Was Standard Oil The First Apple "Elastic Demand"-Type Monopoly?
While reading 13D.com's latest newsletter (one of the best, but Kiril you have a mistake in point 1 w/r/t QE2 - the POMO 17-30 schedule is not 9%, it is 4%), we stumbled across this terrific excerpt from "Memoirs of David Rockefeller", which highlights the exploits of John D. Rockefeller, Sr., the man who out of nothing went on to create the world's biggest and most important company in the history of the world - Standard Oil, and in doing so effectively created the US corporation in its modern form, as well as defining the concept of the monopoly. That he is also the patriarch of the Rockefeller legacy, which has since shaped the face of modern capitalism, is secondary. It is no surprise that during his time, he was viewed in diametrical opposites by the general public - he was either loved or hated, pretty much like all men of relevance. While we will ignore any ethical claims, what we find most fascinating from the below excerpt, is the purported approach which Rockefeller took when creating the Standard Oil monopoly, one which was premised upon "elastic demand" or the same razor-razorblade model of vertical integration that is exhibited best by none other than the company which comes closest to an Std Oil type of monopoly-presence: Apple (and just so there is no confusion, we refer of course to the distributed content, commission-based revenue stream model). Which leads us to a few tangential thoughts, chief among them - is Apple planting the seeds of its own destruction courtesy of its unmitigated success? The 1911 decision to break up the Standard Oil monopoly was as much driven out of economic principles, as one of populist retaliation. It is no wonder that Apple is now the second largest company in the US by market cap... just behind Standard Oil offspring Exxon.
Does the same fate await Apple as came to befall Exxon's originator.
And the second question is whether or not Wall Street, in its excitement to spot a monopolist model with impenetrable barriers to entry, has gotten ahead of itself? Indeed, oil, in the current global infrastructural environment, is irreplaceable and has been since the advent of Standard Oil, making the monopoly argument moot. But the iPad? It is true that Apple enjoys a near monopolist status currently, but that is exclusively due to the sheer visionary brilliance of Steve Jobs. What happens next? Is the market discounting the fact that buying AAPL stock is effectively the same as, as much as we hate to say it, selling life insurance on the visionary in charge of it all?
Is the future for Apple thus cloudied by one of two outcomes: a monopoly "break up" future, or one where the company withers away into a Jobs-less irrelevance. At its current growth rate, it seems that one of the two is more or less inevitable. Of course, Wall Street has once again opted for a 'goldilocks' perfection pricing outcome. So has the Fed about the US economy. While we may be wrong about Apple, we are certain that 'goldilocks' never works out. Ever.
As for Standard Oil and Rockefeller, we hope you enjoy the below excerpt. His grandson, John Sr., who in turn was the CEO of Chase for many years, is probably one of the few who can give a complete, if very much biased, view of his grandfather, and the company that started it all.
Grandfather had started at $5 a week as a clerk in a dry goods store in Cleveland, Ohio, and went on to found and run the Standard Oil Company, which for all practical purposes was the oil industry in the United States until the Supreme Court ordered the trust dissolved in 1911 after a long period of acrimonious litigation. Many of the companies that emerged from the breakup still exist: Exxon Mobil, Chevron, Amoco, and about thirty others as well.
Standard Oil made Grandfather rich, possibly "the richest man in America." He was also, for much of his life, one of the most hated. The tabloid press attacked Standard's business practices and accused it of crimes—including murder—in its relentless efforts to eliminate all competition and perfect its monopoly of the oil industry. Grandfather was the target of Progressives, Populists, Socialists, and others discontented with the new American capitalist order. Robert La Follette, the powerful governor of Wisconsin, called him the "greatest criminal of his age." Teddy Roosevelt used him as a whipping boy in his effort to bring the industrial monopolies to heel. Ida Tarbell, who through her writings probably did more than anyone to establish the image of grandfather as a greedy and rapacious "robber baron," wrote: "There is little doubt that Mr. Rockefeller's chief reason for playing golf is that he may live longer to make more money."
Today most historians would agree that the picture painted of Standard in those contemporary accounts was highly partisan and often inaccurate. Grandfather and his partners were tough competitors, but they were guilty of no more than the common business practices of their day. It was a different world then. Few of the laws that regulate business competition today were in place. Standard was operating on the frontiers of the economy: it was new, unexplored territory, in some cases literally like the Wild West. Muckrakers idealized the first years of the petroleum industry as some kind of entrepreneurial Eden. It was, in fact, exceedingly cutthroat. Prices gyrated wildly, with huge swings in production and alternating gluts and droughts of oil. Refiners and producers were bankrupted and driven out of business overnight. Grandfather was no romantic; he thought the situation was speculative, shortsighted, and wasteful, and he set about to correct it in a tough-minded fashion.
The accusations that Standard cheated widows of their inheritance, bombed rival refineries, and drove competitors into ruin by any means available all gleefully repeated by Tarbell and others—were absolute fiction. The real story is that Standard was considerably more honorable in its dealings than many of its competitors. During the process of consolidation, Standard offered not only an honest, but often a generous price for competing refineries—so generous, in fact, that competitors often reentered the business simply for the opportunity to be bought out again. Grandfather's partners complained bitterly about this persistent pattern of "blackmail, " but he continued to buy in order to complete his plan.
Standard was a monopoly. At its height, it controlled 90 percent of the domestic oil industry and was tying hard to buy up the last 10 percent. Grandfather, however, never saw anything wrong with dominating the market, not only for the owners and workers in the industry, but for consumers and the country as a whole. This runs so contrary to textbook assumptions that many people find it hard to credit his sincerity on the matter. But as Standard's market share increased, the cost of petroleum products to the consumer—principally kerosene during Standard's first decades—dropped dramatically. Kerosene became universally available, and Standard's product was cheaper and better. The company invested in new technologies to improve the range and quality of its products and to develop new uses for by-products that earlier had simply been poured onto the ground or dumped into the nearest river. Gasoline is the most obvious example of a waste product that eventually found a prime use in the internal combustion engine and became the most valued petroleum product.
It was Grandfather's policy to lower prices, believing that the less expensive the product, the more of it people would buy; and the larger the market, the more economies of scale Standard would be able to employ. Without having studied economics, he understood the meaning of "elastic demand." He always believed that it was good practice to "do a larger volume of business at a smaller profit per unit." Many economists talk of business as "responding to market demand"; but that isn't how Grandfather operated. He also created demand by setting up new channels of distribution at home and abroad. For instance, as a market device, Standard often gave away lanterns to ensure that consumers would buy kerosene to burn—much as Gillette gives away razors so that the customer will continue to purchase razor blades. Grandfather drove his associates to buy refineries, to develop new oilfields, and to increase production long before demand existed. Standard acted most aggressively during economic downturns when others retreated, because Grandfather had a long-term vision of the industry and how it should be operated.
A number of factors distinguished Standard from its rivals: a willingness to invest in new technologies, a constant concern for the cost of production, and great attention to the market of its products. Grandfather successfully integrated within one cohesive organization the diverse elements of the industry from production at the wellhead to the final delivery to the customer. Standard was the first modern, fully integrated economic enterprise. That was Grandfather's greatest achievement: building the petroleum industry and, in the process, creating the modern corporation. It was an organizational triumph that transformed the business world.
The American public welcomed the Supreme Court's dissolution of the Standard Oil Trust in 1911 with great acclaim. However, it should be remembered that the ultimate result of Grandfather's consolidation of the oil business was a cheaper, better, and more reliable supply of petroleum that helped the United States make the transition from a decentralized, agrarian nation to a highly centralized industrial democracy.
My father, who later had his own troubles with the press, used to describe with a kind of envy Grandfather's equanimity in the face of the storms raging against him. When Grandfather read the Tarbell book, he remarked to everyone's consternation that he "rather enjoyed it." In my view it was Grandfather's deep religious faith that gave him his placid self-assurance in the face of personal attacks and supreme confidence that enabled him to consolidate the American oil industry. He was a devout Christian who lived by the strict tenets of his Baptist faith. His faith "explained" the world around him, guided him on his way through it, and provided him with a liberating structure. The most important of these principles was that filth without good works was meaningless. That central belief led Grandfather to first accept the "doctrine of stewardship" for his great fortune and then to broaden it by creating the great philanthropies later in life...
In our secular age it is difficult for us to understand a life that was so governed by religious faith. For many, too, a life lived according to the strictures of the Baptist faith - no drinking, smoking, or dancing - seems a painfully dour existence. But Grandfather wore the commandments of his religion, all the things that would seem to us such burdens, with ease and even joy. He was the least dour man I have ever known; he was constantly smiling, joking, and telling shaggy dog stories. Often at dinner he would start to sing softly one of his favorite hymns. He wasn't singing to anyone it was as if a feeling on peace and contentment were welling out of him.
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