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Antitrust regulators aim to prevent restrictive agreements between companies that prevent fair market competition and excessive market concentration.
Despite their concerns, concentrated markets are not unusual. Indeed some typical protections, such as patent and trademark rules, can entrench the power of dominant companies. In other cases, the barrier to entry is high capital costs.
Global duopolies, where just two participants control the supply of a particular good or service, exist in some sectors such as aerospace, where most of the world’s largest commercial jets are made by Boeing in the US and Europe’s Airbus.
However, market power does not necessarily translate into outsized profits, nor high shareholder returns. A closer look at the commercial aviation market offers lessons on this point.
Europe’s Airbus updated the market this week on its 20-year forecast for global jet demand, increasing this to 40,850, about 3 per cent up on last year’s outlook. If the past history offers guidance, Airbus and Boeing should split much of those orders evenly.
The market for commercial jets has become even more concentrated over that time. Boeing and Airbus managed to prevent Bombardier competing in narrow-body airliners. The Canadian jet maker had pushed into the territory of its bigger cousins with its C series of planes during the 2000s.
Backed by the US Commerce Department, in 2017 Boeing managed to scupper Bombardier’s efforts to sell in the US, the largest market for the planes. Its 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 rebranded as its A220 series. Competition authorities barely batted an eyelid at the deal.
Government financial support and lobbying efforts underpin the duopoly’s position in airliners. But also, deep expertise and large investment requirements create a moat protecting both companies.
Geopolitics matters in aircraft manufacturing. Both Brazilian manufacturer Embraer, a distant third place globally and China’s state-backed Comac have strong domestic market share. Both aspire to build their global market share.
Market power does not necessarily mean good news for shareholders. Research from 2006 by finance academics Kewei Hou and David Robinson found the exact opposite. Lack of competition reduces a company’s appetite for risk taking — high barriers to entry result in less share price downside risk but can also lead to fewer gains. There was some evidence of this at Boeing, which appears to have underinvested, leading to bigger problems later.
Returns tend to be lower. Among the least concentrated industries annual returns were 4 per cent higher than for the most concentrated, the research found.
All this suggests investors can grasp when innovation is at risk from excessive market share concentration. 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 efforts of regulators in the US and the UK to block Microsoft’s takeover of game software maker Activision Blizzard.
Both the Fair Trade Commission in the US and the UK’s Competition and Markets Authority fear Microsoft, maker of Xbox consoles as well as 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 its less competitive XBox console hardware. The two companies say that gaming, however, is migrating to mobile devices. This remains a fragmented and competitive area.
Activision Blizzard recently said that in the first few days after its release, the video game Diablo IV had grossed sales of $666mn. It described that appropriately occult figure as “auspicious”.
The same day, the US FTC went to court in an effort to stop the big video game maker from closing its $75bn deal to sell itself to Microsoft. The agency had previously sued to halt the tie-up. But without an injunction, the companies could take the risk of completing the combination.
Microsoft described that action from the regulator as its own stroke of good luck. The software titan believes it can press its legal case sooner and that it will prevail in court. Activision and Microsoft are committed to the deal as merger contracts demand their “best” efforts to complete. But both sides will not be too broken up, as it were, if the government forces them to break up.
When the deal was struck 17 months ago, Activision was reeling from a corporate governance and internal culture scandal. Since then, the collective sense of shame has moderated. At the same time, Activision’s standalone prospects have rallied.
Following the deal announcement, analysts’ consensus earnings estimate for 2023 bottomed out at just over $3 per share. That figure has now rallied to about $4 per share on the strength of Diablo and other games.
As for Microsoft, its shares are up 40 per cent since the start of 2023. Its 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 $3bn reverse termination fee, though the sides could negotiate something lower if they are ready to move on. Closing the acquisition seems complex and time-consuming, at the very least, considering there is a legal fight in the US and the UK has blocked the deal.
Wall Street and corporate America will quietly pray the two companies will keep up the fight. A win would chasten a Biden regime that has battled industry consolidation. But the partners may lack the devilry to persist, no matter how infernally Activision spins its game releases.
Lex is the FT’s concise daily investment column. Expert writers in four global financial centres provide informed, timely opinions on capital trends and big businesses. Click to explore
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