The Toll Booth on Innovation That Big Tech Can't Avoid

Some of the market’s most exceptional compounders don’t win by outmaneuvering dozens of competitors. They win because they only face two or three.

Oligopolies possess a rare combination of structural advantages that turn good businesses into great ones. When a handful of players control a market, three economic forces align in investors’ favor.

First, pricing power. Oligopolies tend to practice rational restraint rather than suicidal competition. They understand that a price war destroys value for everyone, so they compete on service, innovation, or brand. They rarely compete on price. Which lead to stable and high profit margin that would be impossible in fragmented markets.

Second, prohibitive barriers to entry. The scale requirements, regulatory moats, and network effects in established oligopolies make competitive entry ruinously expensive. A would-be challenger doesn’t just need a better product. They need billions in capital, decades of customer relationships, and often regulatory approval.

Third, competitive stability. Market share in oligopolies tends toward equilibrium. Customers rarely switch vendors without compelling reasons, and the incumbents have built relationships, switching costs, and integration points that make defection painful. This stability creates predictable cash flows and straightforward capital allocation.

A great is example is Visa and Mastercard’s payment network duopoly which has delivered 20%+ annual returns for decades, collecting a toll on the inexorable shift to digital transactions. S&P Global and Moody’s control credit ratings, with regulations ensuring captive demand for their services. Boeing and Airbus operate a cozy duopoly where decade-long backlogs insulate them from cyclical whims.

Of course, not every oligopoly creates investment magic. You need secular tailwinds pushing demand forward and mission-critical products that customers can’t live without. But when these elements align (oligopolistic structure, expanding end markets, and indispensable offerings), the results can be extraordinary.

The subject of this issue is part of another oligopoly that sits at the foundation of the semiconductor industry, profiting from every chip design cycle. It serves customers who literally cannot build their products without its software.