‘A moderately gifted person who would have been a community treasure a thousand years ago has to give up, has to go into some other line of work, since modern communications has put him or her into daily competition with nothing but the world’s champions… The entire planet can get along nicely now with maybe a dozen champion performers in each area of human giftedness.’
Kurt Vonnegut
I like sports. Tennis, basketball, football, footy…sport is both entertaining and educative.
We often draw lessons from sport and its legends — usually about perseverance, determination, hard work, and discipline.
But sport can offer analogies for the corporate world, too.
Sports can teach us lessons about how competition affects organisations and their key players.
Winner-take-all markets
Competitive sport is cutthroat.
Whatever the individual sport, it is organised in such a way that there is only ever one winner.
In the English Premier League, only one team occupies the top spot on the ladder at the end of the season.
In tennis, only one player holds the trophy at the end of a Grand Slam.
We can therefore classify sports as what economists Robert Frank and Philip Cook dubbed winner-take-all markets.
Winner-take-all markets are asymmetrical in their distribution of gain.
Lotteries are an extreme example where all the prize money goes to the lucky winner.
The problem with winner-take-all markets
Winner-take-all markets can be engrossing to watch but unpleasant to participate in.
These markets can also be wasteful by corralling participants into upping stakes that don’t change the structure of the game.
No matter how much everyone spends, trains, or practices — there will still only be one winner.
We can see that with transfer markets in football. To win something like the Champions League, teams need quality strikers, defenders, midfielders, and coaches.
But in an ultra-competitive competition like that, many teams are vying for the top prize.
Each knows the other is as hell-bent on winning as the next.
So teams bid up prizes for top talent. The market for football players turns into an arms race.
Even though only one team will hold the trophy in any given year, teams continue to spend — and spend big.
The CIES Football Observatory, for instance, found that the annual inflation growth rate on the transfer market for big-5 league footballers has been 26% since 2014.
This arms race isn’t without repercussions. As the Football Observatory found:
‘The amounts at stake on the football players’ transfer market have strongly increased over the past decade. At big-5 league level, the investments in transfer indemnities have grown from €1.5 billion in 2010 to a new record of €6.6 billion in 2019 (+340%). During this period, big-5 league clubs have recorded a cumulative deficit of €8.9 billion. English Premier League clubs alone have a total net negative balance of €6.5 billion, with a record deficit for Manchester City (€1.1 billion).’
Netflix and the streaming wars — the winner-take-all curse
Netflix and the streaming war it’s engaged in with HBO, Disney, Amazon Prime, Hulu, Foxtel, and others reminds me of a winner-take-all market, too.
In pursuing subscriber growth — viewership dominance — streaming services must spend big on talent.
Writers, directors, actors.
You win by having the hottest shows and the biggest films.
To do that, you need the best writers to conceive the best ideas, the best directors to helm the projects, and the best actors to execute the vision.
All that takes money…
A lot of money when you’re not the only one competing for the writers, directors, and actors.
It’s a bidding war with no end in sight.
But the war promises lucrative returns to the potential victor.
If a streaming platform becomes the go-to place for entertainment — the one-stop shop for people’s entertainment needs — it stands to gain plenty.
Netflix may have been considered the victor a few years ago, but new entrants have protracted the war.
Content spend is unlikely to wane as long as the rivals pursue the same ends.
In 2016, Netflix spent about US$6 billion on content.
Earlier this month, co-CEO and chief content officer Ted Sarandos said Netflix had budgeted about US$17 billion for content spend in 2022.
Like its football counterparts, Netflix feels like it must continue to pay up to stay ahead — or even to stay in the same place.
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| Source: Statista |
Tech’s winner-take-all shadow
Of course, becoming a winner in a market where the winner takes all is great.
But it’s not guaranteed, and the margins are slim.
As Robert Frank and Philip Cook wrote in their book on the subject:
‘The best soprano may be only marginally better than the second best, but in a world in which most people listen to music on compact discs, there is little need for the second best. In such a world, the best soprano may earn a seven-figure annual salary while the second best struggles to get by.’
Perversely, this state of affairs doesn’t necessarily dissuade the second best from trying.
Why should it?
In their eyes, they are only marginally worse than the best. What if they invest that extra dollar on new gear or talent or equipment or coaches? That extra dollar to gain an edge?
And the arms-race cycle continues.
The winner-take-all shadow is spreading over the tech sector, too.
Famed venture capitalist Marc Andreessen was worried all the way back in 2013 about the transition of the tech sector into a winner-take-all market:
‘So the big technology markets actually tend to be winner take all. In normal markets you can have Pepsi and Coke. In technology markets in the long run you tend to only have one…The big companies, though, in technology tend to have 90 percent market share. So we think that generally these are winner-take-all markets. Generally, number one is going to get like 90 percent of the profits. Number two is going to get like 10 percent of the profits, and numbers three through 10 are going to get nothing.’
Why is the tech sector prone to winner-take-all market tendencies?
Network effects and the internet’s compounding influence.
As economist and former Bloomberg columnist Noah Smith noted:
‘Why are today’s growth industries more likely to be winner-take-all? The Internet. Companies such as Facebook or Snapchat have strong network effects — the more users they have, the more it pays to become a user. It just doesn’t make sense to have three or four Facebooks out there. Strong network effects create natural monopolies — industries where competition tends to vanish on its own.’
But it’s not just the tech sector prone to winner-take-all market dynamics.
Respected Massachusetts Institute of Technology economist David Autor corroborated Andreessen’s hunch and extended it beyond the tech sector.
Autor told Bloomberg that winners — what he calls superstar firms — are rising across industries.
‘“We find that Superstar persistence has increased not declined over time.” Plus, he added, the superstars are getting bigger: “There’s little question that concentration is rising in many industries. That’s pretty well established by now by many independent inquiries.”’
So what should investors make of this?
Be aware of winner-take-all markets and their implications. Always consider the competitive landscape and business context a stock operates in.
Firms operating in these markets have a lot to gain — and a lot to lose.
The energy arms race
It isn’t just sports organisations and streaming services compelling each other to bid up prices in a talent spend arms race.
Our governments are doing it, too.
They are not bidding up talent, however, but energy.
Just like talent, energy is scarce. And governments are aiming to shore up supply to secure energy security.
Just last week, US President Biden announced his administration would splash billions to bolster the domestic supply of critical battery tech materials.
And yesterday, my colleague Ryan Dinse discussed moves in the hydrogen sector.
Battery metals, hydrogen, nuclear, and gas are all part of the wider energy story.
In a globalised, harmonious world, energy does not have to be a winner-take-all market. Trade makes everyone a winner.
But the more the world fractures, the fewer winners there are to go around.
So what world are we in?
And what does it mean for the energy sector?
Tomorrow, our Editorial Director, Greg Canavan, will release a comprehensive new report on the entire energy industry.
It’s essential reading, with surprising findings. So keep an eye out for Greg’s energy report in your inbox tomorrow.
Until next week,
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Kiryll Prakapenka,
For Money Morning
