Becoming so dominant in your industry that you suck out all the oxygen needed for competitors to survive is a hallmark of what are known as virtual monopolies. They're perfectly legal and can make a great investment because they have almost the entire field of play to themselves.
Three Motley Fool investors identified Live National Entertainment (NYSE:LYV), Facebook (NASDAQ:FB), and Monsanto (NYSE:MON) as companies with competitive moats so wide as to be virtual monopolies in their field.
The top dog of live music
Brian Feroldi (Live Nation Entertainment): If you've gone to a concert in recent years then you are likely painfully aware of the huge booking fees that are charged by TicketMaster. What's more, you may have also noticed that ticket prices themselves are not exactly cheap. However, if you want to see an act like Beyonce, Guns N' Roses, Adele, or Coldplay, or hundreds more, these big costs are simply the price of admission.
Live Nation Entertainment is the company that is primarily responsible for the soaring prices. However, the company can get away with it because it holds a dominant position in the industry. Live Nation owns TicketMaster, claims exclusive booking rights to roughly 200 large venues, and manages more than 500 acts (including all of the superstars listed above). In essence, if you want to go to a big-time concert, you're are probably going to have to do business with Live Nation.
Looking ahead, Live Nation has the wind at its back thanks to two megatrends: First, low-cost music services have killed music sales, so most artists are now dependent on live shows as a way to generate revenue. Second, Americans have become increasingly willing to spend money on experiences rather than things. These factors are increasing the supply and the demand for live shows, which plays right into Live Nation's hands.
The only knock against Live Nation's stock is that Wall Street has priced it for huge growth. Shares trade around 84 times next year's earnings estimates, so any growth shortfall could cause the stock to tumble. However, given the company's strong competitive position and two major tailwinds in place, this Fool thinks that paying up to get your hands on the stock is worth it.
Social network's march toward a monopoly
Travis Hoium (Facebook): There are social networks outside of Facebook, but they're not really the same as the world's largest social network. Facebook has 2 billion users and knows everything from where they live to their likes and dislike and, most importantly, who their friends are.
What makes Facebook a virtual monopoly is that there's really no substitute. That's the beauty of the company's network model; it doesn't translate over to other networks well, if at all. Facebook's network power can also be used to augment its other networks, which it has used to grow Instagram and its own Messenger app.
Right now, it's hard to see how a new social network could enter the market and compete with Facebook in any way. The few that have tried, like Instagram and Snap (NYSE:SNAP), have either been acquired or Facebook has copied most of their features.
On the advertising side of the business, where Facebook makes most of its money, it's able to leverage the eyeballs that visit its sites and apps every day and what it knows about those users to target ads. Even publishers have to take into account how their articles are going to show up and be shared on Facebook, making it a key partner.
When you're the center of the modern social world, advertising, and publishing, it's a sign you might have a virtual monopoly. And that's the place Facebook sits in the market, for better or worse.
You are what you eat
Rich Duprey (Monsanto): There might be plenty of seed companies out there and a number of herbicide makers, but no one has a lock on the market like Monsanto. It's glyphosate-based herbicide Roundup is the world's biggest seller both commercially and in residential markets, and Monsanto's agriculture productivity division, which is primarily Roundup, generated some $3.7 billion in sales, up 6% from last year.
But the bigger opportunity is in seeds, which have been genetically engineered to withstand being sprayed with Roundup and still grow. Its Roundup Ready seeds command massive market share. For example, in soybeans, the latest formulation of its Roundup Ready seeds has licenses in place with seed companies that own 90% of the market. It also notes that more than 140 million acres of corn globally are planted with at least one Monsanto technology. Seeds and genomics generated over $10.9 billion in sales this year for the biotech.
Of course, Monsanto has agreed to be acquired by global chemicals giant Bayer (OTC:BAYR.Y) in a $56 billion deal, but it's not a done deal as Monsanto generates a lot of negative visceral emotions among people and the merger is receiving intense regulatory scrutiny. But when it comes to owning the agricultural market, Monsanto is about as close to a monopoly as you're going to get.