M = Monopoly = Money in .NET

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Table 201 Pro tability Comparisons of IBM and Microsoft
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Financial Highlights IBM 2008 2007 2006 2005 2004
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Revenues Total assets Operating income Operating income as a percentage of revenues Operating income as a percentage of total assets
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Financial Highlights Microsoft 2008 2007 2006 2005 2004 2003
Revenues Total assets Operating income Operating income as a percentage of revenues Operating income as a percentage of total assets
$604 $727 $243
$511 $632 $185
$443 $696 $165
$398 $708 $146
$368 $944 $ 90
$322 $817 $ 96
402%
362%
372%
366%
245%
297%
334%
293%
237%
206%
96%
117%
Dollar amounts in billions
two companies also suggests that Microsoft (21 percent over six years) is much more pro table than IBM (12 percent over six years)2 Whenever a company creates a near-monopoly or an enduring competitive advantage, it offers a good investment opportunity In many situations, it may not be possible to invest in those companies because they are not traded publicly For example, De Beers is considered a
profitability and accounting
monopoly in diamond mining and distribution, especially in the highquality diamond market However, you cannot invest in De Beers because it is a privately held company A monopoly still needs to be managed well to protect its pro tability Because of their high pro tability, monopolies attract competition, and unless the monopolist can maintain its monopoly, pro tability will decline over time In the drug industry, a company may have a monopoly on a drug for a particular disease Whenever a drug is a huge success, other drug companies start researching in the same area to discover a similar chemical that is equally or more effective in treating the disease Drug prices remain high as long as the company has a monopoly over the product but decline when competition emerges Conversely, consider the example (discussed next) of a Berkshire-owned newspaper that went from losing money in a competitive environment to becoming highly pro table when the major competitor folded However, monopolies do not last forever For example, unless newspapers react ef ciently to Internet-based news and advertising, they are likely to face a decline in their pro tability and may even become extinct
Buffalo News: How Pro tability Changed Dramatically
Berkshire Hathaway owns the Buffalo News, a daily newspaper in Buffalo, New York, a city known for its blue-collar workers and traditional industries When Berkshire bought it for $325 million in early 1977, the Buffalo News was a distant second to the local Courier-Express and was losing money3 But since October 1982, it has been the only daily major newspaper serving the Buffalo area The monopoly came about because of events that included a long legal battle emanating from action by the Courier-Express In early 1982, Charlie Munger wrote, If the litigation continues and if the competing paper succeeds in somehow changing the law as enunciated by the Federal Court of Appeals and in obtaining the kinds of injunctions it is seeking, or if any extended strike shuts down the Buffalo News, it will probably be forced to cease operations and liquidate 4 However, the Buffalo News persevered, and its victory was indeed sweet In 1983, the rst full year after the competitor closed, the $19 million the company earned in operating pro ts covered the losses from the previous years with some pro t left over
M = Monopoly = Money
Figure 201 illustrates the advantage of a monopolistic environment Using the available data from 1979 to 1999, I report the pro tability (operating pro ts as a percentage of total sales) of the Buffalo News in relation to the pro tability of all other non-insurance Berkshire subsidiaries, including See s Candies, Nebraska Furniture Mart, and Borsheim s The Buffalo News s pro ts jumped signi cantly in 1983 when it became the only newspaper in town when it became close to a monopoly In the subsequent ve years, pro ts more than doubled to $418 million In 1999, the Buffalo News earned more than $55 million on revenues of $160 million In general, if you nd a company that is likely to increase its monopolistic stance or widen its moat growth in pro ts will follow, and you will probably earn a high return on your initial investment