On Monday this week, there were two unconnected events that had an invisible, but important common thread.
First, AGL Energy gave up its plan to split into two and lost its CEO and chairman, finding itself without leadership or a plan; and second, the share price of a small local goat milk baby formula business, Bubs Australia, shot up 40 per cent because the company caught a break.
AGL is the leader of Australia’s energy oligopoly, one of many holding this country back, and Bubs is the beneficiary of the failures of an American oligopoly.
The company announced on Monday that the United States Food and Drug Administration had rushed through approvals for Bubs’ product to sell in the US because of a dire national shortage of infant formula.
Monopoly winners and losers
Bubs was founded in 2005 by Kristy Carr in her kitchen when she was on maternity leave with the first of her three daughters, and since then she has built a $50 million-revenue-a-year business from nothing.
Two companies – Abbott Laboratories and Reckitt & Colman – control about 75 per cent of the US infant formula market, and when an Abbott plant in Michigan had to be closed after samples of a lethal bacterium were found, the result has been a catastrophic disruption to supplies across the country.
So US authorities are scouring the world for supplies, including from Kristy Carr’s goats.
Duopolies and oligopolies abound in the US, and not just in baby formula and technology, where the likes of Google, Amazon, Apple and Facebook are dominant. Other concentrated industries include beef processing, airlines, film and television, and wireless communication.
Australia has them in banking, supermarkets, mobile telecommunications, internet service provision, energy retailing, gas supply and transport, insurance, pathology, domestic air travel and, of course, internet search (Google) and social media (Facebook and Twitter).
And this week’s humiliation of AGL is an example of the pitfalls of this – companies become satisfied, incurious and lazy, devoting themselves to milking monopoly rents while expending as little energy as possible.
In scuttling the demerger, Michael Cannon-Brookes has an alternative idea for the company – innovation.
He wants to use its 4.5 million customers as the basis for what’s called a distributed energy resources platform, which basically involves orchestrating millions of household rooftop solar and batteries into a large-scale electricity trading platform using artificial intelligence, to create a new source of power generation.
UBS analyst Tom Allen wrote this week that “the right tech could fundamentally change the future of energy generation & retailing”.
There’s a lot of electrons to flow through the power lines before it’s clear whether Cannon-Brookes and whoever is left at AGL can pull that off, but it’s worth a try – in the new decarbonising world, AGL’s fossil fuel market power is meaningless.
Industries locked up tight
Competition is coming to the energy business whether the existing rent seekers like it or not, but there are many industries that remain locked up tight. The new era of the internet has done nothing to democratise capitalism.
Regulators, courts and legislatures have failed, and allowed capitalism to become a system of inefficiency and inequality.
Several studies have quantified the amount that pricing mark-ups have increased as result of concentration of market power in the hands of just a few countries.
In America the average mark-up has increased from 20 per cent in 1980 to 61 per cent.
Globally, research by the IMF suggests it’s gone from 10 per cent to about 50 per cent.
An economist with Australian Treasury, Jonathan Hambur, published a paper last year examining the extent of market power and mark-up expansion in Australia, and found that mark-ups have increased by about 5 per cent from the mid-2000s – a much shorter time frame than those global studies.
Hambur found that there “appears to have been an increase in market power and decline in competition over the period”, and concluded that this appears to explain part of the slowdown in productivity growth in Australia over the past decade.
Keynes, Marx, Polanyi abandoned for a free market
In the 1980s and ’90s, economists and politicians naively decided that leaving everything to unfettered free market capitalism would guide economies towards the most efficient and democratic distribution of wealth. It didn’t work, or rather it only worked for those who were in charge, or already rich.
They rejected not only the ideas of Karl Marx, but more importantly, those of JM Keynes and the great Austro-Hungarian economic historian Karl Polanyi, who said that an unconstrained free market and small government would inevitably lead to monopolies and wealth concentration in the hands of the few, leading to political and economic instability.
During those two decades governments sold virtually every business they owned, especially in Australia, in many cases selling them as continuing monopolies or oligopolies to increase their value.
An especially appalling recent example of that was the sale by the New South Wales government of the Port of Botany in 2013 to IFM Investors, ultimate owner of The New Daily.
To get the price up, the O’Farrell government passed a law that requires the separately owned Port of Newcastle to pay a penalty of $100 per container to NSW Ports if it handles more than 30,000 TEUs (twenty-foot equivalent units).
That effectively made Port Botany a long-term container monopoly and improved the price that IFM paid. The ACCC challenged it in the Federal Court last year and lost, and is now appealing to the full court.
That appeal is a hugely important decision for Newcastle because the port needs an alternative to coal, which has supported the town since the demise of its steel mill.
Without containers, the city is in trouble because coal clearly has a limited future. The company says it could handle two million containers a year, but paying $200 million for the privilege would make it unviable, of course. Whether shipping lines would use Newcastle for unloading containers is another matter.
It’s no reflection on IFM, the buyer of Port Botany – it didn’t ask for the restriction on the Port of Newcastle, and paid the price that was justified by the rules.
If those rules now change because the ACCC wins its appeal, or the federal government intervenes, IFM would have to be compensated.
It’s an egregious example of the failure of governments to protect their citizens from the power of monopolies.
In the case of Port Botany, the NSW government foisted a monopoly on the people of NSW and cashed in the higher port charges that would result. It was basically a hidden new tax with the state government getting paid upfront.
All companies always try to increase their market power, and try to become a monopoly – it’s arguably a duty of the directors.
The role of government is to correct the tendency towards monopoly and inequality through regulation, and to rein in the power and excess returns of the 21st century robber barons, but they have manifestly been falling down on the job.
In a landmark speech last year when he was still chairman of the ACCC, Rod Sims said: “We have serious concerns about the level of competition in our economy and our ability under the current law to prevent further consolidation via anti-competitive acquisitions.
“Unless something is done, these concerns will only intensify in the years ahead”.
Nothing has been done.
Alan Kohler writes twice a week for The New Daily. He is also editor in chief of Eureka Report and finance presenter on ABC news