area.
Activision Blizzard recently said that the video game Diablo IV had sales of $666 million in its first few days of release. It described that appropriately occult figure as “auspicious”.
On the same day, the US FTC went to court in an attempt to prevent the major video game maker from closing its $75 billion deal to sell itself to Microsoft. The agency had previously sued to stop the band. But without a court order, the companies could risk completing the combination.
Microsoft described that regulator’s action as its own stroke of luck. The software giant believes it can file its lawsuit sooner and prevail in court. Activision and Microsoft are committed to the deal, as merger contracts require their “best efforts” to complete. But both sides won’t be too much separated, so to speak, if the government forces them to split.
When the deal closed 17 months ago, Activision was reeling from a corporate governance and internal culture scandal. Since then, the collective sense of shame has subsided. At the same time, Activision’s standalone outlook has risen.
Following the announcement of the deal, analyst consensus earnings estimates for 2023 hit a low of just over $3 per share. That figure has now risen to about $4 per share thanks to Diablo and other games.
As for Microsoft, its shares are up 40 percent since early 2023. The software machine seems unstoppable. It is riding a wave of hype around generative artificial intelligence.
Should the deal be called off, Microsoft would owe a $3 billion reverse termination fee, though the parties could negotiate slightly lower if they’re willing to go further. Completing the acquisition seems complicated and time-consuming to say the least, as there is a legal battle going on in the US and the UK has blocked the deal.
Wall Street and corporate America will silently pray that the two companies will continue the battle. A win would chastise a Biden regime that has fought industry consolidation. But the partners may lack the devil to persevere no matter how hellishly Activision runs its game releases.
Lex is the concise daily investment column of the FT. Expert writers in four global financial centers provide informed, timely opinions on capital trends and major companies. Click to explore