In last week's column we touched on Warren Buffett, the greatest investor of all time. Before he invests in a company, he likes to make sure it has a competitive advantage. This can take many forms. One of Mr Buffett's earliest investments was in the Nebraska Furniture Mart. There's nothing special about your average furniture store, and the barriers to entry are low. But Nebraska Furniture Mart operates differently. It competes on price and customer service. It runs on much lower profit margins.
What really excites Mr Buffett, however, are monopolies. In his budget speech, Gordon Brown referred to the word "monopoly" twice, both times in conjunction with privatised utilities. Not all utilities remain monopolies, although most of them do still have large market shares. BT now has many competitors yet still dominates the domestic telephone market.
Gas distribution has been opened up but British Gas still has the lion's share of the market. The same goes for your local electricity supplier.
Water companies, on the other hand, remain monopolies - but not for much longer, according to Mr Brown. He said: "Wherever there is monopoly power we will open the way to competition and new entrants." Not surprisingly, the share prices of Thames Water, Yorkshire Water, and Severn Trent sprang a leak on Tuesday. While they are monopolies, they are not the type of company that Mr Buffett would invest in because they are regulated monopolies. The Government routinely sets pricing limits for water companies, meaning they cannot make excessive profits from their position of power.
The type of monopoly Mr Buffett is looking for is a natural one. He owns just a few shares in Microsoft, courtesy of his friendship with Bill Gates, but that company is a perfect example of a natural monopoly. By hook or by crook it put itself into an impregnable position, whereby more than 90 per cent of computers in the world are powered by Microsoft operating systems.
There is, arguably, no company in the world that comes close to touching Microsoft's dominance of its particular market. However, one small UK company strengthened its position in the specialised traffic information network market last week. On Monday, Trafficmaster announced a 13-fold increase in profits, admittedly from a low base. It also announced a strategic partnership with the German giant Mannesmann. Trafficmaster hopes this will go some way to establishing its traffic information system as the European standard.
Trafficmaster gathers traffic flow information from an installed based of roadside sensors. This is fed back to subscribers through a dashboard device. Motorists can then take alternative routes when alerted to yet another M1 pile up. It is particularly attractive to business customers, for whom time is money.
Trafficmaster operates under government licence and has no serious competitors - could it be a monopoly in the making? On the downside, the company is still extremely small, with 1998 sales of just pounds 12m, and highly valued, with a market capitalisation of pounds 300m. Competitors will no doubt be circling, attracted by the apparent good economics of the business.
Like all stock market investments, there is an element of risk, but it will be much reduced if Trafficmaster does turn out to be a powerful monopoly.
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